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An understanding of software companies' unique issues is critical to analyze the value of a company and to help client executives and owners understand the uniqueness of the industry in which they participate. This understanding also helps valuation analysts and their clients to recognize business risks and capitalize on market opportunities. Every business owner believes his or her company is unique.
The software industry's many unique characteristics include: Limited market life. Life of a software program is limited in market. Generally a software life is limited to two to three years. At every 18 month a new technology come up, however lifespan can be prolong though several version. In some cases, new versions are almost new products and extend product life significantly.
Economic scalability. Software is the ultimate property, after it is made, and selling an innumerous number of copies is easy and cheap. It's just a one time investment, thus, software can generate higher profit margins than traditional products.
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Contribution of research and development. A software company expends large sums on research and development, which accounting standards usually require to be expensed as they are incurred but may help the company generate earnings in the future.
Distribution through the Internet. Distribution of software has progressed with quick and simple download from the Internet. This latest distribution channel has substantially lowered costs and selling prices, while at the same time making it possible to conveniently generate sales from a worldwide market.
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Some software programs becoming commodities. Some types of software, such as “search and retrieval engines,” are turning into commodities and are available on the Internet, sometimes they are even free.
Fast changing technological base. The technology of a software company changes at a much faster pace than the technological base of traditional companies. This rapid pace of change creates employee training and marketplace positioning issues.
Different approach to advertising. Some small software companies must have a different approach to advertising than traditional small companies. They cannot only confine their advertising to the yellow pages, local newspapers, or trade associations but they advertise on a national or an international scale as do large companies. This has lead to Internet Marketing.
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