In today’s day and age, many marketing and media agencies are in the process of assessing whether it might make sense to build their own products. For some agencies, it is a natural step in their organizational maturity and they possess the necessary core competencies and other key resources to effectively pull off productization. For others, it is the wrong decision due to several major constraints.
Making the decision to productize your business will require you to think deeply about a number of things, from money management to customer relations to what you want your work environment to be like day in and day out. There are advantages to both a product-based business as well as a service-based model, and each has their downsides as well. To help you start weighing out the different aspects of each type of business, we’ve put together some of the biggest pros and cons for you to consider when making your decision:
Service Business Model
- Doesn’t require much capital to begin: You simply need to cover the cost of employees (or contractors) and overhead, which can be low, especially if you work with a remote team. If you’re just starting out as a one-man-band, you could initially operate as a sole proprietor who works from home and invest as little as a couple hundred dollars into marketing materials (website, business cards, etc.—all optional) and become cash-flow positive as soon as you sign your first client.
- Traditional way of business: Providing a service as your business is a tale as old as time, while forging new pathways with a product can steer you into potentially uncharted territory. If you’re the type who doesn’t like surprises, this is the predictable, safe way to go.
- Something new every day: Working with a variety of clients allows you to change up your routine periodically so you’re not focused on the same tasks day in and day out. This makes for a more interesting work environment for those who tend to bore easily or like switching things up every once in a while.
- The market already exists: Again, for those who aren’t keen on surprises, you have (hopefully) already done the research on whether your market exists before launching your service business. You know your audience is out there from the get-go, it’s just a matter of getting in front of them. If you’re good at what you do, pick the right market, and know how to promote yourself, you’re nearly guaranteed to be able to earn a living.
- Not easy to scale: If you’re like a lot of agencies that charge hourly for services or perform project-based work, then your revenue is directly correlated to the number of billable hours. This requires you to constantly hire more people to deliver additional services and be able to grow the company.
- Creativity has its limits: Because you are working for another person or business, your creativity is limited to the client’s requests. You can help guide them in certain directions, but are ultimately working on someone else’s specifications, even if the client’s vision goes against your expert opinion or their own best interests. The customer is always right.
- Client communication is time-consuming: Managing emails, phone calls, meetings, and other communication with clients can be a time-suck, lowering productivity and taking valuable time away from other important tasks.
- Little or no recurring revenue: Payment terms are embedded in your contracts and are often tied to milestone-based deliverables. Once the project is completed, the revenue from that account comes to a halt until the next milestone or project phase is scheduled. While every agency tries to close steady (long-term) accounts, the one-off projects are also part of doing business and require you to constantly sign new clients to maintain a steady revenue stream.
- Lower valuation: There are many factors that go into valuing a service business, including a multiple of profits or EBITDA (earnings before interest, taxes, depreciation, and amortization). The multiple can be anywhere from 1 to 10 based on your market position, year-over-year earnings (YOY) growth, and dependence on a management team. A steady business with very strong market position, YOY growth, and little reliance on management talent can see a multiple as high as 8-10x profits, while a very small business entirely reliant on their star founder can see a multiple of just 1x profits.
- Scalability: Products are much easier and less costly to scale than services, as growth doesn’t necessarily require the addition of more employees, office space, or other overhead costs. In turn, your increased capacity brings with it increased revenue.
- Creativity: Your vision is what guides production, rather than focusing on what a client wants. This allows you to stay aligned with your company’s mission and gives you the freedom to innovate and create a potentially disruptive product.
- Intellectual property ownership: Typically, anything you create for a client is then owned by the client upon delivery. When you’re creating your own products, all intellectual property rights stay under your company’s purview.
- Recurring revenue: With the help of a dedicated sales and marketing team, you can generally project your sales once you’ve got a good grasp of your pipeline metrics, and can easily project cash flow based on your expected sales and average renewal rate.
- Higher valuation: It’s common for fast growth (100%+ year-over-year growth) to be valued in the ballpark of 70-110x monthly recurring revenue (MRR). This means a company with $100,000 in MRR can be valued anywhere in the neighborhood of $7 million to $11 million.
- It’s a gamble: You have to put in the hours and money ahead of time during development in the hopes that you’ll reap the rewards after launch, but there’s no guarantee people will make a purchase, and you truly don’t know what the demand will be like, especially if you’re launching an innovative product. Market research can only take you so far, and you’re simply working on an educated guess.
- Money is required upfront: Product-based businesses require investment from the get-go in order to launch and grow the business. You may need to put your own money down, apply for a loan, or seek investors just to get started.
- Customer services woes: If you have a product, you’ll have customers, and those customers will require support from time to time. Depending on your product and vertical, the nature of customer support/success can drastically vary. It’s important to take care in this regard as they are the people keeping your company afloat. Assisting customers via phone, email, or live chat can be time-consuming and if a particularly significant event occurs (servers go down, for instance), you’ll need to have the capacity to deal with an influx of customer communication.
So you’ve decided to productize your business…
Now what, exactly, are you going to build? Once you identify your product, the key to a successful execution is finding alignment with your core competencies—that is, the talent, knowledge, and expertise that your team collectively possesses.
Take a look at your organization and evaluate the current core competencies of your team. Do they have the fundamental knowledge required to complete various tasks? Are there any areas that could use improvement? If new hires will be made for areas where talent is lacking, is there a strategy in place to train employees as soon as possible?
Ensuring all employees and contractors at all levels are meeting your core competency standards will not only give you peace of mind, but will also help you stay aligned with your strategic plans for your new product-based business.