Here’s a typical situation: You start a service business. Perhaps you're providing consulting or software development services to other businesses. Eventually, as the business gets going, you run into a problem.
The problem is time.
In a service business, in essence, you're selling your time. You're charging for the time you spend providing the service. There are only so many hours in a day, and eventually the business can’t grow any larger because there isn’t enough of your time to expand it.
You may try to solve that by hiring help. But eventually you may run into the same problem. You’re still selling people’s time. And labor is typically expensive, and can put a lid on profits.
The Scaling Challenge
Therein lies the challenge. Producing and selling goods may be scalable as a business model. Selling time, as in a service business, may be hard to scale. Yet many businesses today are selling services.
—Anita Campbell, CEO, Small Business Trends LLC
That’s where the concept of “productizing” a service business comes in. Productizing a service business means adapting your business model to present what you offer as a product instead of a customized service.
It's not as hard as it might seem to turn a service business into a “product.” However, it may require approaching your business model in a new and innovative way. Here are some elements of a productized service business:
1. Sells One Thing to Many
Turning a service into a product involves adapting the business model so one deliverable can be sold multiple times, instead of only once per client.
Entrepreneur Krista Neher did just that. She was selling social media training sessions one-on-one when she ran into the scalability issue. To scale her business, Digital Boot Camp, she changed the model to sell one training session multiple times, instead of once. She began recording the training and selling the recordings online. She also offered classes at a training facility her company built.
That’s one example of a business owner who figured out a way to deliver the same core services, but as a product that could be sold over and over to many.
Custom services may still be available as a special offering. But the main business model involves selling a “thing” instead of selling custom services each time to a single client.
2. Charge by the Hour
A services business often charges by the hour. Even when the service provider charges a flat fee for a project, usually the project fee is calculated based on some number of hours the provider has to devote.
A productized service, on the other hand, can throw hours out the window. There’s a completely different pricing model.
A productized service is sold as a “package” for a set price. Pricing is based on market factors and value of the item being sold—versus an hourly rate plus profit margin tacked on.
3. Clearly Defines the Offerings
To make a profit selling a service like it’s a product (and avoid scope creep, which can eat up profits), it may help to clearly define what the customer gets with each price level.
For example, a business card company might off a basic design for $5, but add on services as specific price points. The rates might be listed clearly on the company Web site, along with the benefits of adding more detail (and increasing the sales cost). Each level may be clearly defined in terms of whether it involves merely re-working an existing design, creating a totally new design or getting multiple design concepts to choose from. Each offering has a different price.
4. Has a Published Price List
Many consultants and service providers don't publish prices. They may want to have an exploratory interview with prospective clients, understand the nature of the clients' needs and quote a custom fee. This is understandable, inasmuch as they are delivering a custom service.
However, products aren't usually sold based on custom quotes. Think of an e-commerce site or retail store. There’s usually a price for an item that's clearly marked; the buyer sees it and buys it.
Readily available pricing information may be crucial if you want to scale from a single sale into thousands of sales. Doing custom quotes can be time consuming and may keep the number of sales down.
5. Creates Recurring Revenue Streams
In his book The Automatic Customer, John Warrillow emphasizes the importance of recurring revenue streams. They lead, he claims, to a less stressful business.
Warrillow writes about the stress of having to create new revenue each month. Subscription-based businesses, on the other hand, can let you go into each new month with customers and revenue on the books.
A productized service business may be presented as a subscription. Think of your online accounting software or online help desk system. Instead of a one-time purchase of software, today you may get a hosted solution that you access online and pay a monthly fee to use.
Productizing a service business may not be for everyone, but it may also solve a number of the issues that plague small businesses, such as the inability to scale, stress of constantly acquiring new customers and projects, and limited profits.
Read more articles on growth opportunities.
This article was originally published on March 23, 2015.