By Carlos Saba
Co-founder of The Happy Startup School
I recently organised a roundtable discussion with 10 other agency and product founders to discuss the pros and cons of each business type. It was a fruitful session with lots of interesting debate.
I’d been to too many of these types of events set in soulless meeting rooms where it was all about egos. Such environments stifle any genuine exchange. At the Happy Startup School we like to make our events experiential as well as informative. The key is to get people feeling relaxed and connected to promote knowledge sharing. Several of the founders knew each other already and holding it at the beach added to the feeling of openness.
Running a Service Business
We’ve been running a digital agency for the past 10 years and we are well aware of the challenges. It’s not easy to make a lot of money as an agency. It’s decent sustenance, but a poor investment. Agencies such as ours tend to range from 1 to 20 people, with the vast majority having a couple of staff and a handful exceeding 100 or more. There’s a challenge with scale. The bigger you get the bigger the monster you have to feed (i.e. try finding £100,000 a month to keep everything going). Unless you’re super organised and/or super lucky you’ll probably take on work you probably shouldn’t, and deal with people you wish you wouldn’t. Slowly, slowly the sense of autonomy you felt at the beginning fades away as your clients become your bosses, and you end up being at the mercy of their whim.
Service Business Pros
- Low setup costs
- Variety of work and clients
- Well known business model
- Catering to an existing market
Service Business Cons
- Client management is labour intensive
- Peaks and troughs in cash flow
- Time based billing
- Expensive to scale
- Always building someone else’s vision
- Agencies tend to focus on pleasing the client
- Finances can suffocate creativity
Running a Product Business
With the booming startup scene and the birth of multi-billion dollar software products, agencies are increasingly looking to building their own products. The lure of being able to generate recurring revenue using in-house skills is all too tempting. However, it isn’t all a bed of roses. Building a product requires a different mindset to working for clients. For instance you’re working on something without any guarantee of payment. You’re also guessing at what future customers might want. While the returns may be huge the risk of potential failure could be equally so.
Product Business Pros
- Ability to scale
- More predictable revenue forecasts
- Possible lower overheads
- You’re building your own vision
- People are more mission driven to disrupt and create something new
Product Business Cons
- Requires upfront investment
- Customer support can be a burden
- Unknown demand at first
- Hard to pivot once product is established
- At some point it’s all about optimising
Transitioning from Service to Product
We’re very interested in how you make the move from being a purely service based business to be more product focused. Why? It’s all about leverage, the ability to exponentially scale our impact without having to exponentially scale our headcount. I wanted to find out from others how they managed to do it or whether they were thinking about making the transition. I’ve tried to summarise some of the output from the morning.
The grass isn’t always greener
There is a misconception that by going from service to product you leave behind having to deal with unreasonable people (i.e. clients). While this may be so you will still need to deal with customers and also possibly investors. You’re never truly free to do what you want. The saving grace is that during the development of your product you’ll have reduced the number of stakeholders that try to influence your decisions.
Don’t just do it for the money
An interesting point was made that “there are better ways to invest your money” than build a product. If you’re a successful agency and think that developing a product will be an easy way to generate recurring revenue, then you need to pause. While developing the initial version of the product could be relatively cheap a lot more capital will be needed to grow and scale the business. Also, it’s likely that the first idea you have won’t work (and possibly neither the second, third or fourth). Unless you’re in it for the long haul you need to be prepared to lose more money than you earn for a while.
You need a different mindset
A dynamic creative agency team isn’t necessarily the best team to build and grow products. After the initial creative period of designing and developing the first version and once you’ve built something people are willing to pay for, then it’s all about optimising, refining and scaling. This takes a different, more numbers focused and diligent mindset. It becomes less about radical innovations and more about incremental improvement. Unless a change makes the product radically better customers will be looking for consistency and reliability. Creative innovators will soon get bored. What you need are focused business builders.
How do we define “a product”?
This was an interesting discussion as it wasn’t immediately obvious what the definition should be. If we say that product is all about recurring revenue then agencies that sell retainer agreements sell products. If the definition is more about selling the same thing repeatedly then agencies that productise their process are selling products. Ultimately I believe that the true definition of a product based business is:
- revenue scales much faster than the associated costs
- the cost of provision is consistent (doesn’t change from customer to customer)
- all IP is owned by the business
The conversation needs to continue about which type of business is better but the short answer is “it depends”. If you want to build something truly scalable then you should go down the product route. However, if you love the cut and thrust of working with clients and enjoy the variety then stick with a service business. However, if you’re ambitious maybe you can do both…
Header photo by https://twitter.com/tomeversley