from service to product

There are 12 posts filed in from service to product (this is page 2 of 2).

The mental switch – From Service Business to Product Business in 1 Year

This blogpost is part of the series: “My Challenge: From Service Business to Product Business in 1 Year“. You can read the full series here, or you can read this as a stand alone post.

After I published last weeks blogpost about my challenge to be break even on products in 1 year, many people asked me: “So, what is your great idea?“. Well, I have to disappoint you guys and gals. A startup is not about a great idea. Nobody will pay for your idea. People pay you for a solution for their problem. We will come to that in a future blogpost about idea extraction. There I will reveal my idea, explain how I got to that idea, and show you how you can find a problem for which people are willing to pay money if you take away their pain. In this blogpost, I want to focus on something more important than the actual idea: the right mindset. This might be an eye opener for some of you.

In order to succeed in a product business, you will have to spend a lot of time upfront. On short term, this time will have no return. In other words: you are putting time into something without being paid for it. You will NOT be paid for building your product, for the time you spend in the idea extraction or for calling potential customers asking for feedback on your first version. Even worse: you will loose money! Since every minute spent on your product is a minute that you can not spend on billable projects or on your job, it is a complete upfront investment of your time. But you will have to go through this investment if you want to get at the other side. There is no other way. All the successes you see in the world are a result of an upfront time investment. If you are serious on launching your product business, you have to give up some things now in order to be better off later. And you have to act on it. Now.

Trading time for money is like smoking: it’s an addiction. And the longer you smoke, the more difficult it is to stop. Or in other words: the sooner you stop smoking, the more easy it is to succeed. So it is ALWAYS BETTER TO STOP TODAY THAN TO STOP TOMORROW. By postponing, you make it more difficult for yourself. And between you and me, how silly is it to take the most difficult path? I’m a lazy person, so I take the path of the least resistance. The same way, as your service business is growing, as you earn more in your service business, you get more and more used to it, you get used to the salary, to the way of working, to your certainty, you hire more employees and you rent bigger offices. Day after day, it is becoming more difficult to take the switch. Therefore: act now, not tomorrow.

As soon as you realize that (1) you have to go through it in order to succeed and (2) you better act now than tomorrow, your eyes are opening.

So let’s take action! Make things concrete, tangible. Best is to set a (relatively) short term and realistic goal.

NOT: I want to be the next Facebook in 10 years from now.
BUT: I want to get $1.000 in recurring revenue from my product in 4 months from now.

If you can get to $1.000 monthly recurring in 4 months, you can as well get to $5.000 in 12 months, no? And to $20K in 2 years, no? Set clear financial, short term and tangible goals. In our Ruby on Rails and mobile agency Zorros, this translates to the following:

  • We decided we want $10K automated recurring revenue from our products by September 2013. This is maybe not enough to be break even, but as said above: if we can get 10K, we can as well get 20K, 30K or 50K. It’s a matter of time.
  • In order to achieve this goal, we decided to spend between 25% and 50% of our time on products, not on service business.
  • Why a minimum of 25%? Since less than that is just procrastination of the switch. Why a maximum of 50%? Since we are still working on exciting projects that we want to finish decently. We are not stopping service business overnight, we want to keep on delivering good quality and we will even accept new nice projects.
  • We treat our products as other projects: we plan them in, we use the same tools, the same quality, the same way of working. Except: nobody is paying us for that.
  • That is an immediate cut in revenue of 25% – 50%.
  • So I made a calculation of our survival time. What if the product would bring in 0$ and we would spend 50% of our time on products? How long would we survive without going bankrupt? What is our deadline?
  • The combination of the cash we had at the bank, and the most pessimistic scenario of 50% cut in revenue gave the answer. Let’s work out a fictive example:
  • Let’s say that normally, we make $25K of revenue per month for trading time for money. Let’s say also that our monthly costs are $20K (mainly wages, in a software service business, employees are the highest cost). That means that we have a $5K of profit per month if we spend 100% of our time on service business.
  • Let’s assume we have $100K of savings  / cash in our bank.
  • Now, we are going to have a serious cut in revenue: 50% of our time is spent in non billable things like building the product, research for the right product/market fit, calling clients, cold calling, emailing, … So, our monthly service revenue goes from $25K to $12.5K, while our costs stay at $20K. That means: in stead of a $5K profit per month, we make a $7.5K loss per month from now on.
  • With $100K on our bank account, and with the assumption that our product brings in $0 (so, our product would be a complete disaster, worst case), it means that we have survival period of 100/7.5 or 13,3 months. For easy calculation, let’s make this 12 months.
  • This means: we have 12 months where we can spend 50% of our time in building a product. In the worst case, the product brings in $0 by then, and we have to stop everything and we need to start spending 100% of our time again on service business or we are bankrupt. In the best case, the product by then brings in $10K of revenue, enough to become break even.

Such a concrete target makes everything very tangible and real. It forces us to get real, to take action, to forget about business cards, shiny logo’s, and going viral, but to focus on the most important:

Between today and september 2013, we have to find a pain that we can solve, and for which 200 people in this whole d@mn world are willing to pay $50 a month. We will spend 25% – 50% of our time on that.

200 people in this world that will pay $50 per month…if you look at it that way, it’s quite a feasible challenge, isn’t it? Yay!

What is next?

  • In the next blogposts I will go through the idea extraction process (how to find a pain for which people are willing to pay to get rid of it)
  • I will talk about landing pages and pre-subscriptions in order to get customers even before your product is launched
  • I will talk about the importance of mailing lists
  • I will reveal the product we are working on – wow
  • I will give financial details on our monthly recurring revenue
  • …and much more

Stay tuned!

Hey, by the way…it takes me quite some time to write all this. It would take you a minute to tweet or share or like this blogpost. I owe you some karma if you do so, thanks!

My Challenge: From Service Business to Product Business in 1 Year.

My Ruby on Rails and mobile agency Zorros was born in August 2010. We build web and mobile software for our clients. In 2.5 years we grew from 0 to 7 people. We are having fun, we build exciting stuff, we are profitable, we work from home (yay!), and we are happy since we are paid to do what we like to do.

But there is something that nags us. On the long term, we will have to do project after project after project after project. We can not grow, or at least not without hiring more people. And more people means less of a young dynamic startup culture and more bureaucracy. We can not scale. And although we like building things, we are never building our own things.

In September 2012, I took an important decision. Or rather, a challenge. Here it goes:

I will switch from a service company to a products company. By september 2013 I want to be break even purely on products.

WOOOOOOOOT. HOW? WHY?

What is life like in a service business?

In a service business, you trade a certain service for a certain amount of money. Consultants, dentists, doctors, lawyers, carpenters, programmers, kinesists, freelancers. They all trade their hours for money. Typically, they have an hourly rate. For 10$, 40$, 80$ or 250$ per hour, they will provide service ABC to company XYZ. Or they accept “fixed price” projects, which is nearly the same, since the fixed price is just the number of estimated hours times the hourly rate. (Note: fixed price projects are often worse than being paid per hour, since you have to estimate and commit your price upfront for an often not so clearly defined project scope. In most cases the scope is fuzzy and appears to be bigger than originally thought, but the price not.)

So, if you trade hours for money, what do you do to earn more?

Exactly, you work more hours!

But there are only so many hours in a day. So what do you do when you are at your limit of 12 hours per day?

Exactly, you hire an employee, so you can sell his or her hours!

And what do you have to do once you hire an employee?

Exactly, you have to make sure there is enough work in the pipeline to make sure this employee is not without work, since an employee without billable work cost you a lot of money. Time is ticking!

Bottom line is that your service business is growing in headcount, in revenue and in hours sold per day. But:

  • The projects pipeline is much harder to maintain. You have to make sure everyone is billable every hour. You have to deal with employee turnover, holidays, illness, company policies, new hires, urgencies, complaints, estimations, incidents, and so much more. There are much more things that need your attention.
  • None of these tasks are creative and fun, but they are all on your shoulders.
  • All of this extra worries for a little grow in profit.

Turnover in service companies grows in direct relationship with the headcount. And profit is a percentage of turnover. So profit grows (little by little) when your service company grows (and your agenda becomes much more busy).

There is a direct relation between time and profit. But since time does not scale, your profit will never scale.

IN A SERVICE BUSINESS, THE HARDER YOU WORK, THE MORE WEIGHT YOU PUT ON YOUR SHOULDERS AND THE MORE HEADACHES YOU ARE WILLING TO ACCEPT, THE MORE YOU EARN.

Hard work, weight, headaches for some extra peanuts? Doesn’t sound like a great deal, isn’t it?

Here below a graph of the profit growth of a typical service business over time, as the business grows and hires more employees.

In a service business, you are not investing your time. You are burning your time. Every last day of the month you have to:

  • pay salaries
  • find work for the next month to make sure that you’ll be able to pay salaries next month

Every first day of the month, the counter is reset to zero. You have to refill your agenda with billable days for the next month. And so on, and so on. You don’t own a company, you own a job. Congrats.

The challenge: switch to a product business

We challenged ourself in september 2012, 5 months ago, to be break even with products by september 2013.

What does that mean: “break even with products”?

In a product business, you do not sell your time for hours. Instead, you make a huuuuuuuuuuuuuuge (yes, that many U’s) upfront time investment in order to build something that can be sold over and over again. There is no direct relation between time and revenue or profit. Money keeps on rolling in, even if you take a little pauze. You don’t sell time for money, you sell something that you already have for money.

If your product price is 50$, and you sell 10 copies per month of it online, you would make 500$ per month. If one way or another (let’s say…good marketing) you get to selling 100 copies per month, you would make 5.000$ per month. Now imagine you can sell 1000 copies per month. Now, THAT SCALES, isn’t it? In a service company, scaling profit times 100 would mean to hire 100 times more employees. Good luck to plan in holidays and see your children grow up! :-)

This is the profit growth of a successful product, compared with the profit growth of a service business.

Note that in point “A”, you did invest a lot of time and money in your product, but you didn’t get any single $ yet for that time investment. You are in negative. As told before, launching a product is an upfront time investment. It takes a lot of upfront energy, time and motivation. But in point B your product starts paying itself back: it brings in as much money in as it costs per month. In point “B” you are break even.

Our primary goal is to be break even on products. That means: the monthly recurring revenue that our products bring in should be enough to cover monthly costs.

Why is break even a magic point for us?

It’s magic since it means that even with zero billable hours for several months in a row, we would survive. We would not be profitable, but we would not go bankrupt neither. We stay break even. But break even with PLENTY OF TIME to improve our products so our users will love them more. No duties. No trading time for money anymore. All time is be ours. We would be able to invest our time in more products or better products, in growing, in scaling. And without pressure, since bills are paid at the end of the month.

IF YOU CAN GET BREAK EVEN WITH PRODUCTS, YOU CAN AS WELL BECOME (VERY) PROFITABLE.

Once you are break even with your products, the hardest part is done. You are one step away from profitability. The number one primary goal of every product founder should be: break even.

So, will this work? Will it fail?

I don’t know. You will figure it out together with me…

But I now one thing for sure. I am so motivated on making this real, that I will do everything necessary to make it work. It might fail, it might work. But quite likely it will not completely fail. And with some luck (yes I know luck is not a strategy, don’t tell me) it might as well work out very good.

Over the next series of blogposts I will share my experiences with you. I’m going to be 100% transparent on all the steps I take and will document everything out on this blog.

Questions like:

  • how did you find your product idea?
  • how long did it take to build the first draft?
  • where are you now? how much MRR (monthly recurring revenue) do you make now?
  • what did you do wrong?
  • how did you market your product?
  • …and so on.
You’ll read everything in detail on this blog.

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