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Case: ProfitLogic

Recommendation: ProfitLogic should put its effort to implement more


profitable ASP strategy in long run, refuse from short-term attractive licensed
software proposal as more capital risky direction of business development
and discontinue custom ASP as less profitable, less scalable and less
attractive for investors business model. The company should continue to
explore its ASP skills which give company ability to grow using generated
profit and stay away from capital intensive investment which with less
probability will be supported by investors.
Money
ASP strategy in long run demonstrates more attractive cash flow / revenue
than licensed software business model and does not need additional
investment injections. In three years ASP model will bring on $10 mln. more
than licensed software model (please, refer to financial table below). At the
same time licensed software model will require additional investment in
building suite of product in amount of $2 mln. and increase additional burn
rate in $3 mln. yearly to support new business model. As result ProfitLogic
will have to find an additional financing in amount of $2,73 mln. in the first
year on very volatile capital market.
Market
ASP market is still small accounting only 4% of the market, but conservative
forecast still predicts its tremendous growth for forthcoming three years from
$1 bln. to $8 bln. while licensed software merchandise segment showed only
34%. growth rate for the last years. Companies is going global and they
required more flexible and capital intensive IT infrastructure supported by
ASP.
Competences & Competition
Profitlogic have less experience in the software market than the ASP market.
Becoming a licensed software company will require a significant
transformation of the culture and composition of the company moving from
R&D focused to software development company with relevant specialist. It
also required to take risky investment in development in additional suit of
product in order to compete for the market having less competence in it. And
it should be done upfront before sale run.
Summary
Current financial constraints, more scalable business model, accumulated
ASP competence, more attractive and stable profitability in future and
attractiveness to investors as well as fast growing market favor choice of ASP
business model for Profitlogic.

CashFlowProjection, $'000
2001

ASP
2002

2003

3
3

12
15

24
39

New clients
Total clients

LicensedSoftware
2001
2002
3
3

12
15

2003
24
39

CashFlow
Initial configuration
One-time license fee
Monthlymaintaince fee
Total Revenue
Less cost
Netcashflow

900

3 600

7200
35100

900
3600
270

3 600
14400
1 350

7200
28 800
3510

2700

13 500

3600
-9000
-5400

17100
-9000
8100

42300
-9 000
33300

4770
-12 000
-7230

19350
-12000
7350

39510
-12 000
27510

Additional investments
Development cost
Up-front cost
Total investment

-2500

Netcashflowmovement

-7900

8100

33300

-11730

7350

27510

9000
1100

1 100
9200

9200
42500

9000
-2730

-2730
4620

4620
32130

Cash balanceat the begging


Cashbalbnceattheend

-2500

-2500
-2000
-4500