How to Convert a Service Business into a Product Startup
It goes without saying that a product company is far more valuable than a service company. That is why every service provider fantasizes about turning their service into a product. The problem is that there are a lot of wrong ways to start that evolution, and getting it wrong
I’ve been through the product development process several times. It’s almost become my specialty. My first startup was a successful conversion of a consulting business into a product. My current startup is transforming a time-consuming service into a product. Along the way, I’ve discovered that there are only a few overarching strategies for converting a service to a product, and they all come with easy-to-make, potentially fatal mistakes.
But here’s the thing: product evolution is unavoidable at some point. Service-based businesses, no matter how well-run or how high-end the service, will always be limited to two to three times the labor costs. And if we run out of low-cost labor, the business collapses like a Ponzi scheme.
If our service isn’t behaving and evolving like a product, we can be certain that technology, market trends, and skill scarcity will turn our business into a race against time.
So I’ll go over each of the overarching strategies and how I used them to transition from a service business to a fully-functional product company, as well as how to avoid the fatal mistakes along the way.
Automation: Machines handle all non-skilled tasks (and some of the skill stuff).
What if you could take all of your fantasy football league stats and write crisp, fun recaps that read like sports-page articles about your and your friends’ matchups? It’d take you a couple of hours to do it properly, and maybe two of your 10 league friends would notice, but they’d notice a lot.
Imagine if you could do this for everyone who participated in fantasy football. According to the most recent estimates, 41 million people play fantasy football, so two out of ten equals 8.2 million people who care. Unfortunately, performing that service would require millions of hours.
At my previous company, Automated Insights, I created the algorithms while the founder wrote the code to get machines to write those recaps in three hours. Assume those machines aren’t churning out silly fantasy football recaps, but rather public company earnings release reports. Our technology was used by the Associated Press to publish highly detailed deep dives into each release about 12 seconds after the data was made available.
Our automation did not eliminate the need for writing, but it did turn the service of data analysis and reporting into a product.
While automation has been used as a productization strategy for as long as there have been machines, technology has advanced to the point where we can begin to automate tasks we never thought possible.
The Killer Error: All machines, no humans
Some tasks are simply not meant to be automated. In the fantasy football example, humans “wrote” the articles, but in a different way, multidimensionally rather than linearly. Without our human intervention, the articles would have read like Mad Libs (same words, different numbers) or stiffly robotic.
To put it another way, if we automate too much, we lose usability. Take care where you invest your profits.
Repeatable Methodology: Don’t just do it; teach them how to do it.
When you get really good at something, you probably learn all kinds of tools and shortcuts that help you be better and more efficient. You’ve probably thought of a few of your own. Selling those shortcuts is a really simple way to go product.
Financial Dynamics, a technical consulting firm that built client-server software for Fortune 500 companies, was the first startup I worked for. We started building a framework that we would install before we started coding as we got better at it, and that framework did a lot of repetitive stuff very elegantly with a single command.
We eventually reached the point where we were 80% framework and 20% custom. Then we stopped developing custom software entirely and only sold the framework. We were acquired shortly after the transition to a product company was completed.
The Deadly Mistake: Methodologies do not sell, but tools
The most common error I see is when service companies rely too heavily on their methodologies. They end up selling a process rather than a set of tools, which reduces their service to an exercise rather than a product. Business is not an exercise, no matter how good it is.
A second error I see is when service companies undervalue their own talent and experience, mistakenly believing that anyone can do their job by following their methodology. This almost never happens. Maintain a managed services division within the organization.
Packaging: Distributing revenue to a larger number of customers
With the Do-It-For-Me (DIFM) economy exploding, all kinds of consumer startups are springing up to handle those time-consuming and inconvenient tasks that were previously DIY.
It began with simple services such as lawn care and (wink-wink) car washes. Spiffy, my current startup, is your one-stop shop for car wash, oil change, and soon a variety of other vehicle maintenance services, so you’ll never have to “take your car in” again when it needs something.
The consumer service-to-product market is expanding to almost every (in)convenience we can DIFM for busy customers now that everyone has a computer in their pocket.
And, of course, having an app handle your individual business (personal or impersonal, depending on your perspective on technology) is becoming the norm in regular business. Accounting, hiring, marketing, and sales transactions, as well as technical architecture and online storefronts, are all becoming digital and productized.
Recurring revenue is the allure. When you productize a service, your company’s financial health is less dependent on the financial health of your customers. Your customers, on the other hand, are a more quantifiable and consistent stream of numbers.