It’s no secret that a product company is much more valuable than a service company. It’s why every service provider has that dream about transforming their service into a product. The problem is that there are a lot of wrong ways to put that evolution into motion, and doing it wrong can kill the business pretty quickly.
I’ve been through the product evolution several times. It’s sort of become my specialty. My first startup successfully turned a consulting business into a product. My current startup is turning a labor-intensive service into a product. Along the way, I’ve learned that there are basically a handful of overarching strategies you can use to convert a service to a product, and all of them come with easy-to-make, potentially lethal mistakes.
But here’s the deal: At some point, product evolution is inevitable. Service based businesses, no matter how well they’re run or how premium the service, will always max out at two to three times the labor costs. And if we run out of cost-effective labor, the business begins to fold like a Ponzi scheme.
If our service isn’t acting like a product and evolving into a product, we can be sure that technology, market trends, and skill scarcity will turn our business into a race against time.
So I’ll take you through each of the overarching strategies and how I’ve used them to transition from a service business to a fully-functional product company, and how to avoid the killer mistakes along the way.
Automation: Machines do all the non-skill stuff (and some of the skill stuff)
What if you could take all the stats from your fantasy football league and write crisp, fun recaps that read like sports-page articles about the matchups between you and your friends? It’d take you a couple hours to do it well and maybe two of your 10 league friends would care, but they’d really care.
Now imagine you could do this for everyone who played fantasy football. At last estimate, 41 million people play fantasy football, so two out of 10 is 8.2 million people who would really care. Too bad performing that service would take millions of hours.
At my previous startup, Automated Insights, I developed the algorithms while the founder wrote the code to get machines to write those recaps in three hours. Now imagine those machines aren’t writing silly fantasy football recaps, but public company earnings release reports. The Associated Press used our tech to publish highly-detailed deep dives into each release about 12 seconds after the data was made available.
Our automation didn’t make writing obsolete, but it turned the service of data analysis and reporting into a product.
While automation as a productization strategy has been around as long as there have been machines, technology has advanced far enough that we can start to automate tasks we’d never dreamed possible.
The Killer Mistake: All machine, no human. Some tasks just aren’t meant to be machine-driven, yet. In the fantasy football example, humans still “wrote” the articles, we just did it in a different way, multi-dimensionally instead of linearly. Were it not for our human input, the articles would have read either like Mad Libs (same words, different numbers), or stiffly robotic.
In other words, if we automate too much, we lose usability. Be careful where you take your gains.
Repeatable Methodology: Don’t just do the thing, teach them to do the thing
When you get really, really good at something, you’ve probably learned all sorts of tools and shortcuts that make you better and more efficient. You’ve probably even come up with a few of your own. So a really easy to way to go product is to sell those shortcuts.
The very first startup I joined was Financial Dynamics, a technical consulting firm that built client-server software for Fortune 500 companies, a precursor to SaaS. As we got better at it, we started building a framework that we would install before we began coding, and that framework did a lot of repetitive stuff very elegantly with a single command.
Eventually, we got to the point where we were 80% framework, 20% custom. Then, we stopped building custom software altogether and just sold the framework. With the evolution to product company complete, we were acquired shortly thereafter.
The Killer Mistake: Methodologies don’t sell, tools do. The biggest mistake I see is when service companies lean too hard on their methodologies. They end up selling a process instead of a set of tools, which just turns their service into an exercise, and not a product. Business isn’t an exercise, no matter how good that exercise is.
A second mistake I see is when service companies underestimate their own talent and experience, naively assuming that anyone can do their job by following their methodology. This is almost never the case. Keep a managed services arm in the company.
Packaging: Spreading the revenue over more customers
With the Do-It-For-Me (DIFM instead of DIY) economy exploding, all sorts of consumer startups are springing up to take care those time-consuming and inconvenient tasks that used to be DIY.
It started with simple services like lawn maintenance and (wink-wink) car washes. My current startup, Spiffy, is your go-to for car wash, oil change, and soon a number of other vehicle maintenance services so you’ll never again have to “take you car in” when it needs something.
Now that everyone has a computer in their pocket, the consumer service-to-product market is expanding to almost every (in)convenience we can DIFM for busy customers.
And of course, the personal touch (or impersonal, depending on your view of technology) of having an app take care of your individual business is becoming the norm in regular business. Accounting, hiring, marketing, sales transactions, even technical architecture and online storefronts, all of these and more are becoming digital and productized.
The lure is recurring revenue. When you productize a service, the financial health of your business isn’t tied so strictly to the financial health of your customers. Instead, your customers are a more quantifiable and steadier stream of numbers.
The Killer Mistake: You can probably see this one coming. Former service companies converting to packaged product companies almost always underestimate the level of effort required to give that quantifiable and steady stream of customers the proper customer experience to keep them quantifiable and steady. Customers churn in and out, which is crazy expensive.
Another big mistake in packaging a product is developing pricing that is complicated and not customer friendly. If you can’t box the service into understandable, affordable chunks, it isn’t a product yet.
Marketplace: On-demand and evolution
A marketplace is usually two-sided with both customers and service providers using the product, like Uber. It acts like a middle layer to remove the barriers in finding customers/providers and transacting with them.
Spiffy is actually a hybrid between packaging a service and a service marketplace — we’re both, and neither. We’re like a two-sided marketplace in that we connect our customers to a service provider through an app. We package our services into understandable and affordable products. Then everything from arrival to payment is conducted through the app.
One hard truth we learned early was that we needed full time technicians executing our service, not contractors. That’s definitely not true for every marketplace, but it’s coming to a head for some of them now.
Another truth was that we needed to be the high-end service, not the cut-rate discounter. Customers need a reason to change their habits, and convenience and pricing usually don’t cut it. You need to give them a different and better experience.
The Killer Mistake: Too much tech too soon. The mistake that kills these marketplaces earlier and quicker is spending too much time and money on building out the tech too early. And by too early I mean before:
- Viability is proven. The marketplace works on paper but doesn’t take off in the actual market.
- Demand is discovered. A marketplace may be able to serve customers, but can it find and land customers?
- Margins are realized. Doing an old thing a new way is expensive, especially at first.
- Scalability is assured. A marketplace can serve a handful of customers, but might get overwhelmed at hundreds or thousands of customers.
There are all kinds of derivations of these strategies that can fulfill that service-to-product dream. The key is to know which one we’re following and exactly what we’re getting into. When we do that, we can increase our odds for success, as well as increase our customer base, revenue, and valuation.