OnStartups

Dealing With A Downturn: Selling More Services

Posted by Dharmesh Shah on November 20, 2008 in strategy 20 Comments

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.