Why I chose 'service as a service' for my startup

Why I chose ‘service as a service’ for my startup

January 17, 2014 - 44 Comments

When I sold my web agency 18 months ago, I vowed to never touch a service business again. I was burned out.

I was sick of explaining the same things to clients, sick of not being able to scale the business, sick of offering the same thing that every other local web agency was offering.

I should have sliced away the parts of the business I didn’t like and only keep the valuable parts.

I didn’t have the courage to do this – so I sold the agency and started building a new business.

Why my project-based business sucked

I set about building a software startup called Web Control Room. I didn’t want to:

Be the go-to guy. My days were often filled with grey area tasks that only I could do – this kills growth.
Hit scale issues. Scale would be built directly into the business model. SAAS businesses can grow infinitely, as long as the market is there.
Get bogged down by staff costs. I could get there with affordable staff, not expensive local staff like I did with my agency. That escalated stress levels and ruined profits.
Experience the financial roller coaster of a project based business. It would provide consistent, growing revenue so I could have a reliable and normal wage.
Have the feeling that I’m doing the same thing as everyone else. I could operate in a less competitive space with a unique point of difference.

I ran out of options

My startup bombed and my numerous efforts to work out a software business model failed.

I ran out of time and had to make drastic changes to avoid getting a job. I was 2 weeks from going back into corporate slavery.

‘Service as a service’ or a monthly recurring service was my only option and I’ll explain how I arrived here shortly.

Hindsight is 20-20 and it’s worked out to be a great option.

What to look for in a business

I didn’t want to start any old business. I shared my ideas and asked questions in forums, but a lot of people didn’t understand why I didn’t just go back to building sites for people.

The runaway success of WP Curve has validated this decision as the right one, which has worked out well – because I had a lot of requirements to meet:

Short runway. I was out of time, I had to generate revenue quickly.
No sales, no project management. I don’t like the ‘hard sell’ and having sales staff throws costs through the roof. The expectation of local individual project management was out too, it’s simply too costly to hire staff to do it.
Scalable. When you offer a product or service delivered by affordable contractors, then the business is much easier to scale. A local web design business is very hard to scale because there is ongoing back and forward with the client, which has to be done by you or someone like you.
Large market. I’m not into niches. I wanted to make sure that whatever I started could be a $1,000,000 business in a few years. I wanted people to talk about it and appeal to everyone in our audience.
Building an asset. I wanted to build an asset long term, because I learned that project clients were worth very little when I sold my last business. The website and the recurring clients were transferrable assets. The historical revenue from project work wasn’t worth much at all.
Recurring only. There are so many benefits of recurring businesses, with predictable revenue being the most obvious. The hidden benefit is the ability to grow and scale something that is very simple. With a monthly recurring business, you get simple metrics, simple goals, easy to see growth and sources of growth, all built to use the power of momentum. Recurring, compounding revenue growth is a powerful beast.

There aren’t many business models that fit this criteria. Here’s a list of businesses that I considered, but scrapped:

Product – the runway is too long.
Niched-down product – my market was already proving too small.
Project-based – not a recurring model.
Enterprise – looong sales cycle.
Specialist web work – difficult to scale.
Content marketing – difficult to scale.
Conversion optimization – difficult to scale.
Design – difficult to scale.
Consulting – doesn’t build an asset and is time intensive.

A community would go close, but they are difficult to build into a significant asset. There aren’t too many $1,000,000 communities, plus the successful communities are run by entrepreneurs with huge followings.

They don’t scale particularly well and most have churn which affects growth.

So I came up with the idea for a recurring web development service… while I was at a hobby farm, looking at miniature horses.

Benefits of service as a service

If you can get Software As A Service (SAAS) business working, then it’s the ultimate business model. It’s a big IF. There is also a strong case for service as a service.

1. Easy sell and immediate value

Since day 1, we’ve found it very easy to sign up customers to WP Curve. We signed up 7 in the first week and over 20 in the first month and every month since launch. Services provide immediate solutions to problems, so it’s not hard to get people to pay for them.

Working out how to get your software to solve immediate problems is much harder than it sounds. If you have funding and time on your side, you might be ok. Without it, it’s tough and you need some luck and brilliant execution.

2. Quick or no validation

I like businesses that don’t require validation. Validation is a troublesome process and if you can launch a business in 7 days there’s no need to validate it. Launch it, see who signs up and continue to improve.

3. Grow quickly

Since you can move quickly, it also means you can grow quickly. SAAS can grow quickly as well, but only after you find momentum. That may take a long time or never happen at all.

In under 7 months our business has grown to $130,000 in annual recurring revenue, growing by more than 15% every month. The next point is so important, it needs a quote:

We have signed up more customers in 7 months than my last business did after 7 years.

4. Serve huge markets

It’s extremely difficult to enter a huge market with a software idea. If you entered the WordPress market, you’d have to come up with a must-have plugin or a better CMS than WordPress. Good luck!

If you enter the help desk market, you’re competing against companies that have had teams of very smart people building their app out for years.

Some people ‘niche down’ and create something for less people. This is fine, but their growth is stunted and it’s hard to grow from a niche business to a large one.

With services, you can attack a huge market (like WordPress support) with a slight point of difference and you are good to go.

5. Less competition for innovative ideas

The software startup space is intensely competitive. I had quite a few ideas for software, some I built and some I didn’t. Because there are so many ideas out there, you need more than just a good idea to stand out.

Your competitors might be funded and can afford world class people and facilities. There isn’t nearly as much innovation in the service space and I feel with a slight twist, we were able to stand out and get noticed very quickly.

6. No need for freemium or free trials

Freemium and free trials can kill early startup growth. Why?

The distance between making a customer use and founder learning is so big. Freemium customers might take months or years before they vote with their wallets and show you what they value.

Free trials mean waiting a few weeks to see if your changes had an impact. Add a few of these cycles in and all of a sudden, you are a few months in and you haven’t learned much about what your users want.

With services you know from day 1. No free trial, no freemium, just pay now and we’ll get started. When we finish the job, let us know what you liked and what you didn’t like.

7. More personal

A service business is a lot more personal. It’s great to help people out directly with their issues and help them grow. It was unusual running a software business for the first time – you hardly ever hear from your customers!

That can be a good thing, but it’s also nice to get to know the people you are solving problems for. It’s hugely motivating to be constantly told how much you are helping people.

I can say with 99% certainty that I’ll never get into any kind of project based services business again.

Your thoughts

Would you consider a ‘service as a service’ model for your next business? Why or why not?

Tell me in the comments.

About Dan Norris

Dan Norris is a co-founder at WP Curve and a passionate entrepreneur with an obsession for content marketing.

Gideon Shalwick

right on!
- http://wpcurve.com/ Dan Norris
  
  Thanks man, and thanks for the chat earlier. I’m keen to keep up with what you are doing.
Casey Stevens

Spot on Dan. Many of the same reasons I started the current business I have. Watching you guys closely to see how I can apply what you’ve done.
- http://wpcurve.com/ Dan Norris
  
  Great to hear Casey, keep us posted on how things go for you also. Thanks for commenting.
http://www.linchpin.net/ Damian Thompson

I DIG IT!

I would counter that WordPress is a niche though Niches rock…
- http://wpcurve.com/ Dan Norris
  
  I would reiterate my comment here
  
  http://www.tropicalmba.com/services/
  
  That you are kidding yourself.
  - http://www.linchpin.net/ Damian Thompson
    
    I would reiterate that you misunderstand the word niche.
    
    niche – (noun) a specialized but profitable segment of the market: [ as modifier ] : a niche market for quality food.
    
    Nothing about size, just specialization. You are in the WordPress niche. I am in the Marketing Automation niche.
    
    [drops mic and walks offstage]
Matthew Newton

Nice one Dan.

Working on my own thing right now actually. Service as a Service.
- http://wpcurve.com/ Dan Norris
  
  Yeah buddy. Let us know how you go with it. I hope some of our stuff is useful for you. Let me know if you want to come on the weekly live podcast and chat about it.
Rick Dass

Lots of value in the article Dan.

One key difference between ServiceAAS & SoftwareAAS is the margins involved.

You referred to “Get bogged down by staff costs” as a reason why your project based business sucked, I’m wondering how the margins for WPCurve compare to this?

Given your fair use policy for WPCurve customers, geographically distributed staff and 24/7 service provision, I’d imagine margins are relatively thin unless you have a creative way to solve this (not even comparing to software as a service). Do you pay your WP geeks per fix or profit share or hourly?!

Would you care to comment on the margins involved with your business?

Like I think you discussed for Informly, is revenue in this scenario a bit of a vanity metric? Rather its profitability/margin and user growth (you are spanking this) that should be focused on?

Cheers.
- http://wpcurve.com/ Dan Norris
  
  Hey Rick, thanks mate sorry I didn’t reply sooner I wanted to make sure I was at my computer to write a decent reply. I love this question by the way.
  
  There are quite a few things about Software as a Service that are without doubt better than services. That’s why I mention in the article that I still think SAAS is the ultimate business model.
  
  I didn’t go through all of these things in the article but certainly margins is one of them. Consider these stats from the slidedeck from Buffer when they got their first angel round of funding.
  
  If you look at their stats:
  
  $150,000 in annual recurring revenue in 9 months. I think we will get there quicker than this. We are already at $132k after 6.5 months.
  
  Growing 40% / month. Again this is about the same for us at least for the first 6 months. This won’t be sustainable for us though because there are too many things that hold back our ability to grow. We would be happy with 10%.
  
  97% margins. That’s where things get interesting.
  
  97% is insane and I don’t think you would get those margins in many other businesses. I would be surprised if that did end up being an accurate margin as they grow, but even if it’s 90% it’s pretty crazy.
  
  Here’s the full article: http://goo.gl/BicxOk
  
  Our best estimate of our margins are:
  
  70% while in full bootstrap mode with the founders are intimately involved in everything and optimizing for our wage (which we are).
  
  50% once we start to reduce our role in services and run it more like a proper established business.
  
  Either way these margins are way above more established businesses so I think the margin on services can still be quite good when you are small bootstrapped company.
  
  The difficulty is in how hard it is to get to a position like Buffer with software. Most people I know working on software who have started in the last few years aren’t anywhere near these numbers.
  
  So while it definitely would be great to be Buffer, it’s much easier to be a different version of WP Curve.
  
  And yes revenue is definitely a vanity metric. So is profit though really. Most profit margins will end up normalizing more or less as a business grows. And companies where founders are heavily involved have skewed ideas of what the profit really is.
  
  If you have a simple business model like ours, growth is the best metric if you want to know where you are headed. If we need a 5% boost in profit margin or we can afford a 5% drop, these are easy changes. Going from static growth to high growth though is not easy, so that’s what we pay most attention to.
  - Rick Dass
    
    Hi Dan,
    
    Whoa that was a whopper, next time just add a few images and create a new post
    
    Thanks for your answer.
    
    I think Buffer is an outlier, albeit other software companies may fall into the 90% bracket as you point out.
    
    50% when in full service mode is excellent. Higher than I expected you to state. I was concerned as your offering has an “unlimited” mantle, albeit with “reasonable” constraints, but suppose the 80/20 rule applies to your customers time/resource requirement.s
    
    Dan & Alex, I’ve been enjoying your podcasts, please keep up the good work.
    - http://wpcurve.com/ Dan Norris
      
      Yeah cheap dev costs plus reasonable use. Thanks for the compliment.
http://organiclifeguru.com/ Chris Badgett

Great post Dan! I’m a WordPress web designer myself and have been playing with the idea of transitioning the act of building a website for a client into a recurring monthly service (which of course has to be bundled with other services like SEO, software updates, content, etc …) It’s a lot easier to sell $2,000 per month than a $24,000 website. It’s hard to get past the need for highly skilled scalable staff like you mentioned though.
- http://wpcurve.com/ Dan Norris
  
  Hey Chris yes I went through a big long list of services I could offer that didn’t have me relying on expensive local staff. SEO is too messy I wasn’t interested. Design can’t be done easily without expensive staff. Hosting is too commodotized and doesn’t really have you adding enough value IMO. Small developer jobs worked well for us. The other one that I almost went with was conversion optimization.
Walker

Great post Dan. As a developer I have found that it is easy to slip into the trap of “product or bust”. Your success with a service as a service model helps shine light on an alternate path. Thanks for sharing your specifics.
- http://wpcurve.com/ Dan Norris
  
  Thanks man great to hear. Don’t give up on the product either, we have 2 software products as well and they have their benefits. Particularly if that’s your skill set.
likedbydesign

Interesting post Dan! Love your work.

Just looking at the Buffer slide deck on 97% margins.

I think they are basing that figure off servicing the 880 paid customers generating the $150k per year. That is on average around $170 per year investment per paying customer.

So they are saying their operating costs to service that customer is $5 or so each year.

What they are not including, is the support cost to service their 55,000 customers on a free plan.

I have both a SaaS and a service based business and Im sure you will agree with me, you cant service 55,000 people for $4400 a year ($5 x 880 clients).

I think your note on profit margins when the founder is actually working in the business is very under rated. If you are really looking to build a business as an asset to sell one day (even more so with a service based business), you really need a founder exit plan (business working without a founder working)

Not only will it increase it’s worth, but it expands the amount of investors interested.
- http://wpcurve.com/ Dan Norris
  
  Hey man thanks yeah I hadn’t given thought to how they calculated that margin but it seemed crazy to me. I don’t really know a lot about margins, but just intuitively it makes sense to me that SAAS would have better margins. But yeah nothing would have a 97% margin.
  
  It might make for some good content actually to have someone come in and school me on that ha.
  - likedbydesign
    
    Hi Dan
    
    Happy to have a chat and perhaps a guest blog on the topic.
    
    Feel free to contact me at mitch@likedbydesign.com
    
    Cheers,
    Mitch
Melissa Ran

Wow fascinating take as usual Dan! This is very top of mind for me atm. Totally agree with you that SaaS is the best option if you can make it work, but because that is the case, the bar to making it work is very high.
For most SaaS businesses, a good outcome would be making a nice side income but it’s very hard to turn it into more due to high acquisition costs and barrier to entry. I had started thinking about the idea of taking traditional b2b services and making it subscription based to get the benefit of recurring predictable revenue. I guess that’s kinda the ‘service as a service’ you are speaking of.

Would you say more feasible ‘services’ to do would be the ones with a software slant where the costs of service is lower for you to provide? How is ServiceaaS different to, say, professional services firms that companies have on a regular retainer (think PR, legal)?

Re. ‘niche’, I think the word does have some ‘very small market’ connotations, but at its core, I agree with Damian that it is about specialisation, rather than smallness of the market. Specialised segments need not be small and can be very profitable.
It’s really just semantics, when people say: ‘ find a niche’, I interpret it as meaning ‘find customer-product fit so you know exactly what kind of customers to target and what specialised things they need that you can position yourself as offering’.

I think we can all agree that
1. being targeted = good
2. picking a very small market that doesn’t support growth = bad
- http://wpcurve.com/ Dan Norris
  
  Hey Melissa, good stuff. I think professional services, even with retainers is a totally different thing. I really don’t know a lot about that world and don’t have any intention of learning.
  
  I guess fundamentally any sort of retainer service is the same as service as a service, but there are a lot of things about that model that don’t make it anything like the sorts of SAAS businesses that I like. High touch and difficulty to scale would be the 2 main ones. Much lower margins, higher staff costs and establishments costs. That’s not a really appealing business to me.
  
  I don’t agree with Damian about niching but I can see there are 2 ways to look at it. To me there’s no point coming up with a name for something if it doesn’t have any meaning. The word niche has small connotations. That’s the whole point. If it didn’t, then why does the word exist?
  
  My argument with Damian is that a market of 70 million people (WordPress) is not a niche. Whether the Oxford dictionary says it is or not I don’t mind. But in business the word is used to describe the benefits of going after a smaller, more focused group of people, more specialized service etc.
  
  Damian’s definition is a catch all. By his definition having a CMS at all would be a niche (since 70% of sites don’t have one), and the web itself would be a niche (since it’s just a part of marketing). Does that mean every freelancer and web agency is following the niching down strategy? I don’t think so. There’s no value in the word if it’s not going to mean focusing on something smaller.
  
  I think what you are saying is ok except I don’t think that’s what people say. like most advice says ‘find a niche’ and they specifically encourage people to find a small group of people who really care about something specifically.
  
  This is clear in Damian’s podcast where they discuss all of the ideas. ‘The auto responder guy’, ‘the podcast editing guy’, ‘the about page specialist’, ‘the CTA re-writer guy’ etc etc.
  
  I don’t see any of these businesses as appealing businesses. For them to be appealing they would have to have scalability built in and the potential to grow beyond the founder. I guess the argument is that it will be easier for these guys to grow beyond the founder because they will have reached profitability quicker because they are more referable. But this is a big assumption to make that I don’t necessarily agree with.
  
  When Damian was the Ontraport guy, my thoughts were to ditch it and focus on automated marketing as a whole. I didn’t refer him any work as the ontraport guy. Once he focused on other systems I started referring him work.
  
  I don’t think we can all agree that being targeted is good. It all comes down to the definition of targeted. Having a simple service is good, but offering that to a large market is also good. I think that’s what we do. I wouldn’t describe us as targeted, because 70 million people is not a small group of people.
  
  Also I think the guys who support niching probably would support a small market that doesn’t support growth based on the idea that you can pivot out of that market once you grow. To me it makes more sense to begin with the end in mind and just start out in the larger market and keep the same course.
  
  For others who are interested here are a few links:
  
  http://www.tropicalmba.com/services/
  
  http://linchpin.net/podcast/linchpin-podcast-005-perils-niching-far/
  
  The second one sums up my position which is in line with James. The Empire Flippers example they talk about is a good case in point where there are 2 sides that I can see:
  
  1. Starting off as the Adsense Flippers gave them immediate appeal to that audience and helped them grow quickly.
  
  2. Starting off as the Adsense Flippers was a mistake because they had to change it because it was too tight.
  
  I can see both sides but I lean towards Schramko’s position on this one.
  - Melissa Ran
    
    So can I get your opinion of what criteria for good Service as service businesses?
    Would it be b2b (and even b2c?) services that are relatively low touch, low cost, relatively replicable/systemisable from 1 client to the next, that makes sense for clients to pay a recurring subscription fee?
    
    What are some businesses you would put in that category?
    
    Re. niche
    I’ve not heard the podcasts so just went by was was posted in the comments.
    
    Time to check out the podcasts and challenge my thinking!
    - http://wpcurve.com/ Dan Norris
      
      I don’t personally like B2C, I think it’s way too hard. Consumers don’t pay recurring fees for very much. Internet access, insurance, phone bills – they are all really high barrier to entry fields. I wouldn’t really know where to start with B2C.
      
      Yeah I think in terms of the criteria I covered that in the post. Things like quick to launch, low touch sales, scalable, large market, ability to create an asset, recurring are all the things we look for.
      
      In terms of what I’d put in that category, obviously any type of SAAS business. Most recurring services businesses like Damien’s linchpin service (DFY marketing automation), private communities or masterminds although they aren’t great for scale, conversion optimization is another option we were going to look at, bookkeeping could be easily done this way as well I think someone is going to kill that as a business model if they haven’t already with things like Xero – the old school bookkeepers with cars that rock up to your presence seem irrelevant now – where’s the WP Curve of bookkeeping? That would be a great business. I know a guy who does recurring designers which is another example. Not as good though because it’s not as easy to scale, higher touch, not as bigger need for design either.
      - Melissa Ran
        
        My friend started an online accounting business for a monthly fee about 2 years ago and it’s going really well, called ‘nudge accounting’. Scaling as they grow is one of the major challenges.
      - http://wpcurve.com/ Dan Norris
        
        Accounting would be a lot trickier. Bookkeeping I think would be better. Too much grey with accounting ha.
      - http://www.jobiety.com/ Kashif
        
        Interesting discussion Dan and Melissa. Talking of SAAS, I am running a number of job listing sites, mostly on auto-pilot, linking employers/recruiters (via job ads) to job seekers. I am using a WordPress based CMS to offer this service. Would you categorize this model as SAAS?
      - http://wpcurve.com/ Dan Norris
        
        I guess that would be services? You aren’t selling the software so it’s not SAAS and it’s not a recurring service right?
      - http://www.jobiety.com/ Kashif
        
        Yes its usually a one off service. However, I am now planning to license/lease the software too.
Rob Clarke

Thanks Dan great post with lots of food for thought. I’m right in startup phase so your articles are illuminating and helpful.
- http://wpcurve.com/ Dan Norris
  
  Awesome great to hear Rob.
http://www.conversionalchemy.com/?utm_medium=BlogComment&utm_source=Disqus Tim Coulter

In an era where everybody is obsessed with SaaS, this is refreshingly different viewpoint Dan.

I’ve also run project-based businesses and I particularly like your phrase “My days were often filled with grey area tasks”, which so perfectly describes the distracting lifesyle inflicted by that model. I definitely don’t want to go back to that!

I’m currently preparing to launch a business around one of the concepts on your reject list: conversion optimization. However, I plan to introduce a twist to the business model that I hope will allow it to scale in exactly the way you described in this article. I’ll let you know how it turns out.
- http://wpcurve.com/ Dan Norris
  
  Awesome! Keep us posted Tim
Derek Buntin

Great article Dan! Incidentally i’m currently going through your pain right now and trying to reorganise the business to turn it from a single payment project based business to an ongoing retainer business. I had your idea a few years back but using Joomla instead, just never had the time due to all these grey area tasks i do daily, damn annoying i can tell ya
- http://wpcurve.com/ Dan Norris
  
  Good stuff Derek, keep us posted on your progress and thanks for commenting.
Micheal Waldrup

Wow Dan, right on time with this one.
I just found your site and now have 12 tabs open to save to pocket for later. It’s going to take me a while to get through all of that with my current JFDI attitude, but I just wanted to say this is a fantastic post. It also directly applies to what I”m working on, so thanks for putting your thoughts out there.
- http://wpcurve.com/ Dan Norris
  
  Hi Michael, awesome mate glad to help. Let us know if you have any questions.
http://www.successwithfocus.com/about/ Jeff Jones

Great article, Dan!

I really appreciate the open discussion of your experience with the different business models. I can totally see how Service as a Service is very exciting and gets around the negatives inherent in the others.

I think you’ve opened my eyes and I know I’ll be looking for another type of business model to bring what I have to offer the world.

Jeff
- http://wpcurve.com/ Dan Norris
  
  Awesome great to hear Jeff thanks for the comment. Keep us posted on how you go.
Wilding

Hey Dan,

This is the best site on starting a business I’ve
ever read. My experiences dovetail with your
insights just about 100%. Loving it!

My question: Have you read ‘Work The System’
By Sam Carpenter?

I just finished it and came to the conclusion
that it’s not the answer for many businesses.

But for a Service As A Service model that you’re
using, it’s just about perfect.

I’d be interested in your take on it.
Oosie007

Hi Dan. Wow. How I wish I found your site two, three heck 6 months ago. We ( me and my business partner) owns a digital agency/ social media/web shop based in South Africa. Our target used to be large enterprises and obviously retainers. Due to some politics in South Africa we can’t really do business with most of these clients unless we get a higher black economic empowerment score, which unfortunately is not possible over here. Corruption rules.

So we were tired of the same putches, the creative staff that got “bored” after two months, or wanted equity after 4! So we scaled down, and although we still own this company, we only kept ourselves and a great designer.

Our plan was lets build a startup “product”, with all the amazing possibilities etc etc. We do have a bit of cash so we are thinking we can afford to build this. We have been going through the lean startup process, and we also got stuck on the validaion. We are now thinking will this app actually be able to generate income..I am sure 5 years down the line if we are able to get funding, but personally I don’t think that is something to bargain on.

So after reading this. I have this little birdie on my shoulder saying, we should find one service ( of the 1000 we used to offer.lol) and try and build a Service as a service.

Would really love floating a couple of our services or potential service as a service concepts past you to see if you can help us spot something that we can package .

Wish we could have a coffee, as your story sounds exactly wher we are now..
Thanks for a brilliant article! Johan
- http://wpcurve.com/ Dan Norris
  
  Hey Johan thanks mate I’m glad you liked it. We do a call every week if you want to jump on the call we could make a podcast episode out of it? Let me know if you are keen dan@wpcurve.com
rfiling

Excellent – we definitely needed an Australian alternative to the clunky word ‘productization’ Service as a Service is it. Enjoyed the read.
- http://wpcurve.com/ Dan Norris
  
  Thanks yeah the old ‘productised services’ ha.