Today, most tech entrepreneurs steer clear of the service industry because investors are looking for high-margin, repeatable income. The multiple of service revenue is different from the multiple of product revenue.
When I decided to start my startup, I never thought of selling professional services. However, I quickly learned that providing services related to your product is very helpful for guiding. When my company began using our low-code development platform to provide design and development services, these services generated highly profitable recurring revenue and greatly improved the unit economy. These services have also contributed to the success of a large number of clients.
However, service products are not for everyone. Here are some questions to ask yourself to determine if service should be part of your guided work.
Does the Service Have a Good Profit Margin?
For the bootstrap to work, you need a healthy margin. At one of the companies I founded, our professional service is a necessary element of customer onboarding because product implementation is very complicated, not self-service.
Our professional service profit margin is 20%, which significantly eroded our cash. In this case, the service is not a revenue center, but a loss leader; we must provide something to guarantee more valuable recurring income. If you are in the same boat, service will never be a viable guiding strategy. However, they can be a tool you use to drive rapid recurring revenue growth.
Does the market/customer need service?
Without service components, most people simply cannot use many technical products. In my company, we found that although our low-code development platform can be used by people with the least coding experience, some parts of our user base are not inclined to build their solutions on our platform at all. We also found that even with powerful tools, many people still want to use the expertise of an experienced software design team.
This prompted us to create a service team that can charge design and development fees as a start-up project, and can even provide continuous development services on a monthly basis. Following this route can generate three to six months of return on investment in sales and marketing. Do you have these opportunities?
Can you finally outsource your service offerings to the provider’s ecosystem?
The service can act as a bridge to help finance the loss of the platform so that external personnel can take over. Building an ecosystem can create an impressive flight effect. Participants can not only become service providers, but also channels for generating new product sales without having to increase their own sales team.
Salesforce and Workday have done a great job executing this strategy. Ideally, your product will get enough acceptance and you can sell your service department for additional profit. Does the
service give you more customer intimacy and improve your retention metrics?
When your products and services are connected with manpower and technology, customer switching costs will increase. This intimacy can significantly increase your retention metrics and ensure predictable income.
Having excellent people to help customers can make up for initial product defects and establish a level of trust that pure low-touch products cannot achieve. This is especially important early in the product life cycle of any startup.
Can service guidance strengthen your product development?
The establishment of a service department also provides another benefit: the opportunity to “eat your own dog food”. In fact, when employees use their own products, the effect will be significantly improved. In my company, we rotate the core team members inside and outside the professional service team to ensure that every engineer can feel the customer’s feelings. I think this will bring the brilliance of the product.
I am not advocating becoming a service company, but having a product company with a service company can avoid a risky investment before your product is more mature. This can help you avoid situations like dilution, loss of control, and rapid growth to come out quickly.
As someone who founded two venture capital-backed startups before, I like how service orientation can make my business develop more thoughtfully. Before scaling, we have time to consider the product/market fit. We are not looking for a growth rate that the platform cannot support. We are hiring smart employees. We are carefully reviewing the return on investment of all our expenses because every dollar counts.
In addition, we are checking the usefulness of our own products with real customers and creating a benign feedback loop to drive new features. I think this is the smartest way to develop a company like ours: to build a long-term company, not to achieve some arbitrary goal in order to obtain additional venture capital.
There is an important consideration before starting the service: you need to make sure that you are growing (albeit at a conscious rate) and not just floating. This is why you need to consider the above issues before following my advice. It is essential that you have the confidence to create enough potential customers and customer success for the formation of the final business model without distracting the service.
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