Moving from selling services to selling product

Products are hard, but you should be trying to move past hourly-based billing

Moving from services work to having a successful product is probably one of the hardest things to do. Well, perhaps no harder than doing any startup from scratch, but the benefit in doing it from a services company is that you have a built-in way to bootstrap yourself.

As a single consultant or small development shop, you work for a number of clients on different projects. You might become known as an “X” shop, where X is some particular framework or programming language, being the go-to team when the complex or large projects come up. You get to learn about different verticals and different problems, coming up with technical and design solutions to fit. And you make consistent income 1 with a high flexibility around work hours and location.

With a product of your own, you get to invest in the things that matter to you - the design, the vision, the care given to the technical smoothing, or perhaps the user experience of contacting support. Really, you can invest in whatever parts of the product that you’d like. There is no client to wreck the design or insist on the wrong features or really, any of that other complicated dealing-with-clients stuff. There is a fantastic recent post by the makers of Harvest, a time tracking app, that really speaks to the pride that a team can have in building a product:

Our team is comprised of people who believe in crafting beautiful code, sweating the details and pixels, and working hard to find the right words to express our ideas. At the end of each day, we want to take a step back and say, “that’s our best work yet.”
Harvest Blog On Craftsmanship

It’s somewhat ironic that a time tracking web app – likely an essential tool in the profitability of service companies – is referenced in the context of building a product instead.

Buying your time back

One of the things I’ve started using in my discussion with services companies is the concept of making the first $10,000 with their product. That’s $10K per month.

I came up with that number as short hand for two intermediate developers working on it full time. That’s usually when it hits home that products are hard. Because I’m not adding in the cost of offices, or hosting, or, you know, stuff like marketing.

The math for startup founders is a bit easier. Even in high-cost-of-living Vancouver, my standard back of envelope assigns $2K / month for founder salaries 2. As a single developer, any product that makes you $2K per month means you have an unlimited runway. Do you try and build another product to see if it’s easier or harder to get customers? Do you add new features or add new distribution channels – you’ve got lots of options, since your base cost of living needs are met.

In any case, that first X dollar amount can be something that focuses your effort. In essence, you are buying your time back, by having customers who are funding your product.

Productizing Your Services

One of the discussions I have with many people is how to productize themselves and their services. This doesn’t apply just to software developers, but anybody who is being paid for their expertise on an hourly basis.

What I mean by productize is to have standard packages and pricing. Even if you translate those packages back into hours, this gives you the freedom to look at investing in tooling & automation – in building products inside your business that aren’t just hours.

Hourly billing is a fools game. It misaligns the motives of clients and consulting shops. You, as consulting shop, are driven to equate billing more hours with making more money. When instead you should focus on becoming more awesome at what you do, while continuing to rent that awesomeness to your clients. My friends at Denim & Steel call it “invention for hire”.

The switch to agile makes things a little bit better, especially with custom software development. You can set a flat rate per iteration for your team, perhaps with a flat rate “on boarding” with the client to set the features and timelines. An interesting new startup that is helping connect teams and clients who want to practice this method is Group Talent. I haven’t had any direct experience with the site yet, but anything that moves us away from RFP responses and hourly billing is a good thing.

Investing in your product

Every startup blog under the sun talks about customer development, lean, and various other ways to go through the process of building a startup product. This doesn’t change when you are doing it from inside a services company, but you should consider the time as an investment.

I started by talking about buying your time back. You should track the time you put into your product, just as if it was another client. If you’re lucky enough to have high margins on client work, you might just be able to buy back big chunks of time to invest. This could be a time period for the whole company, or having individuals dedicated to the product full time.

One note about building a product that scratches your own itch. If you are spinning out a tool that you are using yourself internally, you’ll need to work extra hard to be objective about the customers for the product. There are many many MANY project management, time tracking, and proprietary CMS platforms out there: why will yours succeed where so many have failed? As always, the test is will customers buy it? And I do mean “buy it” – having your clients use it as part of your consulting work is not a good enough test.

To get real feedback on whether this is a viable business, you have to actually attempt to sell it to people. It can be tough to flip the switch and attempt this. It also means that actual non-development hours (and potentially non-developer people!) are going to be needed to spread the word, get feedback, and generally dedicate time to making the product a business, with all that entails.

As a service company, you can trick yourself into carrying the cost for a product that simply isn’t making money. Setting sales goals – such as X paying customers after Y months – can be a good trigger to do further investment on your own, like dedicating a full time person before the product is bringing in a full salary. But, this can’t continue forever: the product has to be showing enough traction that your investment pays off.

No VC money required

I think this is one of the big things that people aspire to – to say they didn’t need a VC (or angel).

The recent story of MetaLab, a Victoria-based company, entitled Build the rocket first: From $0 to $500K in 1 year with no VC money had all sorts of attention. There are some great stats that make for interesting reference points:

  • three people were dedicated to the project for nine months
  • 25% of the team’s time was allocated to client work
  • the estimate of the cost of their product, Flow, came in at $300K
  • there are now 10 people working on Flow full time

The article says “We broke all the rules”. Well, not really – I think they did all the right things in doing a services to product move. So the stories about the MetaLab team focusing is, I think, more about making a plan and sticking to it until they literally bought all of their time back (and more!).

Focus

I’ve been looking for an excuse to spread this post by Matt Henderson of Makalu Media more widely.

Matt wrote a post on How to schedule focus, suggesting that all of their projects get planned in blocks of a week. This means the entire team can be working on one thing - so everyone can be in this flow of having context and riffing off each others’ ideas, problems, and solutions. Versus the context switching overhead of juggling multiple clients, multiple project teams, and so on.

If you’re able to “buy” an entire iteration of work for your entire team, this would be the ideal way to move a product forward.

Consider this both a recommendation to follow more of what Matt & Makalu are up to, as well as a prompt for Matt to get us an update of how it’s working out!

Let’s Talk

I’ve been having all sorts of discussions with teams on both sides of the services vs. product equation. The title of this post specifically says “services to product” – since I believe that you should be investing some of your services time into trying to make a product.

I’ll be at the 2012 Polyglot Conference on May 26th, where I hope you’ll join me for a live discussion. Bring your own experiences and questions. Track the talk on the Polyglot Session Suggestions site, as well as adding your own comments and links.


Footnotes

1 Consulting realities: Most of @ASmartBear’s post focuses on the difficulties / painful realities, but he ends with this quote: <blockquote author="Jason Cohen" href="http://blog.asmartbear.com/consulting-company-accounting.html The unfortunate math behind consulting companies">

Most consulting companies don’t make much profit, and it’s one in a thousand that has the discipline to launch a successful product during off-hours. If you’re going to make it happen, you yourself need to be serious, disciplined, and relentless.

But you can do it.

And if you do, you’ve just self-financed a startup, made a nice living, mitigated much of the risk of product-only startups, and built a great team in the process.
Jason Cohen The unfortunate math behind consulting companies </blockquote>

2 Founder salaries: I have heard some gripes recently that barely funded companies are having their founders take home a “regular” salary of that $5K / month mark, or higher. I agree that that’s too high, barring special circumstances. Your payoff from a successful startup should be a lot more than a couple of thousand per month. With two founders, dialing back your take home pay means you can pay another person to be full time.