Tag Archives: product development

Are You Planning to Sell Boxes or Hours?

Angel investment, Bootstrapping, Starting a Business, Venture Capital, , ,

All of these are just “in general” points. There will always be exceptions. But still, it’s good to understand the huge difference between service businesses and product business. Selling hours has advantages, but selling boxes does too. And there are huge differences, things I think you need to understand.

My wife and I spent several years working on converting our business planning business to “sell boxes, not hours.” It took a long time, but eventually that worked. But we started with a service business, and it was only after several years of that business that we started to convert it to products. Here are some of the standard tradeoffs.

  1. Service businesses take less capital to start. Particularly professional service businesses, like consulting, graphic design, landscaping, bookkeeping … you don’t have to buy products to sell, or materials to build products. You need credentials, yes, and a computer, and in most cases a website. But you’re not worried about design, prototypes, packaging, inventory, channels of distribution, and all that.
  2. Service businesses are harder to grow. With a product business you sell more and you make more money. Succeed with online marketing, open up a new channel, and you can build more of those things. Product businesses usually – obviously not if a lot of hand labor is involved – scale up. On a classic service business, though, to double sales you have to double your payroll. That’s what investors call a “body shop.” Classic service businesses can be great businesses for the owners and workers, but they’re rarely good investment opportunities for outside investors.
  3. Investors like Product businesses. I’ve been spending a lot of time lately looking at pitches for our angel investment group, and evaluating businesses for some major business plan competitions. Investors like product businesses because you can lever up, and scale. And you can sell a product business – the whole business – to somebody else. And you can make sales while you sleep. And of course, to make this perfectly clear …
  4. Investors don’t like service businesses. It’s the body shop problem. The assets walk out of the door every night. The assumption is that they don’t scale. Sure, there are exceptions.
  5. Web service businesses act like product businesses, without the inventory drag on cash, or the problems of physical distribution. A web service can scale up, if it’s designed correctly, and go from 100 to 1,000 to 10,000 without needing a lot of hand labor or human intervention.

So what? I think it’s good to know. Service businesses start up all the time with only a few thousand dollars of initial investment. All you need is that first good client, and off you go. There is less risk. It’s easier to get from nowhere to covering costs.

But if you want to go big-time, or if you want to build a business you can sell, build products or web-based services.  Sell boxes, not hours (or a web app).

(Image: Quang Ho/Shutterstock)

Paradox: Lead vs. Listen in Product Development

Business Stories, Technology, Web/Tech,

This is a problem I’ve struggled with for more than 20 years: ideally, does product development lead, listen, or both? Is the ideal developer a crabby older sibling who knows better, or a compliant servant? Do you build what’s good for the customer, or what the customer wants?

puzzleThey aren’t always the same thing. Think about how software becomes so feature-rich that it slows to a crawl and drives its users crazy. Isn’t that because developers listen to customers, and every customer wants some additional bell or whistle, so they add them all in? Think about leading word processors and spreadsheets, and all the different things they can do.

A few years ago I wanted to publish a presentation tool (software) that wouldn’t let its users do boring bullet point text-filled slides. It would have defaulted to a big graphic and a title for each slide, and allowed occasional very big type-size bullet points, so only a few would fit. I couldn’t get that idea to fly, so I dropped it.  How were we going to tell people they couldn’t add more text?

And if you want a very broad example, visible almost everywhere, take restaurants. What do you think? Do most restaurants lead, by giving customers excellent healthy food, at the expense of flavor? Or do they give customers not-so-healthy food full of not-so-healthy ingredients, but that tastes better?

Returning to the United States to live in Palo Alto in 1981, after 10 years living in Mexico City, I looked for the occasional high-end Mexican restaurant offering good Mexican food (such as real ceviche, to name just one menu item) instead of greasy stereotyped burrito stuff. I talked once to an entrepreneur who tried. “The buying public won’t let it happen,” she said. “People think of Mexican as cheap and greasy, not good food.” (Happily, this has changed somewhat in the 20+ years since; I had real ceviche at Ola in Miami and at Cevicheria La Mar in San Francisco last month. Both are good restaurants.)

So here’s the question: what are you going to do? Listen to customers? Lead by giving the world what it needs, whether it wants it or not? Or both? Which is more successful? Which is more satisfying?

(Image: istockphoto.com)