Amazon.com Widgets Blast from the Past: Developers and Economics

Blast from the Past: Developers and Economics

By Nick at December 04, 2012 20:45
Filed Under: Software Development, Delphi

Here's another article from my series at CodeFez -- and here's the response that Steve Teixeira wrote to it.  The comments on both are a pretty interesting discussion.

I never cease to be amazed at how little the average developer knows about economics. I mean, I don't claim to be an expert, but I have taken a college class or two and read up on the basics. Even just understanding the basics, though, gives one surprising insight into why things happen the way they do in the marketplace.

For instance, we are in the process of hiring a new developer at my company. We figured out what qualifications we were looking for and determined about how much salary we wanted to pay. It quickly become apparent, however, that we weren't offering a high enough salary to attract the caliber of candidates we wanted. So what I did was to go on the newsgroups and start whining about not being able to find any good Delphi programmers. Okay, no, I didn't really do that. What we did, of course, was to increase the salary that we were offering. Simple supply and demand issue: There wasn't enough of a supply of good Delphi programmers at the price we wanted to pay, so the solution is to be willing to pay more – a no-brainer decision, really. Once we did that, we found that we have been able to find plenty of valuable candidates. Simple economics.

One common area that I see developers totally misunderstand is that of Delphi pricing. One thing you learn in Economics 101 is that the vast majority of companies are “price searchers”. That is, they are constantly searching for a price that will maximize their profits. (Some companies, mainly producers of commodities, are “price takers”. That is, they take whatever price is offered. Farmers are a good example. A corn farmer can only sell his corn at market price. If he asks for more, the market will simply buy corn from another farmer that will take the offered price). Borland is definitely a price searcher. They can set their prices as they please, and will do so to maximize profit. Of course, the market will respond to any particular price by demanding a certain number of units at that price. Price searchers are constantly adjusting prices to maximize the amount of money they make.

Note that they don't set price to maximize revenue, but rather profit. The cost of goods sold is a factor here as is the cost of simply having customers. Sometimes a company will actually price a product in order to limit the number of customers they have in order to maximize profits as sometimes having additional customers causes decreased profits. (That may be a bit counter-intuitive, but think of a product that has high production and support costs.) So for example, sometimes doubling your price can increase profits even though it drastically reduces sales. If doubling the price cuts the number of customers you have in half, but also cuts your production and support costs in half as well, your profit increases. (This is a very simple example, and it is actually hopelessly more complicated than that, but you hopefully get the basic idea).

So Borland, having learned from years of experience and copious sales data, is quite aware of what effect various prices have on sales. No doubt by now they have a pretty good idea what price will maximize their profits and how price changes will effect sales.

Where it gets really interesting is pricing outside of the United States. Europe, of example, is a completely different market than the US. Taxes, the demand curve, and the number of potential customers are all different. Borland clearly believes that they need to – and can – charge more in Europe than in the US. The price difference is not related to the exchange rate between the Euro and the Dollar; it has everything to do with maximizing profits. Clearly Borland believes that a higher price in Europe – again, a completely different market – will mean higher profits. That's why Delphi costs more in Europe. I suppose Europeans could view this as “price gouging”, but in reality, it's just the market signaling to Borland that it will bear a higher price than will the American market. Simple economics.

Another economic blunder that developers frequently make is ignoring economies of scale. Borland is a big company that is publicly traded. Many Delphi developers work in small, private companies. Borland has legal obligations, overhead costs, and market demands that most little-shop developers don't even know about, much less take into consideration. Borland's main competition is one of the largest corporations in the world. Borland faces investors who expect a return. Borland has to deal with major entities in the media that can write things that can have profound effects on Borland's business. All of this combines to make running Borland a complex and difficult task that most of us simply don't comprehend.

So I love it when a developer posts in the newsgroups something like this: “Borland should just hire two college students to go through and fix all the Delphi bugs in Quality Central.” Well, that sounds great, but is clearly isn't that simple. First, fixing bugs in a big product like Delphi is no small, trivial task. Finding people with the talent and skill to do Delphi bug-fixing isn't easy. And they certainly aren't going to be cheap. The notion that some college interns can do it is quite naïve. The economic blunder comes, though, in thinking that the cost of fixing all those bugs is merely the salary of a couple of developers. First, employees aren't cheap, no matter who you hire. Human capital is by far the most costly – and valuable – part of doing business. Secondly, I don't know what your development process is like, but bug fixing at Borland is more than a guy hacking out some code. Every fix has to be extensively tested for efficacy and correctness, and then the whole product has to be regression tested to ensure that any given fix doesn't actually break something else. Fixes need to be incorporated into shipping product and distributed to existing customers. The documentation needs to be updated. And who know what else needs to be done? The point is this: the costs of things that many people think are small are in fact much larger than the average developer appears to realize.

The economics of running a business like Borland isn't something about which I claim to be an expert. But I do know that I don't know enough to be able to claim to know better than Borland. Something to consider before you fire off a post in the newsgroups that starts out “Borland ought to just....”

Comments (14) -

12/5/2012 7:44:21 AM #

"I never cease to be amazed at how little the average developer knows about economics."

Amen, brother. And what makes it so sad is that there is no excuse whatever for the ignorance of programmers about economics. Or, for that matter, for the ignorance of any citizen. Thomas Sowell has made it incredibly easy to get the fundamentals, free from technical jargon. Henry Hazlett, in fewer pages, emphasizes the critical failing which is the downfall of (nearly) all legislation: failure to consider *all* the consequences of an action. And Milton and Rose Friedman ably wrote about the essential nature of economics in our lives.

And once one has digested all that, there is Ludwig von Mises, whose "Human Action" aptly summarizes in its title why we must understand economics.

William Meyer United States |

12/5/2012 10:32:03 AM #

I never cease to be amazed how little the average developer knows about software development.

I mean, expecting developers to understand economics may be in their own best interests, but it's not their job, for the pete-of-sake.  Whereas, to wit, being a software developer is your job, if you're a paid Delphi guy.  And to hear the guys on the forums talk, you'd think few of them actually understood HOW hard it is to work in a 5+ million line-of-code codebase that has 5+ million users.   Oh yeah, because few of them ever have worked on anything like the scale of the Delphi product.

It's a wonder, this product is. Really amazing.  Sometimes I look at it and I just say "Wow". Other days, when it's not working perfectly, I say things that I hope my toddler doesn't overhear. Delphi is like a mule though, it doesn't seem to mind when I say bad things about its lineage.  It's the best and most useful piece of software I've ever owned.

W

Warren Postma Canada |

12/5/2012 12:29:15 PM #

I never cease to be amazed at how little the average corporate executive understands about both economics and software development. Their stupidity regarding both is truly breath-taking.

Contrary to what Nick states, companies don't price search, that would be too intelligent; it is the market that price searches, penalizing both the idiot company that priced too high (Borland/Embarcadero) and the imbecile company that priced too low. The market is (usually) much more intelligent than it's participants. Read Hayek.

John Jacobson United States |

12/6/2012 9:52:46 AM #

Jake --

I definitely should read Hayek.

All companies price search. By "price search" I mean "Search for the price that maximizes profits".  And you can't know that EMBT's prices are too high -- they may very well be pricing perfectly.

Nick

nick United States |

12/6/2012 10:19:43 AM #

Hayek, Austrian School of course. This is still a lot closer to 'real' Austria/Austrian School than Mises for example.

Prosperity simply does come from creating the potential first and investing then. Little slower in the early days and limited indeed. The result is that you end up as a mid-range company. Anything else has a lot to do with go-live's asset transfers ... another (way of doing) business imo.

Bunny Austria |

12/10/2012 3:10:06 PM #

"And you can't know that EMBT's prices are too high"

Of course I can. Look at how non-existent Delphi is in the marketplace.  The market has rendered a verdict.  

John Jacobson United States |

12/10/2012 8:07:47 PM #

"non-existent in the marketplace" is a gross exaggeration and an incredibly imprecise statement.

It may very well be that Delphi is priced precisely right to maximize profits for EMBT.  Or maybe they are priced to low or too high and are leaving money on the table.  You can't possibly know what it is, unless you've done an extensive study of the demand curve for Delphi, which I strongly suspect you have not done.

nick United States |

12/10/2012 3:28:21 PM #

"I definitely should read Hayek."

Especially the stuff he wrote in the field of evolutionary epistemology. He does a great job of explaining how evolutionary processes in general create order without a designer, not just economic processes but language and law as well. He was close in with the leading lights of evolution and REALLY understood the theory and it's implications for everything people do.

It was Karl Menger that asked the real question that the social sciences ought to address, but it was Hayek that answered that question most effectively: how can it be that complex orders like language can arise without anyone actually designing them?

John Jacobson United States |

12/9/2012 12:24:10 PM #

Actually, I spoke imprecisely:  All companies that don't sell commodities are price searching.  

A farmer doesn't price search, he has to take the price that everyone else gets. He can do a form of price searching by silo-ing his grain and waiting for a better price, but he can't demand a price other than the commodity price.

nick United States |

12/15/2012 5:00:50 PM #

A farmer is a price searcher in case he/she or granny sells fruits vegetables to the neighbors. Price searcher exist on both sides, the seller as well as the buyer side. Commodities are comparable, somehow classified in order to become compared.

When a friend of mine was searching for craftsman in order to setup a new office for Seque, Seque wanted to know the prices for the painting by m2. This was almost unusual in our country these days. Now we can say, 'Wait! There are many reasons why this is not the best idea'. This leads to the cheapest solution, but this can become troublesome. I think software prices are very similar to this example.

Compare VS to Delphi and you compare two different companies ... you compare different people's unique work. In case of most commodities in the past you compared the nature's work when growing the vegetables for example. This changed too - but the quality of our food is lower. In the past you had 3 to 6 times more ingredients ... in practice things are more expensive today.

One thing I observed is that humans are conditioned to check the price for things they can grab - materials. When we setup networks in the 90s, people checked the price of the mouse and compared, also hardware. They did not check the price for the services. We have another tradition. It's (was) accepted that human's work is valuable and the price simply should stay within an acceptable bandwith.

Your example with the employee. Of course the U.S. is a country whose labor force is very mobile ... in this case you can say, there is something like a market. There is no need to move in order to earn more if you are happy with what you have.
visual.ly/moving-money-how-economic-climate-has-affected-interstate-migration

Simply offering what you are willing to pay is the best strategy. Employing people at salaries that are to high is just expensive and too low leads to almost no good result. But, there is no linear relationship between higher salaries and better results. The more, lower salaries lead to more happy employees, if the salaries are not too low and job is a brain worker's job. You cannot create a job that fits to the income - it can only be the other way around. The moment an employee is a price seeker and price seeker only it is better to let him go to next application.

In Mid-Europe HR tries to create positions that match collective agreements. People must fit to criteria for a job description in order to justify a certain gross income the state deducts tax from. Someone put into a position who acts as a placeholder for money that is redistributed by the state. The differences in the net salaries are very low in my country. On the other hand, Austrians are happy people. Poor those who have to fit to such a job created ... this goes wrong on a long term. You are paid because the company can afford not because your input is this important on a long term. For some strange reasons the exception, those whose input is important, don't think too much about the money side - they are interested in the work.

Bunny Austria |

12/8/2012 5:30:19 PM #

Article super interessant. Beaucoup de discernement dans tes explications. Je met ca en favoris. Merci pour le partage !

maison container France |

12/9/2012 1:53:43 PM #

Nick, you said it yourself, good Delphi developers don't come cheap but that's because they are getting rare. You won't find cheap experienced Cobol developers either. Embarcadero would be well advised to try to reverse that trend or where is their revenue going to come from five years from now? Pricing for max profit alone is short-term thinking.



Arthur Hoornweg Netherlands |

12/12/2012 10:30:35 AM #

Whether Embarcadero price search or not is unclear. The descriptions, and slightly condescending comments about programmers and economics are less so. Certainly there is a lack of elasticity in Delphi demand which will result, in time, in a sudden snap in demand. This will leave those for whom delphi is a very high percentage fit for their business models, stranded, as those, with lower percentage fits - who were being stretched and stretched and suddenly snapped - were effectively subsidising the small core.

I am of the lower percentage fit, and cannot justify the need to move to enterprise for the database stuff, and am now quite happy with Lazarus for my "delphi" needs. As a user from Turbo Pascal 3 onwards, it's  like losing my  walking boots, which I've used for 30 years.

Stephen United Kingdom |

12/15/2012 4:40:36 PM #

You've hit the nail on the head, Nick!

"So what I did was to go on the newsgroups and start whining about not being able to find any good Delphi programmers. Okay, no, I didn't really do that. What we did, of course, was to increase the salary that we were offering."

As you've observed, good Delphi developers don't come cheap. That's the same reason why I've moved out of development in Singapore, and started working in other areas.

Of course, most businesses don't care whether code is lousy or good. As long as the code can do what the requirements are, businesses don't bother if developers can code well or not. All they need are developers who can write code that works.

Chee Wee Chua Singapore |

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