What are you building and what do you want?

In my years of experience in the tech industry, I've seen many companies fall into the same trap: they start by pleasing a few customers, often bending over backward to meet their needs, and think they've built a business. But what they don’t realize is that they’ve merely scratched the surface—they haven’t established a product mentality. This approach might keep the lights on initially, but it doesn’t set the foundation for scaling.

These companies often find themselves at a crossroads, realizing too late that they haven't built the right technology or cultivated the necessary culture to scale into the business they eventually want to become. They’re stuck in a mode of constant customization, tailoring their offerings to the whims of a few clients rather than creating a scalable product that can serve many. As a result, they struggle to grow beyond a small, service-oriented operation, limiting their potential and value.

The transition from a service/consulting 'we will build the feature you ask for' mindset to a product-oriented one is not just a shift in how you operate—it's a fundamental change in how you think about your business. It requires not only the right technology, built with scalability and flexibility in mind, but also a culture that prioritizes standardization, efficiency, and long-term growth over short-term customer satisfaction. Without this shift, companies risk remaining small, unable to achieve the scale, efficiency, and valuation that true software products command.

The Crucial Distinction Between a Technology-Enabled Service Provider and a Software Product

In the rapidly evolving world of software and technology, understanding the difference between a technology-enabled service provider and a software product is essential for businesses aiming to scale, maximize value, and achieve their long-term goals. This distinction lies primarily in their business models, the value they deliver, and how they are used by customers. But beyond these operational differences, the choice between building a service or a product has significant implications for your company's culture, technology, and, ultimately, its valuation.

Technology-Enabled Service Provider

A technology-enabled service provider offers a powerful software tool that can do almost anything but requires a consultant to tailor and apply it to each customer's specific needs. In this model, the software acts as a versatile platform, not as the final product, but as a foundation upon which customized services are built. Here are some key characteristics that define this approach:

·??Consultant-Driven: The core offering is a service that involves a consultant or expert who understands both the software tool and the customer’s unique requirements. The consultant configures, adapts, and applies the software to create a tailored solution for each client.

·??Flexible and Adaptive: The software is highly flexible and can be molded to meet the diverse needs of individual customers. This often involves significant customization and continuous adaptation as the customer’s needs evolve over time.

·?Human Expertise: While the software is a critical component, human expertise is essential in delivering the service. The consultant’s role is to guide the customer through the process, ensuring the software is used effectively and that it delivers the desired outcomes.

·?Ongoing Engagement: The business model typically involves ongoing relationships with customers, with recurring revenue generated through subscription fees, service contracts, or pay-per-use models. The value is delivered continuously as the software tool is applied and refined according to the customer's changing needs.

·?Example: A company might offer a comprehensive data analytics platform capable of handling vast amounts of data. However, the true value comes from the consultants who work closely with each client to customize the platform, integrate it with existing systems, and provide ongoing insights and recommendations. The software is the engine, but the service and expertise are what drive the outcomes.

In this model, the software is a powerful tool, but it requires skilled hands to unlock its full potential, making the service provided as crucial as the technology itself.

Software Product

On the other hand, a software product is a standalone piece of software that customers purchase or subscribe to in order to use for specific functions or tasks. Here are some distinguishing features of this model:

• Product-Oriented: The primary offering is the software itself, designed to solve specific problems or fulfill particular needs. Once purchased or subscribed to, the customer uses the software independently.
• Standardized: While software products can be customizable to some extent, they are generally standardized solutions designed to be used by a broad audience. Customization is typically limited to configuration settings rather than extensive service-based adjustments.
• Self-Service: Customers are usually expected to install, configure, and use the software with minimal ongoing involvement from the vendor. Support might be available, but it is often limited to technical assistance rather than ongoing service delivery.
• Revenue Model: The business model might involve one-time purchases, subscription fees, or usage-based pricing. The revenue is often tied to the sale or licensing of the software itself, rather than ongoing service.
• Example: A project management tool like Jira is a software product that companies buy to manage their projects. Once acquired, the users interact with the software to organize tasks, assign work, and track progress without the need for ongoing service from the provider.

Why Software Products Command Higher Valuations

A key reason software products command higher valuations than technology-enabled services is their ability to scale with minimal additional cost. Software products can "make money while you sleep," generating revenue without the need for ongoing human involvement. They don’t require the “flesh wrapping” of services, which makes them more attractive to investors and acquirers.

However, achieving the valuation of a software product is not just about what you sell—it's about how you build and operate your business. There are two critical issues to consider when transitioning from a service provider to a product company: technology and culture.

The Two Critical Issues: Technology and Culture

1. Technology

• Architecture Matters: To build a true software product, the technology must be architected correctly from the start. This means designing with scalability, maintainability, flexibility, and all the other 'ilities' in mind. If your software isn’t designed for scalability, you're not building a product; you're building a sandbox that won’t support your business growth.
• Think Like a Product: Even if you're working in software, you need to think of it as a physical product. Flexibility should come from configuration, not customization. Customization for individual clients can lead to technical debt and hinder scalability, which ultimately prevents you from achieving your business goals.
• Hiring Right: When interviewing developers, I always ask if they’ve built a commercial software product before. Writing code for an internal IT shop inside a corporation is not the same as building software for the market. A commercial product demands a different approach to coding, architecture, and user experience.

2. Culture

• Product vs. Service Mentality: Culture plays a huge role in whether you can make the transition from a service provider to a product company. Do you think like a product company or a service company? Product companies focus on scalability, standardization, and saying 'no' to custom requests that don’t fit the broader product vision.
• Saying No: Can you say no when a big company demands a new feature just for them? If not, you might be better off continuing as a technology-enabled service provider. Selling tools wrapped with people services can be profitable, but it won’t achieve the same valuation as a true software product company.
• Decide Your DNA: Don’t wait until you’re thinking about exiting your company to decide what you want. Decide now. Determine what your DNA is and what kind of valuation you’re aiming for. If you want the higher valuation that comes with being a product company, you need to align both your technology and culture to support that goal.

Summary

The distinction between a technology-enabled service provider and a software product lies in more than just the business model; it’s about how you think, design, and operate. A technology-enabled service provider delivers a service enhanced by technology, often involving significant human involvement and customization. In contrast, a software product is a standalone solution designed for independent use, capable of scaling without proportional increases in costs.

If you aspire to achieve the valuation of a software product company, you must think, build, and operate like one from the start. This involves not only architecting your technology for scalability and flexibility but also cultivating a culture that prioritizes product thinking over service customization. Only then can you realize the true potential and value of your business.