Mark Suster (@msuster) has written a very insightful post (What Should You Do with Your Crappy Little Services Business?) on his blog. If you haven’t read it already, you should. He sums up with the following advice.
I’m not advocating that companies are crazy to try and be product companies. In fact, that’s all that I fund as a VC. But I don’t want the narrow world of venture-backed companies and the trade rags that report on them to dissuade the overwhelming masses of potential entrepreneurs from building meaningful businesses that are both fun and economically rewarding.
Basab Pradhan (@basabp), further extends Mark’s post here, where he suggests that services companies never need to find a product strategy “given their lack of skills and management experience of the products business“. Rightly so considering he is mainly referring to the offshore services business.
There is, however, an interesting case for product companies (particularly early stage technology companies) to have a services focus to solve the cash problem. I call it productized services, and this is exactly what we do at Samuday. This is particularly relevant if you are not VC-funded and need to build high quality products with sustained revenue stream. If you are an India based technology company, this might be even more relevant.
Early stage technology companies that are aiming to build high quality products have a tough life in India. Indian VCs mostly invest in e-commerce driven (technology) companies, so funding is scarce for pure technology players. Indian customers have a slightly misplaced definition of technology, thanks to the plenty of offshore/outsourced/software services companies. Several potential customers do not appreciate the difference in technology capability for building a website as against building a real-time communication and collaboration solution. Anything delivered through a website falls in the same league. This leads to a perception problem where your product may not be valued at what it deserves, posing a challenge in building sustainable revenue streams.
Having a pure services play, as Basab points out, might not always be good for the company and is definitely not awesome for a technology business. There is a much larger opportunity for entrepreneurs to create value by taking a hybrid approach. A potential solution is to find an 80-20 balance between your product development and services effort. This helps in the following ways.
- Gives customers better value for their money: There are several areas, where customers are forced to use a product and adapt their workflows according to how the product works. Customers love it when we tell them ” this is what we have right now, but we want to understand your workflows and make necessary changes to ensure your workflow is optimized”. It gives customers a better value for their money and beats the technology perception problem that exists in India. As an agile small-sized startup, you have all the right reasons to do this.
- Helps you build an extensible platform: If you are interested in building an extensible platform for cutting edge technology development, you need to ensure your technology is scalable and easy enough for others to build further on it. The services approach gives the company a unique opportunity to experience a variety of use-cases. You can then build the core technology in a manner that makes it possible to address the varied problems through wrappers, while still using the same core technology. This will eventually transform your modest product into a technology platform (possibly available as APIs for other developers and partners) – a significant value creation. This is almost absent in the Indian technology space and being able to do this with precision will be wonderful.
- Revenue is not dependent on subscription licenses alone: I was talking to a friend of mine who works with a prominent VC Firm. We were discussing about a company they had funded and recently made a successful exit. The company had a good product and was well funded, but were primarily dependent on subscription sales. They had a tough time growing their revenue because users were just not paying for subscription after signing up for their free version. If a well funded company with a dedicates Sales team was struggling to ramp up subscription sales, this is a genuine problem you cannot look away from. This can be a nightmare for early stage companies who are cash-strapped. By adding a 20% services focus, you are removing your dependency on subscription licenses alone and creating value for both the customer and the company.
- Helps you understand the market: This one is critical for the future of your business. Services sales allows you to understand the market and possibly carve your niche. There could be some typical markets which textbook opinion makers might recommend you to target. However, once you try, you might soon realize that the market is dominated by big players and customers are looking for brand name more than the value of the product. An early understanding of the market, helps you rework your strategies and identify the niche you want to operate in. Scaling sales becomes much easier if you have established yourself in at least one sector. The brand problem that arises early will then be taken care of.
We at Samuday are trying to follow the principle of building a technology platform that is scalable and extensible, while our customers get what they want, not the other way. This is good for everyone and helps build a truly world class product.