Dealing With A Downturn: Selling More Services

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Dealing With A Downturn: Selling More Services

 

If you’re involved in the operation/management of a startup, you’ve already heard a bunch of advice over the past couple of months.  Much of this advice can be summed into about two words: Reduce Expenses.

I did a bit of paraphrasing (there are lots of variations and extensions to this, but it’s close enough).  The advice is intended to accomplish one thing:  give you more “runway” so that you can survive the down-turn.  Overall, I think this idea of increasing the time that you can continue to operate your startup is a pretty good thing to solve for.  The more time you have before you run out of cash, the higher your chances that you’ll actually succeed.   I’ve said this about long-term startup strategy before:

Part of your long-term strategy should be to survive the short-term.” 

If you don’t 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 this other variable in the equation that people don’t seem to talk about a whole lot.  Revenue.  It’s almost like we’d forgotten about that. 

When software companies are born, there’s this vision of building a great products company.  Software startups tend to make a conscious effort not to emphasize services.  The reason is simple:  The margins in selling a product are usually much better.  Further, it’s hard to get venture-funding if selling services is a big part of your strategy — for the right reason.  So, many startup people (including me), shy away from selling services.  We accept that it’ll likely 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.  Sure, as a software company, selling services may not have been part of the 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 (not my current one). 

Thoughts On Product Companies Selling Services

1.  Selling services (related to your offering) is almost always easier than selling product.  If you don’t think you can sell services to your target market, I’d be concerned about whether you can sell your product.

2.  Offering services to your existing client-base often works well.  There are two benefits:  You get some revenue and you help your customers get more value out of your product. 

3.  You should be careful that the services you sell don’t center around 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 OK.

4.  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 customization.

5.  Though services margins are definitely lower than that of product, one of the nice things about selling services is that it’s easier to manage head-count.  For example if you’re trying to figure out whether to hire/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.

6.  I’ve 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 that is helping a customer complete an implementation.  During this process, she could identify how your product could be used in a different division of the company, leading to an upgrade.

7.  Services are often a very effective way to guard against attrition in some of your recurring revenue stream.  If you’re delivering services to a customer on an ongoing basis, and they’re thinking about cancelling (in which case you’d lose maintenance/subscription revenue), you’ll likely hear about it sooner and have a chance to do something about it.

In closing, one important point.  I’m 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 and generating revenue (even service revenue) takes time. 

Summary:  You likely had lots of good reasons to not sell services when the company started.  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.

Posted by Dharmesh Shah on Thu, Nov 20, 2008

COMMENTS

"Your expenses contribute to this cash-burn, but there is this other variable in the equation that people don’t seem to talk about a whole lot. Revenue. It’s almost like we’d forgotten about that." 
 
That comment about says it all.

posted on Thursday, November 20, 2008 at 5:45 PM by Kate


This is a good advice to survive this downturn. I did this with my software company in the .com downturn back in 2000-02. It worked and helped us through those difficult times. It might help these ugly days too.

posted on Thursday, November 20, 2008 at 6:39 PM by Terje Wold


It's not just just revenue but cash-flow that's hyper-import in a trust-crunch. 
 
You can no longer believe that the businesses that were grateful and paying you on time are going to be able to do that next month. Reduce those backlogs!

posted on Thursday, November 20, 2008 at 6:49 PM by leeds


Interesting post! My company produces a new-generation spreadsheet, and I would have agreed with what you said until recently - we were doing very nicely by selling solutions based on our platform - but the recent bust has made us go in entirely the opposite direction. We've closed our services business to focus on product sales.  
 
Perhaps this is industry-specific; after all, the best services sales for us were always to finance companies, who are (of course) in a bad way. By contrast, our product sales are to a wide range of industries - and some of those are still making money and are still buying software!  
 
So perhaps services force you to focus on one or two market segment (because they normally require at least some amount of domain expertise) - but then, they are an easier sell than a raw product. A case of putting all of your eggs in one basket, and hoping it's a damn good basket...

posted on Thursday, November 20, 2008 at 8:08 PM by Giles


#1 point- something to think about. We are building ScrumPad supported by services (consulting, coaching, training, implementation). We think product and service feed each other. However, we are being tempted to do customization to the product. But, I understand the cost of going down that path. 
 
Thanks, 
 
Syed

posted on Friday, November 21, 2008 at 1:42 AM by Syed Rayhan


We picked a difficult time to transition from services to products though Dharmesh I would feel scaling services often needs you scale head count versus products where you can still scale without increasing head count at the same rate. Perhaps it depends on the nature of the services you offer too. For us the more services accounts we handle, the more headcount we need to keep up so it can scale but at an exponential cost. 
 
Neil 
ReadyContacts.com

posted on Friday, November 21, 2008 at 8:13 AM by Neil Sequeira


I actually disagree with #3. 
 
I think that if the services you sell center around a customer-specific modification to your product, you should accept it, even if it will not bring much value for a future version.  
 
That customization may differentiate your services from others that are not willing to made the customizations for their customers. 
Of course the revenue from such services should be higher, since they will not, probably, be used by others.

posted on Friday, November 21, 2008 at 11:49 AM by Fernando Martins


I believe this advice is sound. We started as a services group - and turned ourselves into a product company during the 2001 downturn. We capitalized on our experience and code assets - but used services to carry our business forward. 
 
 
 
This downturn finds us as product company generating more revenue from product than consulting. It is much easier going into this downturn with our broader customer base. 
 
 
 
I would generalize the focus a bit more though. Generally, the customers you have when you go into a downturn stay with you. Start with making sure you are taking care of them. New customer wins are hard fought - each and every one of them. 
 
 
 
I'm careful on your #4 related to bundling services. If you have lots of other people's money you may have no worries. My experience is people value what they pay for. If services are free the often go wasted. Your pricing mix needs to include understanding the customer value proposition as well as the high value of customer adds in a challenging environment.

posted on Sunday, November 23, 2008 at 8:19 PM by Bob


Dharmesh, 
 
I've heard experts say with respect to SaaS companies that in a down economy it is the survival of the quickest. How does one balance out cost reduction and need for speed when the spend helps you grow fast but not necc. profitable?

posted on Tuesday, November 25, 2008 at 1:31 PM by Prashant Kaw


Lots of good advice. Obviously you have to choose which ideas would work for your business and think about what your customer ultimately needs or wants from your business. It is the economic downturn, so they won't want to be paying for things they don't need.

posted on Sunday, November 30, 2008 at 10:11 AM by HatchThat Entrepreneur Interviews


Great article. I particularly agree with points #1, #6, #7 (in the B2B space... I think #1 is different for B2C). 
 
 
 
Selling services doesn't have to be just about customizations or integration. The best services are those that really add extra value to the product (differentiate) and allow the customer to do something perhaps they couldn't do by themselves or with someone else. For SaaS vendors I really like the idea of data integration & analysis services, for example. 
 
 
 
I wrote some of my thoughts about value-add services that software companies (especially SaaS) could provide in this article: http://www.software-marketing-advisor.com/business-software-services.html Definitely shares some of the same thoughts.. 
 
 
 
Joanna 
 

posted on Tuesday, December 02, 2008 at 5:48 AM by Joanna Lees-Castro


Good advice and nice post. Reducing expenses and increasing the revenue is the best way to survive as well as become profitable.  
 
 
 
I found about startup and its profitability covered in several posts in http://www.workhomemoney.com/?p=55

posted on Tuesday, December 02, 2008 at 11:42 AM by bikiassam


Hi, I'm in the finishing stages of building a parent teacher conference scheduling website. I already have a prototype that has been used at my school and was very successful. I am planning on launching a website where other schools can signup and the app will be hosted on my site for a monthly fee. 
 
 
 
Would you mind elaborating on point 3. I plan on giving the customers the ability to request modifications/improvements to the app for a fee, I would also make the fee slightly smaller if they allowed the improvement to be implemented on all accounts, not just their own. But you say that you should be careful not to focus on customer specific modifications, what do you think of my plan? Should I give customers this option or will I be swamped with customer's requests? 
 
 
 
Also, I am only 16 and still in school so revenue is really one of my smallest problems, I am only tyring this "business venture" for experience and enjoyment.

posted on Tuesday, December 09, 2008 at 8:39 AM by Evan Rolfe


Interactive Webinar for ISVs and Technology Product Companies: Where should you be putting your money in 2009?  
 
You can register online by following this link: https://www2.gotomeeting.com/register/882066746 
 
 
 
Shweta Gupta  
 
Business Development Manager  
 
Appulse Technologies Inc  
 
 
 

posted on Wednesday, December 10, 2008 at 3:51 AM by Shweta Gupta


Product companies need to work on brand building from early days. I assume in many cases there may not be enough finance available for the expensive brand building exercise - brand building need not be thru expensive media. 
 
 
 
It will be useful if you tieup with a well known name for piggy backing - we have done this successfully at an affordable cost. 
 
 
 
It will be useful if your product is designed to allow building solutions around it. We have done this succesfully.It is even better when others build solutions to sell,as more people work to make your product successful. 
 
 
 
The person building a product is generally dissatisfied with the current version - he/she knows the improvements even before the current version is out ! Remember a time in Japan when the new products were hitting the market even before the shelves were empty !! During downturn it is better to slow down the pace of development. 
 
 
 
Product space allows heavy price cuts and there are customers looking for bargains even in down turn. 
 
 
 
In general majority of startups productidea may not be earthshaking, posing a financial challenge to pull the venture thru a downturn. But it is possible - if you work thru a down turn, you become more seasoned and therefore chances of success later is far better. 
 
 
 

posted on Friday, December 12, 2008 at 7:54 AM by teevee


If you need to survive don’t worry about growing revenue. Worry about growing profit.... 
 
<a>http://www.venturenavigator.co.uk/content/595

posted on Monday, February 16, 2009 at 10:15 AM by Phin Wenlock


teevee, I agree with your points 100%. 
 
 
 
As for the article, I agree, but one question? Does anyone that runs a business ever stop focusing on revenue generation??? I think thats a no brainer. 
 
I have thought about services for many years as an engineer building software and services for others, but now that I have my own business, I do not see SaaS as a good model for me, even in this downturn. The dependencies you create for both yourself and your customers when implementing services to me, are not worth the extra income. The thing you want to be careful about is creating a business dependent on recurring revenue when that revenue requires support, hosting, and people. If you can model something that follows product development, where you can release it and offer support, great. But if adding services means you now are permanently in the services market supporting many many companies that depend on you, should you choose to remove yourself from that market, you could find it difficult. That's why I always liked the product-based model. Much less coupled to my customers, and lower expenses because fewer support requirements. To me, the fact you are in a product line of business means you have thought through these differences and once made, you should work harder to buttress your product sales and upgrades, rather than now bring in a completely new model, increasing costs and risks. That being said, great article and very interesting read.

posted on Sunday, April 26, 2009 at 12:22 AM by Website Photo Gallery Guy


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posted on Monday, May 11, 2009 at 2:51 AM by Jason Smith


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posted on Monday, May 11, 2009 at 2:56 AM by Jason Smith


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