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If you are involved in the operation or management of a start-up, you will have already heard loads of advice over the past couple of months. Much of this advice can be summed into about two words: reduce expenses.
The following advice is intended to accomplish one thing: give you more "runway" so that you can survive the downturn. Overall, I think the idea of increasing the time that you can continue to operate your start-up is a pretty good thing to aim for - after all, the more time you have before you run out of cash, the higher your chances of actually succeeding. I have said this about long-term start-up strategy before:
"Part of your long-term strategy should be to survive the short-term."
If you do not live long enough to see the long-term, all that strategic planning and world-changing vision is not going to amount to a hill of beans (I have a running assumption that the value of a hill of beans is negligible, though it does seem odd to me that we'd use this as a benchmark - but I digress).
So, back to the advice: You need to survive, and so you should reduce expenses and thereby increase the time you have to figure things out. That's great, but it's only one part of the equation. In reality, the length of time you will survive is a function of how much cash you're burning. Your expenses contribute to this cash-burn, but there is another variable in the equation that people don't seem to talk about: revenue.
When software companies are born (much like any other product-based business), there is a vision of building a great products company. In fact, many such businesses tend to make a conscious effort not to emphasize services. The reason is simple: the margins in selling a product are usually much better.
Furthermore, it's hard to get venture funding if selling services is a big part of your strategy. So, many entrepreneurs (including me) shy away from selling services. We accept that it will probably become necessary over time, but we hold-off on it as long as we can.
Now, I'd argue that in today's climate, things are a wee bit different. If faced with the decision of having to scale back expenses (which is usually means letting go of people), generating some service revenue might not be such a bad thing. Perhaps selling services was never part of your original plan, but neither was this massive economic downturn.
So, here are a few thoughts on selling services for revenue. (Note: These points primarily apply to B2B companies. I'm also drawing these points mostly from experiences at my prior company).
Thoughts on product companies selling services
- Selling services (related to your offering) is almost always easier than selling products. If you don't think you can sell services to your target market, I'd be concerned about whether you can sell your product.
- Offering services to your existing client base often works well. There are two benefits: you get some revenue and you help your customers to get more value out of your product.
- You should be careful that the services you sell don't centre on customer-specific modifications to your product. That's a high price to pay for revenue. On the other hand, if a customer is willing to pay for enhancements that you think would be valuable to a meaningful percentage of your target market, it might be okay.
- You might find that offering a bundle of services along with your product increases your probability of a sale. Some customers might be more wiling to buy if they knew they could get your help. This could include training, data conversion, implementation, and customisation.
- Though services margins are definitely lower than that of product, one of the nice things about selling services is that it is easier to manage head count. For example if you're trying to figure out whether to hire of keep someone, trying to figure out whether they'd be accretive is simpler to figure out in the services business. Not easy (particularly in this economy), but easier.
- I have found that the people delivering services on behalf of your products company are often great at uncovering sales opportunities. For example, you might have a consultant who is helping a customer to complete an implementation. During this process, he or she could identify how your product could be used in a different division of the company, leading to an upgrade.
- Services are often a very effective way to guard against attrition in your recurring revenue stream. If you're delivering services to a customer on an ongoing basis, and they are thinking about cancelling (in which case you'd lose maintenance/subscription revenue), you are likely to hear about it sooner and have a chance to do something about it.
In closing, I would like to add one important point: I am not suggesting that you use the service revenue excuse to refrain from cutting expenses that you should be cutting. If you need to let people go, you need to let people go. Also, keep in mind that expense cuts are immediate, while generating revenue (even service revenue) takes time.
Summary: You probably had lots of good reasons to not sell services when you started your business. But, times have changed, and you might want to revisit some of those decisions and arguments. Selling services may be the lesser of two evils.