© 2000 Johanna Rothman. This article was originally published in Mass High Tech, 2000.
“We’ll sell some consulting along with our product, until we’re making enough revenue. Then we’ll phase out the consulting, and be just a product company.” — senior manager at a Boston-area web-based startup
Many startup software/web-based companies decide on a business model that combines products and consulting. It could be years before their products are commodities; their customers want and need the extra consulting services that come with the product. Their customers frequently say, “Just solve my problem, I don’t care how your tool works.”
Unfortunately, many of those vendors run into trouble a couple of years into their growth, with insufficient product or consulting sales. Some standard advice is to choose whether you’re a product or service company, and then put all your energy into one or the other.
If that’s not possible, especially if your product is defining a new market, here are some ideas to help you make the most of your product or service revenue stream:
Hire for excellence in product development and consulting
Since you’re making revenue from product and consulting sales, you need to have people who can deliver for both areas. A recent client hired great developers, inadequate testers, and insufficiently trained consultants. They were surprised that they couldn’t get out a stable product, and that not all their consultants could install it. Once they started hiring great testers and started training their consultants, they were able to work through their customer problem backlog, over the course of six months.
When you’re hiring consultants, look for technical skill in the work around your tools. Are there specific languages or databases the consultants should know about? If they don’t know about them, can candidates turn into successful consultants for you?
Even more important than the technical skills are the problem-solving skills. Consultants are at client sites, where you can’t always help them. Look for consulting candidates who are able to consider the possibilities and come up with solutions. Also, look for people who want to bring that knowledge back into your company, so not everyone has to learn the same lessons with the same difficulty.
Define and continually refine your product strategy
Define your product strategy for the next couple of years by what’s going to be in each release, and how frequent the releases are. If you’re a young company going after a new market, get ready for small quarterly releases. Yes, they’re hard to do. It’s very tempting to say, “Let’s add just one more feature”.
Adding one more feature and pushing out releases while you’re creating a market is a bad idea for a number of reasons:
- If you need to do something small quickly, your development staff will be too focused on the long term, and will be unable to switch context to release quickly.
- If it’s too long between releases, your customers will start pressuring your consultants to customize the product for them. Your consultants will customize, because they’re focused on getting and keeping the customers happy. You will end up with a series of one-off products, tired consultants, frustrated developers, and an incoherent product strategy.
- Nothing ever takes what you think it will take. It always takes longer in software. That “one little feature” will push out the release longer than you could possibly imagine.
Use your product strategy refinement to focus the product for the short term and to steer the product for the longer term.
Decide how long you will have this mix of products and services.
If you’re creating a new marketplace, then you probably have a “boutique” product that is too complex to be a mainstream product at this time. If you’re playing in an already-existing market, your customers may want an entire solution, not a tool. In either case, you need to mature your product so that it is a solution, not a tool, and that takes time. So, decide how long you are willing for it to take. Your product strategy can help. In addition to your product strategy, measure what’s important to you at specific intervals.
Some measurements could be:
- What percentage of sales are due to product and what percentage are due to consulting? What is the actual cost of a sale, both for the product and for the consulting? These two questions tell you what you’re selling, and how well your proposals estimated the actual sale. Along with your customer satisfaction metrics, track these measurements quarterly, to learn where you make money and where you lose money. Once you know where you make money and where you lose money, you can consider other choices.
- Are those consulting and product sales percentages where we want them? Do we need to sell more products or more consulting? Is there something preventing us from selling more of one or the other? Look for uneven-ness in sales and delivery, and make sure your people are helping you deliver the products and services you want to deliber.
- What’s the consulting backlog? If you have a backlog longer than you prefer, make sure you know why. Sometimes, you have a backlog because you don’t have enough consultants or enough specific consultants, and sometimes it’s because you’re waiting for a new release of the product.
It’s difficult to be both a product and services company, but it’s not impossible. Decide on a product strategy, hire people who can get the jobs done, measure what’s important to you, and keep checking where you are with respect to where you want to be.
Like this article? See the other articles. Or, look at my workshops, so you can see how to use advice like this where you work.