Should we be a product or services company?

In my career, I had the opportunity to work for services and a product companies and each wrestled with the challenge of trying to expand into the other side. After all, there are financial benefits to both, but in my experience, I have found that it is nearly impossible to do both very well without deliberate investment. One always becomes the core business and the other becomes the adjacency. It almost becomes a story of the heir and the spare.

How do I know if I work for a product company or services?

You would think the answer would be clear but in a world of #subscriptioneconomy, #softwareasaservice, leases and rentals, maintenance agreements, and other strategies for recurring revenue, it isn't as easy to discern anymore.

Simplest Definition

It used to be as simple as "if I put something in a box or bag and transfer ownership at time of sale, it's likely a product." On the contrary, if there is a Statement of Work with #timeandmaterials requiring the effort of an individual, it's likely a service. With products, you often recognize revenue at time of shipping or delivery whereas revenue on a service may be recognized based on percent completion. In a product company, you may refer to your customer as a customer whereas services companies often refer to their customers as "clients." Things only get more confusing from here.

Product as a service

One of the biggest downfalls of a product sale is that there is no guarantee of revenues in the future related to that sale. You could sell a million dollars one quarter, but then half as much the next quarter. This leads to unpredictable forecasts and may make an organization too beholden to the quarter by quarter #revenuedesperation. In order to smooth out the curve, companies found other ways to create a recurring revenue stream from products which has the added benefit of stickiness with the customer. This could describe a lease of a vehicle, a cell phone purchase agreement with free upgrades, leasing of home gym equipment, software-as-a service, or any combination of things we used to buy outright but now we're borrowing.

Service as a product

Just like the product companies found the revenue curve of a services company attractive, the services companies liked the simplicity of a canned product that could be sold out of a catalog with limited effort to customize a quote. Take a maintenance agreement, subscription agreement, IT support, weekly massages, etc. The goal is to productize the service in such a way that makes it easy to leverage a salesforce who knows how to sell products. Once again, the end user becomes the customer vs. the client.

Commercializing a Research and Development (R&D) Project

It's very popular in government contracting for a company to receive grants or contracts to develop an innovative new technology to meet a specific need. These opportunities seem like a no-brainer because someone else is footing the bill, providing the requirements (aka, "voice of the customer"), and the subject matter experts. This often only gets you as far as the prototype stage and it is expected that the company will find a way to commercialize the prototype and bring it to the market. Often these companies pursuing grants are services companies so they may not have the infrastructure to commercialize a product.

Why does it really matter?

I already said that major companies have been crossing over the threshold for the past decade and successfully, I might add. Let's look at 苹果 who used to identify #appletv as a device you bought and now it's an app you can download on other platforms like #firetv and #roku. It has also become a movie and TV subscription service and a platform for purchasing games and other apps. Let's also look at Peloton Interactive and their complete transformation from selling exercise equipment to selling an exercise service where the equipment was only a biproduct of the sale. Even look at Square . We think of the devices as products but what we're really buying is the ability to accept all forms of digital payments everywhere on our mobile phone.

To the consumer (client or customer depending on the situation), it is all a blur. But to the company, their organization needs to understand what they are and what they want to be because the accounting systems, mission and vision, employees, and strategy need to reflect appropriately.

You can't will yourself into a different type of company

Although many a strategic vision has ended with the notional pivot to the other side, it's impossible to think that hope alone is a strategy. Pivoting between products and services or vice versa is a huge undertaking. The vocabulary is different, the forecasting is different, the accounting systems are different, the pricing exercise is different, and so on. I have seen too many companies lead with sales or business development with the notion that

If you sell it, it will come true

In reality, pivoting your sales team and marketing team is much easier than trying to pivot your accounting, finance, and legal teams. All too often, the belief is we just need sales or business development folks who know how to sell products or services and we will figure out the rest when we need to deliver. This is a MISTAKE!

The structure is entirely different

When you think about a product company, you think about upstream and downstream marketing; product managers/owners; an engineering team; a program management office; #voiceofthecustomer; #voiceofthebusiness; a production team, and a sales team. From a legal aspect, you think about user licenses, limited warranty agreements, shipping point vs. receipt, out of box failures, etc.

When you think about a services company, you think about subject matter experts, talent management, recruitment and bench strength, labor categories and hourly rates, overhead rates, fringe benefit costs, contract vehicles, and business development. From a legal perspective, you may be more concerned about non-disclosure agreements, non-solicitation agreements, teaming agreements, collective bargaining agreements, etc.

The Bottom Line

Being a product or service company takes work, intent, investment, strategy, tools, and structure. It's natural for a product company to venture into services and vice-versa. We have seen great examples of success, but these transitions didn't occur overnight and didn't happen without a lot of investment, communication, restructuring, and upgrades to tools and processes. Sometimes the best way to pivot is through acquisition or partnership. Other times, it is possible to do so organically. Figure out where your business sits on the journey and map out a strategy to meet your goals.

Thanks for tuning in

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