Cost Curves and Fixed Costs: How No-Code Platforms Are Democratizing Software Production

The majority of the time that we have been able to create 'software' during the Digital era, has been characterized by very high fixed costs associated with creating an application. Creating an application requires a company to employ a small amount of skilled engineers, have a long period of development time, and then also make a large initial investment into the required infrastructure. These types of fixed costs affect the shape of the total cost curve for software companies, because they restrict the number of companies that are able to enter the marketplace and produce software. Today, however, no-code platforms have disrupted the traditional economic model by creating a market structure that allows for the reduction of fixed costs, while leaving the marginal production cost at near zero. The result of this process has been the fundamental change in how we look at the economics of producing software, the competitive environment, and the structure of the market, as well as the long-term profitability of the software industry.

Fixed Costs, Average Cost Curves, and Barriers to Entry

Fixed Costs in Microeconomic Theory, are costs that are fixed and do not change irrespective of production. The variable cost will increase as you produce more units. Historically, software development was highly dominated by fixed costs to produce a product: hiring of developers, creation of system architecture and design, coding and testing code, and maintaining the infrastructure for deployment. Once a software application was developed, the marginal cost of distribution became near zero, however the initial entry cost (barrier) would be very high to bear.

As a result of this high-cost structure, the average cost curve at the low-output level appeared steep. In order for a company to achieve a competitive average cost, they must be able to spread their fixed costs over a large number of users. Because of this, software markets were characterised by a high degree of concentration, favouring companies that had large amounts of scale, capital and venture-capital firms, corporate IT budget support, and large amounts of capital to enter into software markets.

No-Code Platforms and the Collapse of Fixed Costs

No-code technology dramatically shifts the dynamic of this platform-user relationship. Users can now move from idea to an app in days instead of months and at a fraction of the cost of hiring a professional software developer to create it. The majority of the fixed expenses associated with the creation of software (coding, deployment, maintenance, etc.) will be absorbed by the no-code or low-code platform and then shared among all of its users.

This will present a very flat average cost curve from an economic perspective. As fixed expenses drop dramatically, the minimum efficient scale of production (where profitability can be attained) will drop; in essence, individuals, small teams, and entrepreneurs without a technical background now have the ability to create software at costs that have historically only been available to larger companies. Therefore, the barriers to entry are diminishing, while the total number of potential producers is increasing exponentially.

This is not a theoretical argument; according to industry analysts, the global market for no-code and low-code technology is expected to reach $65 billion by 2027 (representing an annual growth rate of over 25 percent); additionally, surveys of large companies indicate that more than 70% of new internal business applications are now being developed with the assistance of no-code or low-code technologies. This is indicative of a structural change in the way that production costs are viewed, rather than simply a niche trend.

Economies of Scale Revisited

While no-code platforms do not remove the advantages of economies of scale, they move them from application builders to platform providers. The fixed cost associated with developing all of the tools, security, and hosting infrastructure needed to provide a robust platform for building and running applications is high. Still, the fixed costs associated with no-code software have been spread (amortised) over hundreds of thousands or millions of users. Any economic rent associated with scale is now located within the platform layer and away from the individual software producers.

This process mirrors the transitions seen in other technologies throughout history. The invention of the printing press was an example of reducing the fixed cost of book production relative to the manuscript copying method (manuscripts), which allowed for the growth of many small publishers, while creating large, dominant printing houses. Desktop publishing in the 1980s followed a similar pattern. No-code software presents a shocking change to the production function of digital goods.

Competitive Dynamics and Market Saturation

The entry barriers to many firms decrease, thereby increasing the competitiveness of an industry. With lower average costs, the market may reach a saturation point in which several companies offer similar apps; these apps will compete on the basis of differentiation rather than price. In turn, this means that companies will need to spend more resources on marketing, branding, and distribution, and less on technology or product development. Increased choice for consumers results in a larger consumer surplus, but the lower margins for producers will put downward pressure on long-term profitability.

Lower fixed costs also create an environment conducive to the experimentation of new ideas. The lower costs associated with losing a project means that the rate at which innovative ideas are developed is increasing. This pattern is consistent with traditional economic models that indicate that as the cost of experimentation declines, there will be an increase in the quantity of entrepreneurial activities occurring, even if the success rates are unchanged.

Why This Matters

The software industry had previously been seen as a small, niche market, but has since transitioned into being utilised as an input into virtually all segments of the business world, as well as in healthcare and education systems and government. The elimination of a significant portion of the cost structure associated with creating software (through the use of no-code platforms) opens up many new options for individuals and companies to participate in the digital economy in new ways, creating new means of generating value as a result. Removing the fixed costs of software allows it to become much less capital-intensive and widely accessible as a means of producing software.

Thus, economically, no-code products will redefine the underlying cost curves for one of the most important industries in the world. In the long run, it is likely to create a much more competitive, decentralised, and innovative software ecosystem; one where the success of software is less dependent upon access to capital and more dependent upon the quality of ideas, execution, and understanding of the market where they are operating.