Productized services are all the rage right now. It seems like everyone is trying to start one. But what are they, what benefits do they offer, and how can vendors create them with a minimum of risk?
These questions, and many others, will be addressed. Before we dive in, it's important to ensure that we are starting with a solid foundation of knowledge.
Let's start with two very important definitions:
- Product - An object that is sold to customers
- Service - A performance of labor that is sold to customers
Businesses have made fortunes selling products. They have also made fortunes selling services. Each offers certain advantages over the other.
- Products tend to be easier to sell because customers can easily understand what they're buying and how much it costs.
- Services tend to allow vendors to spend less time and use less labor prior to a purchase being made.
Wouldn't it be great if we could somehow take the best qualities of each and combine them into a single offering?
Productized services do exactly that. They are services that have been altered to look and act a lot like traditional products. Specifically, a productized service is characterized by:
- Fixed scope - The deliverables and methodology utilized must be explicitly fixed and unalterable.
- Fixed price - The offering must have a price that is visible and not dependent upon the details of a particular purchase.
- Lack of individualization - The offering must be intended to appeal to multiple buyers.
What are the benefits to productizing?
Simplification of the sales process
Productization reduces an important barrier to purchase that stops many shoppers cold. Traditional service-based businesses describe themselves by their capabilities. A lawyer might discuss his educational awards, recent casework, and accolades from his peers. Potential clients are left to their own devices in connecting the dots. They must take the initiative to determine whether the vendor's capabilities are an appropriate match for his needs. He'll have to read through a lot of messaging, make a series of assumptions, and open formal negotiations with one or more service providers before settling upon a solution. Compare this with a potential customer who encounters a productized offer. In this case, he'll examine a standardized menu of options and decide whether one of them will best meet his needs, sometimes in a matter of minutes. It's one thing for a lawyer to state that he specializes in elder law. It's quite another for him to say, "I'll write an iron-clad will for $2,000."
Productized services cause business leads and referrals to become more frequent and easier to obtain. This is because the vendor's offerings and pricing structure become simple for third parties to understand, reference, and convey to others. Past customers will be able to point to a productized service and exclaim, "That's the one that I picked." Similarly, business associates won't have to scratch their heads trying to explain how the provider can help a given shopper with his problem. They can simply point to one of the vendor's predefined offerings and say, "This is exactly what you need."
Productized services remove an unpleasant and non-value-adding task from service-based businesses. Many people think that successful service providers need to be better salesmen than practitioners. There's just one problem: most accountants, dentists, software engineers, and gardeners aren't particularly great salesmen. Not only do they lack a strong grasp of sales tactics, but many also lack an interest in performing them. Productized offerings allow vendors to skip much of the sales process and move the focus of conversation from sales and negotiation to discussions of implementation. As a bonus, shoppers who aren't a good fit for a provider of productized services will discover the mismatch quickly and move on, saving the vendor from wasting his time on sales pitches that have little chance of bearing fruit.
Even those who have found success selling traditional services will find a great value in offering a few productized services. Such offerings can act as a metaphorical beachhead. A single sale may be enough to convince customers to place firms on preferred vendor lists, train clients to value the very qualities and characteristics that the firm offers, and catch the attention of corporate managers. Once the initial sale has been made and value proven, firms can then focus on upselling, with offers of additional products and services.
Reduction of overhead costs
Productized services eliminate resources that are devoted to negotiations, discussions of scope, and the creation of custom proposals. This savings, in terms of time, energy, and materials, is then freed up and can be applied elsewhere within vendors' businesses. While some firms will simply take pleasure in the associated reduction of expenses, others will see great value in reallocating those resources to increasing the quality of deliverables, taking on additional work, purchasing advertising, or investing in traditional products. The resources saved can be considerable, especially when one considers that many proposals are never accepted by their recipients.
Productization also incentivizes internal improvements. Most service providers charge by the hour of labor. This leads to many perverse incentives by which the more efficient the performer of the service, the less money he winds up making. As such, it often makes little sense for hourly service providers to consider enhancing their skills or investing in automation. After all, why spend time and money getting better at one's craft, if it will only lead to reductions in income? When working with productized offerings, efficiency gains go directly to the firm's bottom line. This is because the only price that customers ever see is the final price that they will have to pay. In other words, increases to a vendor's effective hourly rate are hidden from the view of buyers. Instead, customers are pushed to focus upon the value that they receive from the service, rather than the hours of labor that were required to produce the deliverables.
The more productized and uniform a vendor's service offerings become, the more the cost of investments into onboarding, process control, automation, training, and research can be spread across clients. Spending that would have been prohibitively expensive when working on projects with little overlap appears relatively cheap when projects share similar requirements. Imagine a dentist who is considering a $10,000 tool for a particular procedure. If he were to use it for a single patient's visit, he'd never be able to justify the expense. However, if he were to perform the procedure many times, the purchase would appear exceedingly cheap.
|Total investment||Number of projects that would benefit||Cost per project|
It isn't just a matter of incentivization but one of visibility. Productizing one's service offerings allows inefficiencies to become easier to spot. As the set of services offered by a vendor becomes more uniform and the tasks more predictable in nature, data from each project will become simpler to aggregate and analyze across projects. Waste, unnecessary risks, and the presence of low-value tasks will show up on reports as patterns. The repeated nature of the work across projects will allow undesirable characteristics to be easily identified, modeled, and eliminated.
Risk reduction for the vendor
The predefined nature of productized offerings reduces a number of risks for vendors that offer them. For instance, the potential for scope creep will vanish, because the definition of each project will have been fixed prior to work commencing. With a bit of effort, providers of productized services can sufficiently limit their initial scope of work such that customers would not even think to push for the inclusion of additional requirements.
Project monitoring and control is much more accurate and straightforward for productized consultants. Because each project follows the same basic script, from the same basic template, and shares the same scope, vendors will learn from experience to watch out for the most important warning flags. The limit of project scope will allow practitioners the opportunity to interpret the data collected at a greater level of expertise than they would otherwise enjoy.
Vendors can use productized offerings to minimize their risk of nonpayment. This is due to the reduced resistance received when demanding upfront payment. Whether they realize it or not, most service-based companies are in the loan business. They pay their own staff with their own money, and then hope that their customers' accounts payable departments will eventually make them whole. Sometimes these payments are delayed. Other times, these payments are never sent at all. It's not simply a matter of a fixed fee structure that empowers vendors to demand payment prior to service being rendered. It's the shift in customer mindset. Most buyers have been conditioned to believe that products are always paid for at the time of sale, and services are paid for after some time has elapsed. Fortunately, productized services often look a whole lot more like products than they do services.
Gain the appearance and skills of an expert
Customers often assume that vendors offering a small number of services are, by their nature, experts. This is because the narrowing of focus allows firms to see similar problems over and over again. The raw experience provides wisdom and confidence necessary to deal with issues within their domain of expertise. In addition, their specializations permit them to dive deep into research within their niche. Whereas generalists are forced to maintain a superficial understanding of many topics, specialists are provided with the luxury of focusing only upon a few. For better or worse, it's not the level of expertise that customers use to determine who is qualified to be a specialist and who is qualified to be a generalist. Instead, they rely on the services offered by a vendor as a signal for expertise - or lack thereof.
The simplified sales process used for productized offerings offers a useful firewall between payment and services offered. By removing negotiations from initial conversations, vendors of productized offerings can focus upon their customers' needs. This will allow vendors to become less nervous and more confident. The hemming and hawing common to business negotiations can be replaced by discussions about customer needs and how the vendors can be of assistance. Businesses offering traditional services will appear more concerned with getting paid, whereas firms selling productized consulting will appear more focused on solving the customers' problems.
One of the most common fears when it comes to productized consulting is becoming pigeon-holed into a specific niche. Of course, there's another term for that. It's called becoming an expert. Performing work in a small area will provide the experience and knowledge necessary to gain abilities that potential competitors lack. As martial artist Bruce Lee once said, "I fear not the man who has practiced 10,000 kicks once, but I fear the man who has practiced one kick 10,000 times."
A particularly desirable benefit to the vendor has little to do with profitability at all. Customers are prone to question the motivations of service providers who charge by the hour. They (correctly) believe that service providers who bill on an hourly basis have an incentive to undertake unnecessary tasks, or select inefficient methods in order to pad their bottom lines. These doubtful clients will act very differently when dealing with firms that offer productized services. The fixed-scope and fixed-cost nature of the work eliminates any incentive for inefficiency. Productized service providers have every reason to complete the work as efficiently as possible.
A framework for productizing services
A lot of shysters and blowhards love to sing the praises of productized services, but it seems as though no one has actually put forth a framework for creating them.
Do not fear! I've created a framework that can guide you to success.
Note: Many service providers (especially those with ambition, book smarts, and a reasonably-sized bankroll) will be tempted to skip the first few phases of the model. Readers should not give in to the temptation. Performing the steps in order will significantly reduce the difficulty, time requirements, and risk of the productization process.
Phase I: Discovery
This phase is often chaotic and characterized by inefficiency. Vendors at this stage may be just starting out, or may find themselves unable to progress for any number of reasons. In any case, firms at this stage should be focused upon answering two major questions:
- Who will pay me?
- What will they pay me to do?
Offerings at this stage tend to be pure services without a hint of productization. Significant focus is placed upon servicing individual clients, rather than building sustainable businesses.
Vendors in this stage enjoy an enormous degree of flexibility and can change the nature of their offerings very quickly. Rather than engaging in premature optimization, firms should utilize their time testing assumptions, learning about the needs of consumers, and gaining experience in providing services. Providers in this stage are often relatively undifferentiated generalists, though specializations in product and customer base will begin to emerge over time.
Phase II: Standardization
In this phase, vendors begin the arduous process of productizing their offerings. Vendors will find this stage as frustrating as it is challenging. A number of assumptions made in phase I will be tested, and some one-off work that proved profitable in the past will need to be divested from the firm's portfolio of offerings. This is because firms must take the step of looking beyond immediate cash flow issues and toward long-term centralization of focus and standardization of offerings.
Difficult questions such as the following are central to firms in this phase:
- What are the highest value problems that can be addressed?
- What is the language that ideal clients use to describe their problems?
- What are the concerns that ideal buyers share?
- How can a desirable client be identified?
- What are ideal customers willing to pay?
Phase III: Optimization
This phase is focused upon making informed alterations to the business, its offerings, and the services provided in order to achieve desired business goals (most often efficiency and profitability). Optimization is not focused upon big decisions, as was the case in the previous phase. Instead, managers should be focused upon making informed decisions.
Questions asked at this stage include:
- What are the biggest sources of risk and how can they be reduced?
- What components of current offerings are not valuable and can be eliminated?
- What types of work and deliverables are similar across many (or all) projects and can be automated or systematized?
Vendors in this stage will often focus on making investments into their businesses via the creation of formal operational flowcharts, value mapping, formalized processes and new tooling. They will also tend to narrow the definition of their offerings, resulting in further reductions in overhead expenses. Such investments will improve long-term performance of the firm and serve as powerful barriers to entry for potential competitors.
It should be noted that task elimination, simplification, and automation does not only result in efficiency gains. In many cases, such actions will also result in defect reduction, latency reduction, and operational flexibility.
Phase IV: Expansion
At a certain point, a firm may find itself sufficiently optimized such that future efficiency gains become prohibitively expensive to implement. Nevertheless, the desire to earn higher levels of profit may continue its siren song. Companies in this position will begin searching for methods to expand their offerings.
The exact nature of expansion will be highly dependent upon the type of business undergoing expansion. That said, the following three possibilities are quite common:
- Complementary productized services (not the same as complimentary services!)
- Premium versions of existing services
- Fully productized offerings
A common misconception is that this stage is merely a repetition of the first stage. Nothing could be further from the truth. Over the course of prior stages, vendors will have gained significant insight into the needs of the marketplace. As such, vendors at this stage will face significantly lower risks, from a strategic perspective.
Phase V: Scaling
This stage is focused upon identifying one or more services created in previous phases and increasing the number of times it is performed for paying customers. Although some degree of scaling can be addressed via automation and increased marketing spend, vendors will likely discover that they must hire additional staff to achieve significant increases in scale.
Questions asked at this stage will likely include the following:
- What parts of the business still require input from the founder?
- Which tasks require the least expertise?
- Which tasks require expertise that represents a comparative disadvantage for the firm?
The higher the degree to which the founder can divest himself from the day-to-day operations of the service, the more easily it can be scaled.
Extreme care is warranted in this phase. Quality and efficiency standards are often reduced as less experienced staff members (or subcontractors) are brought on board. In addition, ramping up of production often entails an element of risk. For this reason, many vendors will find significant value in delaying entrance into, and progressing through, this stage for as long as possible.
Risks: There are a lot of them
While poductized services offer many advantages over traditional services, their implementation does involve a significant element of risk.
The customer and vendor might not agree on the definition of done. Bolstered by knowledge of a fixed price, customers may demand unlimited modifications to vendors' work products. Vendors should never, ever, take on a fixed-fee project unless they have recorded the definition of done in writing, and serve as the final arbiter as to what constitutes project completion. Many pundits will argue the point, but doing otherwise will open vendors up to the threat of unlimited costs and incentivize customers to push for superhuman levels of perfection.
The vendor may be forced to accept dependencies outside of his control. Vendors must ensure that they will neither be penalized, nor delayed, by the actions of their customers or third parties. For instance, offering a fixed-fee service to help a customer learn a new language would be quite risky, as the time and resources required would depend heavily upon the effort put forth by the customer and his willingness to perform self study. For this reason, services that rely upon the efforts of other parties would likely be better suited to time-based fees or contracts that specify timetables and required deliverables with escalation clauses for late delivery or defectiveness.
On a per-offering basis, vendors may find themselves charging less money than they would on individually-negotiated contracts. Vendors that serve many customers over the course of a year will likely find this difference overshadowed by reductions in overhead costs, but vendors that accept only a handful of contracts each year may not be so fortunate.
Especially in the early phases of productization, vendors will feel immense pressure to perform non-productized work. It can prove challenging to stand up to customers who come with cash in hand, requesting non-productized services. However, the more a vendor says "yes" to one-off work, or permits modifications to his productized offerings, the less benefit he will receive from his efforts to productize.
Vendors may find themselves crushed by unexpected costs if they don't limit the scope of their offerings and predict areas of risk appropriately. In some cases, buyers may have significantly more knowledge about their problems than do the vendors. As predicted by the market for lemons, such buyers may be more likely than others to be attracted by the fixed pricing structure.
Productization is a powerful technique that should be in every business' toolkit. It can lead to higher profits at lower levels of risk and effort. Of course, implementing productized offerings can be a challenging, dangerous, and time-consuming effort. It must be undertaken systematically and with an eye toward the needs of the vendor and the realities of his marketplace.