Services vs Products – a revenue dilemma

Services vs products – the great revenue dilemma… build services or build products? What’s the difference? SCALE.

There are 2 types of way of making money – you either bill your services or you develop a product and fuel it’s uptake.

Services

The upshot of selling services is that you can make money from day 1, as long as you’re great at selling those services. If you’re great at execution and  delivery, your reputation should flourish and you’ll be able to sell those services in an increased rate to the clients you sold to before and new ones as they arise.

That’s the upshot. The downside? Services are time-dependant. This means that you’re billing time.

The only way to scale is to bill more time or increase the rate at which you’re billing… but both of these reach a saturation point. There is a limit to how much you can bill per hour and that eventually you will reach a ceiling of how many hours you have in a day to bill. The solution: You hire more people. 

In this situation you build layers in your revenue – different people doing different things; with different skill sets and levels of skill comes the robustness of billing their time at different rates and having multiple workers working on the same project simultaneously whilst other work on new ones and bringing new business in.

Whilst this sounds simple, the reality is that staff have to be acquired, managed and retained. They love you, they leave you, they get sick, they flake, they shine, they become your core asset and eventually… most leave and join or become competitors.

Employee lifecycle in a services based business

The other big flaw in services is that when a client wants more variety, more hours are billed. Eventually one of 2 ceilings will be reached:

  1. The number of hours the current resources can output becomes exceeded and more resources are required. Hiring them means that you need to get more work to keep them busy or the amount that they cost you is greater than the billing… hence, they burn a hole in your pocket. It’s a fine balance that needs to be maintained. Sure you can outsource, but this has it’s own issues – recently unpacked in my posts: “reasons why outsourcing development sucks for startups” and “12 tips to make it cool to outsource your development” – even though these are focused on dev, you can extrapolate much for other outsourcing.
  2. Diversity – often corporate culture creates it’s own internal style of output. Whilst this is powerful, often diversity is required and that results in outsourcing.

It’s really tempting to take on new work and hire more people to accommodate… but the market is changing and the brands are insourcing more and more. They’re figuring out that they can keep small teams in-house that take on work that they send to agencies. When that happens, agencies often lay off a ton of workers or can go under overnight. This is because they bill services and don’t build scalable products.

Products

Products are powerful because of their ability to scale. You build a site, set up the marketing, come back and sales have happen (or at least it’s supposed to work like that :P). The beauty of a well built product is that there is much investment in internal understanding and proprietary technology. The IP is generally difficult to simply replicate and you can get a lead of the marketplace – a first-mover advantage.

Products are scalable and present barriers of entry that services can’t do easily. Having a relationship build over time is not a differentiator of substance. New relationships can be built by competitors, you can get undercut, the personnel with whom you have a relationship with can move on, corporate restructure can shift relationships… but having a product that the client cannot do without and that presents substantial difficulty to replicate is gold.

Once you’ve figured out how to solve a particular problem in a repeatable way and have built a product that delivers that solution – you can scale till the cows come home.

Whoa, there Nelly – it’s not all roses. Products require expertise and need to be built. That means that unlike services – which generally can be sold almost immediately – products require investment of time, effort and funds to get them off the ground and get minimal viable product into the market.

You can make mistakes whilst building, run out of money, the product requires maintenance… there are significant problems that need to be circumnavigated. Products also need to be run by consummate marketers and sales people.

Let’s take a look at a table comparing services vs products: (thank you to Jevon MacDonald – founder of GoInstant – #LegendaryEntrepreneur #Mentor).

services vs products table

There’s another road…

At my startup Springleap, we bill a product we’ve developed as well as some services.

We offer a simple rate card for our products, ranging from creative campaigns to extensions  embeddability, add-ons and so forth, but we also bill for some high-level consultancy and securing extra designs.

One of our clients needed some social media adspend around their campaign and management of the adspend combined with assistance on their over-arching digital strategy. We assisted because we were skilled in all these areas and the best people to build campaigns around our product.

Another good pal, who has a video crowdsourcing site, regularly takes on ad-hoc projects where they write the script for the client and crowdsource the rest. Of course, these clients run lots of crowdsourcing campaigns with them and they’re building a tighter relationship.

What agencies that classically bill services are discovering:

Agencies classically bill services – and that means that they’re in for a hard time if they don’t start acquiring or partnering with companies that consummately create awesome products.

When surveying the marketplace now – just in the ad agency space alone, product-centric companies like Springleap, 99 designs, Talenthouse, Wooshii and Tongal are edging into their market and scaling fast.

I find it almost laughable that Salesforce bought BuddyMedia instead of Publicis or WPP. Considering the powerful assets Salesforce have acquired such as ExactTarget, BuddyMedia and Radian6 – these are assets that could have formed massive scalable differentiators for these groups. Why does WPP not step up and consume these competitors to large aspects of their services? Are they too entrenched?… too addicted to the services-based models?

Whatever the reason – the market is shifting and those that bill services alone are digging a deep hole if they don’t acquire or partner a lot more aggressively. Originally Springleap took the path of trying to only work through agencies but over time more brands started dealing with us directly. I believe that there is a movement in the brands to go direct and question old relationships that are build on services with no core substantial differentiator.

I hope that agencies wake up quickly. They cannot hope to understand the intricacies of the products startups develop or the processes – nor are they consummate community builders. Much like most of my startup pals, we prefer not to build an agency model within our businesses and rather focus on product, delivery and partnerships.

What do you think?

Eran Eyal
Eran Eyal
Eran is the founder of StartupHat, Springleap, Evly (acquired), iDea (acquired), eSquared (acquired).

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