I guess I can say that I know something about both service and product-based business approaches. What you should be aware of at the very beginning is that having a product is a vital part of keeping your company alive during hard times.
I’m going to discuss the pros and cons of having a product-based and service-based company, and what’s more, I’ll try to convince you why it’s essential to mix those two approaches. But don’t worry, it won’t be a boring school essay — just sincere thoughts of the CEO of the tech company.
I can tell you right now that ever since we, at MPC, made a decision to mix these two business types, we’re stronger than ever!
Before we get down to business…
Let’s start by defining the key terms of the article. There are many definitions but I’ll try to explain what I mean when I write product/service-based tech company.
Service-based Company
It’s a company that provides a service performed by humans to clients (yeah, that simple). This is actually not scalable without adding human resources. For example, you can sell a website optimization service — every time someone purchases it, your developer has to do manual work. The same goes for Software Houses, Creative Agencies, Support Teams, etc. I don’t consider companies with a SaaS business model as service-based.
Product-based Company
As the name suggests, a product-based company sells a product or a product that is packed into a service (here’s where a SaaS business model belongs). For example, Adobe sells a specific digital product, and Attlasian is a great example of a company that sells software as a service. These companies don’t have to do any actual work (except marketing and offering a great product, obviously) to sell another copy of the product — they can focus on developing it.
Service Struggle
The market is full of service-based companies. Software houses, outsourcing companies, creative agencies; most of them don’t have any products in their portfolio. All they offer are services, which I think is a big mistake. You should always look for new opportunities and diversify the company’s income if you want to stay alive (business-wise, of course).
If you ever thought about running a service-based company, you should know that it’s a constant struggle to find clients with money and projects. Even when you have a constant inflow of customers it’s always a lot of work that may just not turn out profitable at all. The project evaluations, countless calls with clients … All to put an offer on the table and hope they’ll decide to work with you and not to go with someone else (and so the hard work goes down the drain).
Established companies usually have Business Development Managers (BDMs) working at least 8 hours a day, trying to find new clients. They go to conferences, use their vast networks of contacts, etc. As a company at the beginning of a business journey, you will have to do all the leg work yourself. But even companies that can afford such positions go out of business if one of their huge projects go south.
Large Projects Trap
Let’s discuss one massive trap. Just imagine — you have a new client with a large project; you create new teams and employ dozens of people to meet customer’s requirements. The job is finished after a year of hard work… And bam, there’s no project to overlap!
Sure, you’ll probably find one sooner or later, but for now, you’re left with an overwhelming payroll on your head and the loss of hundreds of thousands. Also, you can’t be sure the next project will require the same skill set or that it’ll be as big as the first one.
Of course, you can let your employees go. But in my opinion, hiring people “for a project” isn’t the most admirable approach to build a long term business (not to mention the backlash it’ll probably cost you). If you can afford it, keep the team and focus their attention on something else. If you can’t … well, maybe you shouldn’t have had hired them in the first place.
Run Your Business Like You Want To Sell It — Wait, What?!
The classic saying goes, Run your company like you want to sell it. I honestly think it’s completely wrong, but this is a subject for another article. Let’s focus on the facts.
I brought this classic up because service-based companies are a lot less valuable (when you want to sell them) than product companies. In short:
- The product-based company can be worth a dozen times more than its revenue from the last 12 months.
- The service-based company, however, will be worth (just) as much as its revenue from the previous 12 months, that’s it.
There are some downsides to running a service-based company but it’s not all bad. A great project or a long term client can skyrocket your company within months (this happened to MPC, so I have some first-hand experience in that matter). Providing services as a freelancer and gathering more and more clients and projects in your portfolio is probably the easiest way to start a company. With time, you’ll start employing first people and develop your business (more on this from me here).
Don’t Let Your Potential Go To Waste
We’ve already established that:
- When running a service-based company, there’s a chance your employees won’t have anything to do at times.
- Offering a product will probably increase the company’s value.
The huge advantage of having a product is passive income that you’ll especially appreciate during the dry season. With no projects on your plate, you can always earn some money from your product (told you — it’ll help you stay alive).
Diversifying your income as a company is the best move you can do. It’s true for both service and product-based companies. If you sell a product, offer your clients customizations. It’ll lead to a win-win situation as you get more revenue, and the clients have one go-to place. Customers are more willing to choose a company that provides comprehensive solutions, and this is probably no secret to you.
Do you see where I’m going with this?
Yes, it’s time to start thinking about your product.
Built from scratch
I’m going to get even more realistic (please, be honest with yourself now). After running a service-based company for several years, you’re probably fed up with demanding clients, scope creeps, evaluations, signing deals, putting out fires, and all the other crap. We’re all humans so it’s completely understandable, trust me.
Just imagine that you’re your own boss and no one tells you what to do — you get to do that. There’s no outside voice you have to listen to; well, apart from the client. Don’t get me wrong, I strongly believe in customer-driven development and gathering feedback from the client is an essential step of the process. Creating your own product is great for one more reason — there’s this awesome feeling of fulfillment when it’s released to the clients every few weeks.
You may not be aware of that yet, but you probably have a lot of in-house talent that can be used. Of course, creating a successful product isn’t easy, but it can befit your company significantly. Maybe you have some internal tools that you built for your team that could be re-sold? There are lots of possibilities.
You’re probably thinking: bullshit; we’re doing just fine, we don’t need a product. Why should we bother and develop something so difficult and time-consuming, when the competition is too big? On top of that, we’ll have to spend a fortune to market the product and build an expensive marketing team …
Yes, all of that is true — creating a great product is not an easy task. And yes, you may be doing fine at the moment, but this is precisely the time to start thinking and building your product. An established product can work as a parachute for your company and turn out a great way to expand your business.
Massive Pixel Creation started as a product-based company and then moved to services with WP Kraken. Currently, we’re combining both of these business types, which, in my opinion, is the best approach.
Conclusion time
I guess the best lesson from this post is to mix the two approaches we’ve been discussing and always look for ways to diversify your income sources. Creating your own product can bring stability to the company, and on top of that, increase its value if you ever need to sell your business. But don’t underestimate the services — becoming a go-to place for the customers is key to your success.
This was fun. Again, I hope someone will find this inspiring. Let me know what you think, or if you’d like to read about some aspects of this in a separate article. Thanks for reading till the end.
Thanks,
Kuba.