2015-03-31 Why business software is going to be free

We've all seen the drop in software pricing. What used to cost $20 per user each month, now costs just $5. Here's why business software is soon going to be free.

The pricing trend

Here's the business software pricing trend (USD per user each month).

In every industry you look at, the cost of business software is still dropping.

Why it'll keep getting cheaper

As my high school economics teacher would say:

• Sale price drops if the cost of materials drops (i.e. cost of servers, developers).
• Sale price also drops if units consumed increases (i.e. more eyeballs on the Internet).

Right now, the world is seeing both. Will pricing drop even faster?

Redmond's law of server costs

Here's my basic rule on server costs, which in the spirit of recent memes, I'll call Redmond's law of server costs:

Law: Every six years, expect to take a zero off your server costs

If you're into maths, here's the equation:

100 * (1 - 0.3)^6 = ~10

Or in other words, if hosting costs drop by 30% every year, then:

• What costs 100c today, will cost 10c in 6 years (2021)
• What costs 100c today, will cost 1c in 12 years (2027)

For this law to be true, all I've got to demonstrate is that per user server costs are dropping by 30% every year. So here goes:

• Server costs are dropping by ~20% each year. Amazon's EC2 cost reductions went from 100% in Jun 2009, down to 20% in Jun 2013. That's a 32% drop each year for 4 years. They've continued to drop since.
• Software's getting more efficient by ~10% each year. For example, PHP is being used by 40% of websites worldwide. Facebook's HHVM project has sped up PHP. Now it's 3-6x faster. This has dramatically reduced Facebook's server costs.

In 2011, Facebook spent about 8c per user per month. Now, granted, probably only 10% of Facebook's costs are for servers (most will be wages), but it highlights how incredibly cheap it's become to run software at scale.

Mobile is eating the world

Page 7 of Benedict Evan's "Mobile Is Eating the World" highlights that in the next 5 years, the world will have two billion more internet users. This is huge, unprecedented growth. That's two billion more people clicking and swiping. Double what we've got today.

Most people struggle to comprehend the huge scale of internet users in other countries. China has more than double the internet users of the U.S. What happens when other countries like India, and Indonesia come online in big numbers?

With the world's internet population set to double the cost of online business software will continue to decrease until it becomes free.

Who's joining the party?

While pricing moved from $60 to $15, it's notable that older companies (pricing at $60) didn't reduce their pricing to compete. It's likely they're incapable of reducing their pricing because:

• Culture: Pricing strategy is a fundamental part of company culture. It sets the tone of the whole business right from the beginning.
• Investors: It's incredibly hard to convince an investor (who's put in millions) with "You know how we've been charging $60 for our product, well we've decided to cut it to $15." It raises their risk, which they don't like.
• Addiction: Getting $60 each person each month is incredibly addictive. It's hard to give up, especially while the money is flowing in, for now.

My guess, is that vendors of non-free software are incapable of moving to free. In our experience, at 1st Money, "free" has to be set right from the beginning. It's got to become the company's culture.

It therefore follows, that Silicon Valley companies who've been so disruptive (by charging only $5), will themselves be disrupted in coming years by free business software.

Or, in other words: it's hard to disrupt a service that's free, but easy to disrupt one that's paid.

What 1st Money's doing

1st Money is building free payroll software for every businesses in the UK, U.S., Australia, and Canada. For today, we're still UK only, but one day we're doing payroll elsewhere as well. No matter where we go, 1st Money's software will mostly be free. No other pricing model makes sense.

What's coming

Free business software is hard to imagine for many people, but look how quickly we all got used to free with "social". Could you imagine paying for Twitter? Could you imagine paying for Facebook? 12 years from now you'll feel the same about business software.

In 12 years time, two more zeros will come off server costs. In 12 years time, the Internet's eyeballs will more than double.

Things will be different, but 1st Money's $0 pricing will be the same.

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