Custom software vs. Off the shelf software

Custom software vs. Off the shelf software

Aug 18, 2022 | Blog Post

If you’re starting a business in the 21st century, you are almost certainly going to need software solutions to run your business. Even the lowest technology businesses will need websites, accounting systems, billing systems, etc. Consequently, one of the first questions you’ll need to ask yourself is, “Do I need to build custom software or should I license something off the shelf?”

We hear this question all the time at CodeStringers, particularly from startups. The company has a business idea that has certain technology requirements, but the founders don’t know the best way to fulfill those requirements.

The answer depends on your answers to a few key questions.

1. Will Technology Be Core Or Ancillary To Your Business?

A business school professor once told our class that business was essential “one big make-vs-buy decision”. For those of you who don’t know, “make-vs-buy” is a fancy way of saying that you don’t have to do everything yourself. As an entrepreneur, how you spend your time is the most important decision you have to make every day. If you spend all day fetching office supplies and configuring email servers, you won’t have time to develop a competitive product or solicit business. Therefore, you should “buy”, i.e. pay someone else to do, anything that your company isn’t best at. So how does this apply to technology decisions?

As an example, let’s pretend that you’re starting a business that makes knitted hats. What do you think your hat clients are going to care about— the digital store’s e-commerce solution? or the quality and craftsmanship of the hats themselves? On the other hand, say that you’re building a digital community that brings together knitters with high-end clients looking for bespoke hats. How would that change your answer?

In case it’s not obvious, the former example would lend itself more to buying off-the-shelf whereas the latter might need a custom solution. In the second example, technology is core to the business’s value proposition, whereas in the first example, it is not.

2. Does An Off-The-Shelf Solution Exist?

Yes, this question looks like common sense, however entrepreneurs often get the answer wrong.

In many cases, the answer is a most certain “yes”. For example, If you’re selling physical goods online and shipping them to your customers, then 99.9% of the time you can use existing e-commerce platforms like Shopify. This also applies to companies needing a marketing website. You can use Wix or Squarespace and save yourself a lot of time, money, and headache.

On the other hand, there are situations where a solution does not exist at all. E.g., if you wanted to start a business that delivers pizza with drones, you’re going to have a hard time managing that business with an off-the-shelf solution.

But sometimes the answer lies in the middle. Sometimes you can use off-the-shelf software for the “solved problems” (i.e. where there are already existing, well-functioning solutions), and integrate it with some new customizations.

3. Are You Looking To Sell The Business Down The Road?

If you’re hoping/planning to, ultimately, sell the business, then you’re going to want to make decisions that ultimately increase the purchase price. Theoretically, a potential acquirer will value your company based on what similar businesses have sold for in the past. The measurement they typically use is “Price Earnings Ratio” or “P/E Ratio”, which means that you take the company’s total earnings (profit) and multiply it by this ratio to get your price. According to a recent study by NYU Business School, application software companies have a P/E ratio of 130 compared to all industries’ average of 99. This means that you can expect to sell your company for 30% more if you’re considered a software company.

If you use off-the-shelf software, you certainly will not be considered a software company, whereas if you build a custom solution, you might be.

Conclusion

Ultimately this decision is up to you as an entrepreneur, and there isn’t necessarily a “right answer”. However, hopefully the above questions will help you navigate this difficult decision. If you have any questions or if you would like to discuss these questions further, please drop us a message or give us a call.

Christian Schraga

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