Product versus Services Orientation in Start-ups

When early-stage companies operate with new products or in nascent markets, there can commonly be strong pull from customers to behave like a services-oriented business to gain favor within customers, educate the target market, or rally support from the business’s ecosystem partners.   And providing more instruction / hand-holding / customization can feel like the right thing to do when customers don’t understand your business’s value proposition, how you may drive their future success, or how you might enable them to cause (or avoid) disruption and disintermediation.

I believe that carefully thinking through this very typical situation can help start-ups avoid a common trap and better focus on executing towards long-term vision.

My bias favors product-oriented businesses even though there are plenty of examples of successful services-oriented businesses. I tend to agree with the common saying that service businesses “add” where as product businesses “multiply” comes from the (difficult & expensive) human-capital requirement to scale within service-oriented companies.

First,  three quick definitions:

Product-orientation: a business that generates the predominance of its revenue from products it has created.  The selling motion may be varied (direct, indirect/channel, or SaaS) but the “thing” that is sold is something that is made once and sold over and over again. This includes subscriptions to web-based data/analysis products that change in content but are, in essence, the same thing delivered repeatedly over time.

Service-orientation (NOTE:  no “s” at the end of service):  To me, this is just the concept of being customer-centric or having a “the customer comes first” attitude in your business.  In general, this is a healthy attitude and you can be service oriented no matter what type of company you are…I bring it up here for the sake of distinction with the next term.

Services-orientation:  a business that generates the predominance of its revenue from selling human-delivered work, expertise, and process directly to customers.  The selling motion is typically direct and relationship-based and the “thing” that is sold is typically customized and unique to each customer’s requirements (which tend to be jointly developed and agreed to as part of the selling process).

Product-based businesses include software companies like SolarWinds, Salesforce.com, Google and Microsoft.  Some of these product-based companies have a services team that ensures the products are “consumed” and/or implemented correctly for their customers.   Services-based businesses include ad agencies, PR firms, graphic designers, video production businesses, IT consulting firms, and even tax-preparation companies.  Most services-based companies leverage or depend on a variety of products (their own or created by other companies) to do their job.

Below are a few A-B examples of how I believe the two different orientations can cause a company to behave. Hopefully, they can be instructive in pattern matching how your business is behaving or being asked to behave by customers in your target market.

What your customers are paying you for:

  • A product-oriented company is (duh) being paid for a product; while the product may include a bundle of “components,” it is created or defined once and sold over and over again.
  • A services-oriented company bundles time, materials, expertise & technology into an offering that is customized for a particular customer.

How you price what your customers are paying you for:

  • Product-oriented companies strive to have a single price or pricing tier (free, silver/gold/platinum) that appeals to the broadest range of customers possible.
  • Services-oriented companies delineate the time, materials, expertise & technology that make up each unique offering in order to ensure that each engagement can be piece-wise profitable and that the price can change as the project scope inevitably changes.

How the sales function engages with customers:

  • Product-oriented sales tend to own the customer over long periods of time, re-engaging those customers to “up-sell” as new products are delivered. Education and expertise may be provided as part of the sales process.  Other support roles (Sales Engineers, Professional Services) may exist, but the sales manager is the quarterback.
  • Services-oriented sales tends to focus on initially winning a customer / engagement only to hand off that customer, post-win, to an account management roll that owns the customer as the project is delivered as well as for future extensions to the original deal.

How the business invests in “what you’re selling:”

  • Product-based businesses invest in building the product ahead of revenue
  • Services-based businesses have invested in people but generally do not proactively invest in solutions for their target market; instead such businesses define the solution in real-time as part of the sales cycle and think in terms of “work for hire.”

When you say “yes” and “no” to customers:

  • Product-based businesses should say yes when customer’s requirements align with the product’s capabilities; when customer’s requirements fall outside of the business or product focus, there must be sufficient discipline to say “no” to the potential revenue associated with that opportunity.
  • Services-based businesses must find a way to increasingly say yes to potential customers. This is true because in relationship-based sales of expertise and capabilities, trusted vendors will be asked to do more and more.  Figuring out how to say yes, profitably, is core to growing a services-oriented business.

How your business scales:

  • A product-based business scales by creating an ever growing/evolving product set and selling it multiple times, broadly to many different customers
  • A services-based business scales largely on the backs of people and relationships; winning and servicing an increasing number of customers requires an increasing number of people with very little exception.

let me know if you agree or not…

Advertisements