Here’s another case study of a start-up that wanted to build a commercial cloud product. They haven’t been able to launch their product.

Unrealistic ROI expectation

We’ve estimated that we should be able to sell 50,000 to 70,000 subscribers in 3 years, asserted the CEO of a start-up that wanted to build a app for a vertical market. They assumed that, with 70,000 subscriptions at a price of $125 per month, they’d bring in over $100 million in revenue in their third year. Pretty aggressive!

Now let’s look at the CEO’s cost model. To build their product, they had hired a programmer with 5 years experience who had dabbled with Apex in a previous job. The programmer had convinced the CEO that he could launch the first version of the app if he received some help from a skilled company in developing the more complex pieces. Together, they estimated the total cost of launching the product at $150k. This included the programmer’s salary. They assumed that once they had a basic version, the programmer would be able to continue enhancing it.

The overall estimated cost was $500k per year against revenue of $100 million. Do you see a problem with this model?

The example above is not fiction, it is painfully true. It is extracted from my recent book, Thinking of … as your Key to the Cloud Kingdom, co-authored by Ian Gotts. The book, featured in CIO Magazine’s “What We’re Reading?” List for March 1st, 2011, will help ISVs ask the right questions that are critical for commercial success in’s cloud.

Getting your financial model right is one of the biggest challenges. The cost of building, maintaining, implementing, supporting, and upgrading all versions of your service will be much, much higher that you anticipate. You also need to be realistic about the number of subscriptions you will sell and the price and number of seats you will get.

The CEO, in the example, was right to get excited about the potential that cloud computing and offers. However, building a cloud app is not like winning the lottery. If you don’t ask the right questions up front to understand the cloud business model, you could be writing checks for years, without seeing any return.

Alok Misra