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Discussion on: What Developers Are: Why an Unprofitable Company Can Have 70% Margins

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ginkgomzd profile image
Michael Z Daryabeygi

Great article.
It is insightful that most developer work is investment and not production.

You have a glaring error however: you consistently misuse the well-known term, "fixed cost". en.wikipedia.org/wiki/Fixed_cost

In your dev-shop example: where hours of developer output has a direct effect on revenue (time and materials billing), then this is the definition of a variable cost (varies with units produced).

It is not the major point of your article to answer the question of "why are developer expenses not included in margins", but I think the actual answer to that is probably some boring accounting stuff having to do with depreciation. Or really, it isn't so arcane: investors want to know the cost to scale, and as you pointed out, scaling a software product is not dependent on hiring more developers (at least not on a smooth curve). So, for an investor to understand the company, investing in development must be classified as capitol investment ( and depreciated over time ) and a clearer view of the operation to move units is given by excluding that cost from both fixed (overhead) and variable (cost of goods) costs.

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Evan

Ah! Good point.