The PS question
Should you do professional services?
Many B2B SaaS companies will consider whether they should be doing
professional services at some point in their lifetime. They will be met with a lot
of conflicting advice on this very topic. In the same spirit as my previous
presentation, I have therefore compiled some of the best content on this topic
from around the web.
Whether you’re already doing professional services or you’re just considering
whether to get started, this presentation will provide you with insights into the
key benefits and the big challenges you’ll be facing when you start
implementing your professional services strategy.
Many young startups are being advised not to have a professional services
business and in my opinion this is a big mistake.
The line of reasoning goes: “Services businesses are not scalable and the
market won’t reward this revenue so make sure that third-parties do your
implementation or clients do it themselves. We only want software revenue.”
This is a huge mistake. If you’re an early-stage enterprise startup services
revenue is exactly what you need. Let me explain why.
➔ Successful implementations: How do you get referenceable customers?
You build a great product and make sure it is used in such a way as to
deliver real benefit to your customers.
5 reasons (1/2)
➔ System integrations: your customers will not dedicate the teams to build the
integrations because they are not yet committed enough to your product or
company. [...] And the other thing: the more your product is integrated with other
systems, the lower your churn rate will be.
➔ Channel partners not yet formed: until your sales volume is sufficiently large, no
self-respecting SI or VAR is going to commit resources to making you successful.
➔ Your best eyes & ears: your most successful sales people are the people who are
on the ground doing the implementations.
➔ It’s profitable revenue covering your fixed costs: professional services =
profitable revenue streams that fuel your business continuity.
5 reasons (2/2)
Sometimes we advise founders of B2B startups to take over-engagement to an
extreme, and to pick a single user and act as if they were consultants building
something just for that one user. [...] As long as you can find just one user who
really needs something and can act on that need, you've got a toehold in
making something people want, and that's as much as any startup needs
Another consulting-like technique for recruiting initially lukewarm users is to use
your software yourselves on their behalf. We did that at Viaweb. [...] We felt
pretty lame at the time. [...] But in retrospect it was exactly the right thing to do,
because it taught us how it would feel to merchants to use our software.
Do things that don’t scale
Add a new revenue layer
Jason M. Lemkin:
But here’s the thing. SaaS Compounds (more on that here). Imagine if you just
added one extra layer, one extra segment, one new way to sell, one product
extension… that just might add another 10% growth this year. [...]
Add professional services, for real. Yuck, you say? Professional services?
Well, enterprise customers are happy to pay for them. You can pack another
20-30% of revenue onto any enterprise deal if you do it right here. Yes, I know
it’s not recurring. But you’ll get it in new deals every year. Hire a head of
professional services and charge for Pro Services. It will work in any six figure
deal, and many five figure deals.
In the case of 37signals, Fried has no plans to sell but loves the freedom of
running a product company. 'When you're a consulting business, you have to
say yes to big clients, who end up telling you what to do. You become beholden
to the giant corporation who is paying you $60,000 for a project,' he explains.
In a service business, clients always take priority, so it is hard to find the time to
work on your product offering. In the case of 37signals, it needed project
management software to better serve its clients, so it had a natural motivator:
either develop the product faster or risk losing clients.
Big clients have a loud voice
Jason M. Lemkin:
Understand that you can make 3-20x the revenues on a given enterprise
customer with a solution sale vs. a tool. [...] But obviously, you’ll probably need
a lot more people and processes (and features and software development) to
provide a true solution. You can’t sell, provision, implement and support a
solution the same way as a tool, even if it’s basically the same business
process you are addressing.
You’ll probably need solution architects. You may have to fly there and go on-
site. You may need account managers and a dedicated professional services
team and sophisticated customer success managers. [...] In any event, at least:
don’t fear the solution. Don’t fear the professional services team, or the solution
architect, or the sales engineer.
A solution sale takes more work
Consulting is the canonical example of work that doesn't scale. But (like other
ways of bestowing one's favors liberally) it's safe to do it so long as you're not
being paid to. That's where companies cross the line.
So long as you're a product company that's merely being extra attentive to a
customer, they're very grateful even if you don't solve all their problems.
But when they start paying you specifically for that attentiveness —when they
start paying you by the hour— they expect you to do everything.
Be careful of crossing the line
The most important thing to be careful about is to be sure WHY you’re doing
the PS business. Hopefully it’s not as a way of avoiding fund raising or finding
quick pockets of money. Don’t become addicted to the quick hit of cash that a
big implementation project can provide.Your goal should be to do PS as a way
of accelerating future non-linear software growth.Therefore you need to be
careful not to accept projects that are too far out of the core business. [...]
Be careful that you don’t incentivize your sales staff to make you into a
professional services firm. You can’t pay full bonus on PS revenue. Not only
because it’s lower gross margin, less scalable and more consumptive of staff
but also because if you make it easy for them to sell PS which is always higher
revenue than paying for software you’ll be sure they sell it ALL DAY LONG.
Don’t let PS take over your company
Your PS business cannot become a management distraction.
Another rule I outline with our portfolio companies who sell enterprise solutions
is that I don’t want them to become a distraction for management. If your CEO
is having to get involved too much in reviewing project success or your core
product team is getting sucked into implementing too many features to support
the rollout efforts chances are you’ve gone too far.
Control the size of PS revenue relative to your software business.
So how much PS is too much? [...] By the time you’re at $5-20m in software
sales I’d like to see PS be no more than 25% of your total revenue.
Manage, but from a distance
But as their projects grew larger and more complex, Fried and co-founder,
David Heinemeier Hansson, found themselves looking for a piece of software
that could help them better manage jobs among a growing network of staff and
contract help. [...] They decided to build a simple piece of project management
software for their own internal use.
37signals' clients saw the simplicity of the software and started asking where
they could buy it. It wasn't long before Fried and his partner realized they had
built a product that might have mass appeal. They polished it up, gave it the
name Basecamp and announced its availability. A year later, Basecamp was
more profitable than the web design business, and so 37signals stopped being
a service business and started being a product business.
From service to product company
One of the best ways for young startups to finance their business without any
dilution is what I call “customer financing,” which is mostly only possible in
businesses that target businesses rather than consumers. Customer financing
often comes in the form of your company agreeing to build a product with a
“sponsor” customer or two and helping them with the rollout / implementation.
Often in this strategy you end up giving them the product for free and bill them
only services fees. You own the IP you create.
The benefits for you are even more clear: you get to build a product raising
significantly less external money (if any at all) and therefore no dilution.
Customer financing = less dilution
Making the best out of PS
Done right, a professional services implementation has a lot of advantages:
➔ You get the ability to sell more, while targetting larger clients
➔ You become less dependant on investors for your financing
➔ You can do customer discovery while making money
As long as your company can avoid the pitfalls described above, defining and
implementing a professional services strategy will help you will all the core
parts of your business. However, you’ll have to make sure that the size of
customers you’re going after justifies it: professional services only make sense
when you’re aiming at medium-to-large customers.
Mark Suster (Upfront Ventures)
Jason M. Lemkin (Storm Ventures)
Paul Graham (Y Combinator)
Jason Fried (Basecamp)
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