Building software products vs building productized services

by Sean Boyce

After you’ve identified problems worth solving and selected the problem you wish to solve, the next step is to think through exactly how you are going to solve this problem and provide value to your client.

Since you are likely interested in building a product to solve this problem, you are probably at least considering a software solution.  However, as I wrote about in my previous article, I would also recommend you consider a productized service as well.  

So which strategy should you choose?  That’s what I’m going to talk about in this article so you can weigh your options.

Background

There are numerous variables to consider when evaluating whether or not to build a software solution product or a productized service.  Factors like time to market, cost, complexity, scalability are the more obvious factors.  Oddly enough, critical factors I don’t see enough professional services firms considering are elements like risk, validation of their value proposition and business model.

You should consider all of these when deciding.  Depending on where your firm is with each of these factors will make it easier to select the right strategy for you.  

What you are probably most excited about, is getting your product to market.  As such, the first topic I want to talk about is go-to-market or GTM.  Let’s take a closer look at both strategies from this point of view.

The Product Go-To-Market (GTM) Strategies

The two strategies we’re going to compare for bringing a product to market are software solutions and productized services.

Software Solutions

The most common version of a software solution would look like a Software-as-a-Service (SaaS) product.  This is typically what we refer to as web-based software that runs in a web browser and can be accessed from anywhere.  The most common business model for a SaaS product is subscription based.  Your clients would pay you a monthly or annual recurring fee to maintain access to your SaaS product and the value it delivers.

An example of a software solution product is my company StaffGeek or another favorite of mine in BaseCamp.  StaffGeek is a tool that drives smarter hiring decisions to achieve productivity through your company culture.  BaseCamp is a project management toolkit for ensuring your team stays productive when working remotely.

Productized Services

A productized service is a limited scope service that is marketed and sold like a product.  It takes the advantages of software solutions (SaaS products) and customized services then hybrids them together to create something unique.  A productized service is limited in scope to more accurately match a typical product, but the value the client ultimately receives is still delivered by the people on your team.

An example of a productized service is my company Podcast Chef or GrowModo.  Podcast Chef provides professional service providers with a way to generate real leads through relationships by starting a podcast.  GrowModo offers website design and website development services.

That’s a high level overview of each strategy complete with a few examples.  Next, we’re going to dive into the advantages and disadvantages of each product strategy.

Evaluating the Software Solutions Product Strategy

Each of these strategies has their relative strengths and weaknesses.  I’d like to explore the most important factors of each when considering the right one for your professional services firm to bring a product to market.

Advantages of Software Solutions

Leveraging a software solution strategy for your product is exciting. Not only is it a new world for you to explore, it’s quite different from running your professional services based firm. Some of the key advantages of leveraging this strategy when done properly are that software can be infinitely scalable, overhead can be kept to a minimum and you are also likely to experience a much higher profit margin.

For lots of reasons, this makes a software solution strategy for your product very attractive.  Each of these are essentially the opposite of what is likely occurring right now at your professional services firm.  As such, having a product to offer that experiences these relative strengths can make for an excellent compliment to the services you are currently offering.

Disadvantages of Software Solutions

Software is very attractive…from the surface.  However, when you dive a little deeper, you see that there’s plenty of reasons to take a cautious approach when considering this strategy for your product right out of the gate.

Probably the most important factor to mention here is that finding product market fit is a real challenge for most companies building software solutions. Very rarely do I ever see that enough research has been done to truly understand the market needs before they decide to build. This is one of the driving factors for why the failure rate for software products is so high – greater than 9 out of 10 software products fail.

Additional disadvantages to consider are the fact that knowing what to build or who to build it for is often not specific enough before most decide to actually build. This means a lot of additional time and money invested making significant changes after the initial build. You need to be very clear and specific as to what problems you are solving and the opinionated way you intend to solve them for your client.  Software is inflexible, which means that you need to decide how the problem will be solved in advance of testing it with real clients.  If they don’t like the way you’ve solved their problem, you are again faced with additional re-work.

I mention all of this to say that there are many reasons why your software product may not be as successful as you are hoping for right out of the gate. There is much to do to ensure this process goes as well as it can and even then, re-work is likely. Software is a significant investment in both time and money.

To give you some additional context on just how much software development effort is essentially wasted, the following report states that only 12% of software features provide 80% of the value received to clients from software products. This means that up to approximately 88% of development effort is essentially wasted. Ouch.

So now that you are more aware of the respective strengths and weaknesses to the software solution product strategy approach, let’s take a closer look at productized services to compare.

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Evaluating the Productized Services Product Strategy

Productized services take a unique approach of hybriding the advantages of both product and services. They were brought to market as a response to solving the respective challenges associated with each approach to create something new. Let’s take a closer look.

Advantages of Productized Services

Productized services have the late mover advantage, meaning this strategy has been developed with the respective weaknesses of both services and software solutions in mind. As such, it has attempted to address each. Since productized services have been designed with this in mind, they’ve combined the strengths of each approach in an effort to solve for the bigger challenges.

Productized services benefit from the simplicity of marketing and selling products by limiting the scope of the solution you offer. This helps connect the dots for clients when they are evaluating exactly how they’d like to solve their problems. This also helps you target a more specific audience which also helps you reach more people.  As they say, the riches are in the niches and I’ve found this to be largely true.

Since productized services force you to limit the scope of your service, they scale much better. Implementation is not nearly as complex.  It is repeatable and repeatability is the first step towards achieving scalability.  

Productized services also benefit from unique flexibility in implementation. Since the value to the client is being delivered by a process, and not by software, it can be modified rather quickly and easily. This makes your solution more agile, which is critical during the testing phase. As I mentioned above, the first version of software often misses the mark and needs to be changed which can be very expensive and time consuming. Productized services don’t have this problem.

For all of these reasons, offering productized services is also more cost effective than traditional services. By limiting the scope and focusing on the procedure to deliver the value, you can be specific about the detailed steps required which enables you to get much more precise in measuring your costs. Having better data here means you can better set your prices to protect your margin and keep it consistent. Again, all of this will support your growth at scale.

However, no strategy is perfect so let’s talk about any weaknesses as well.

Disadvantages of Productized Services

The respective weaknesses of productized services come mainly from the fact they are still technically services. For example, productized services are not infinitely scalable (like software). However, this may or may not be particularly relevant for you. More on this later. Productized services are better designed for a more reasonable growth trajectory. Some may actually consider this limitation to be a strength because growing too fast can actually be a bad thing.

Productized services will require you to build a team (or leverage the team you already have) to deliver the service to your client. This won’t happen overnight either. You’ll need to precisely design and build the procedure with each step mapped out with clear deliverables and key objectives to ensure the process goes well. You’ll then need to train your team on how to complete each step and manage their effort to ensure the quality of the results they produce remains high. As such, you will incur more overhead as your productized service gets off the ground.

I also want to talk about a less obvious weakness of productized services, they aren’t as sexy as software. Essentially, they have a bit of a branding problem when compared with software products. People have a tendency to romanticize the capabilities of software products and shy away from anything that has service in its name, but I feel this is a mistake. Productized services are a wonderful strategy to consider and have achieved a ridiculous amount of success for professional services firms everywhere. As mentioned previously, I’ve built a productized service firm of my own and I recommend the model for people all the time.  It’s even a great strategy to consider before entertaining building a software solution. More on that later as well.

Evaluating the Risks of each Product Strategy

To get more direct about where each of these strategies typically fail, I wanted to include a section specifically dedicated to drawing greater attention to the biggest risks facing each.

Software Solutions

As mentioned previously, most software features that are built aren’t used and most software product companies fail (greater than 9 out of 10). The risk is very high and the cost and time to develop is as well. I’ve had clients that have invested years and hundreds of thousands of dollars into building software products that haven’t generated a dime in revenue. Those are extreme examples, but they are out there. As such, you need to be very careful when considering leveraging this strategy as it can quickly and easily go sideways and turn into an endless money pit that seems to go on forever.

Productized Services

Besides the more obvious weaknesses that I mentioned above, I don’t have a lot more to say against the productized services model. Generally speaking, it’s solid and even a great way to validate what you would like to eventually build with software. If you can get over the fact that building a productized service isn’t as sexy as building a software product, you might just wind up being more successful than you previously imagined.

Evaluating the Costs of each Product Strategy

Everytime anyone gets excited about anything, there’s always the bottom line – what is this going to cost me?? I’ve got you covered there as well. Below, you’ll get my take on what you might expect to budget for if you consider one of these two product strategies.

Software Solutions

If you’re considering building a software solution, what you’ll hear experienced folks in this space say is something along the lines of scoping out everything as meticulously as you can then double or tripling that number. This is because scope creep is real. Scope creep is adding on to what you originally intended to build during the actual process of building. It happens to everyone and if you decide to go the software solution route, it will happen to you.  

As such, you need to be really tight with all of the factors I mentioned previously to ensure what you design is what you build. This will help keep your costs and time invested to a minimum throughout the process.

Productized Services

You’ll need to make the same determinations about key factors when entering the build phase of a productized service, primarily, laser focusing on the problem you will solve for your specific client. You’ll need to know how your productized service is going to solve it better than how they are solving it today. Each of these factors will influence what you need to validate to make sure the model works. Beyond these efforts, the majority of the cost of building a productized service will come from your time. A key advantage here is there may only be a small amount of software to build or better yet, none at all.  

Selecting the Right Product Strategy for You

Eventually, you need to choose a strategy so you can get moving with building your product. So which one is right for you? Well, as usual, it depends. If you are solid with all the factors that matter, you may be ready to go the software solution route because productized services may only slow you down. However, if any of those factors are not properly validated, then productizing services might be the way to go because it will help you make progress without jeopardizing the overall success of your mission.

Generally speaking, my best recommendation is to think along these lines. If you are building a solution to your own problem (you are the client), then I’d be more likely to consider a software solution. However, if you’ll be building a solution for your client, then I’m much more likely to recommend you leverage a productized services strategy.

Getting Started

The first step in the process here continues with my recommendation from the previous section in terms of identifying the right strategy for you.  First, identify whether or not you’ll be solving problems for yourself or your client.  Once you know that, you can get a clearer picture of which strategy may be best for you.

Hiring Help

I’ve seen lots of success and failure (myself included) with building software solutions and productized services.  If there’s a combination in there, then I’ve experienced it.  What this means for you is that I’m in a great position to help you succeed.    

My specialty is product and I offer help through service so I know both worlds. I can help you achieve greater scalability and profitability for your professional services firm through software solutions, productized services or both.

Reach out to learn more by emailing me at sean@nxtstep.io or booking time to speak with me about the needs of your business.

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