Business Magazine

Startups Providing A Service Are Difficult To Scale

Posted on the 17 August 2016 by Martin Zwilling @StartupPro

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The critical success factors for a product business are well known, starting with selling every unit with a gross margin of 50 percent or more, building a patent and other intellectual property, and continuous product improvement. If your forte is a service, like consulting or web site design, it’s harder to find guidance on what will get you funded, and how you can scale your business.

On the product side, once you have a proven product and business model, all you need is money to build inventory, and a sales and marketing operation to drive the business. With services, scaling the business often implies cloning yourself, since you are the intellectual property and the competitive advantage. You have no shelf life, so you can’t make money while you sleep.

Indeed, there are some success factors that are common to both environments. For example, both need to provide exemplary customer service, build customer loyalty, and provide real value for a competitive price. Here are the additional success factors that are really key to a startup with a services offering:

  1. Get your service out of your head and down on paper. If you can’t quantify or document your service for repeatability and new employee training, you will kill yourself trying to grow the business. Even artisan-based services, like graphic design and writing good ad copy, have innovative processes and principles. Capture your “secret sauce.”

  2. Start with a service you know and love. A successful services business, more than a product business, comes from a skill or insight that you have honed from experience. If you don’t have a high level of commitment and passion, you customers won’t seek you out. Now all you have to do is pass it to the many new members as you grow your team.

  3. Don’t let your service be viewed as a commodity. Low cost and low margin products can be winners, if the volume is high enough. You don’t have enough hours in a day, or trained people, to succeed with lower margins in a services startup. Thus you need to highlight how your service is more innovative and higher value to your target customers.

  4. Recruit only the best people, with the right base skills. Customers won’t pay to see your new employees learning on the job, and outsourcing the real work to a cheap labor source is a recipe for disaster. Make sure they bring solid base skills, so your training can focus on the innovative and unique elements that your service brings to the arena.

  5. Be a visible and available expert in your domain. Be accessible on social media, write a blog or articles for industry publications, and participate in conference panels and speaking engagements. This substantiates your expertise and value, builds peer relationships, gives you access to the people and technology to keep you current.

  6. Practice being a good communicator. Customers can touch and see a great product, but services are a bit ethereal. You have to communicate how your service is the best, to your own team, as well as to your customers. If you deliver a great service, but no one knows it, your business will suffer. Make sure everyone knows your vision and values.

  7. The customer experience is more than the service. Product companies sometimes equate customer satisfaction with customer service, but it’s more than that, especially with services. Make sure that every interaction with every customer is positive, the service delivered is exemplary, and always follow-up for reference and repeat business.

For some entrepreneurs who feel the need to attract outside investors as a critical success factor, they should be aware that professional investors almost never invest in a services-only company. The investor perspective is that no manufacturing or inventory implies a minimal need for capital up front. They tell these entrepreneurs to sell themselves, execute well, and grow organically.


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