Thoughts on service and tech startups
Some definitions.
The rest of this post will only make sense if we’re on the same page about what a technology and service business is. The scenarios I am describing combine human-delivered specialty service and a technology platform enabling that service delivery. In the long term, these companies tend to either become large tech-enabled service companies or large marketplaces. In the early stages, before either of those paths is determined, things are a little more fuzzy.
In some cases, the platform has only one service provider (your company); in others, the platform may be available for others to deliver services. On the end customer side, the platform helps the customer receive the services. It might provide other functionality adjacent to the services or have functions that make the services side ‘optional’.
One example of a business that fits this model would be Amazon.com. The website and broader platform provide buyers a place to go and procure a wide range of goods. Amazon offers some goods on the platform under the Amazon Basics brand, but many other sellers are on the website. On the seller side, Amazon provides several centralised services around warehousing and distribution, which make the experience better for customers and capture power over the marketplace.
Maxwell Plus, a startup I previously founded, was another example of this model. The service we provided was testing for prostate cancer. The technology we developed helped patients access that service remotely, and we developed ML-based medical devices to assess blood and MRI results and assist in the diagnostic process. In our case, we were the primary service provider but had planned to bring on other providers as we grew. Those providers would have access to the platform and diagnostic tools when we did. In this case, a customer couldn’t use the technology without the services.
Explorate, the startup I currently work for, is another example. Explorate provides freight forwarding services. Our technology helps customers (those importing or exporting goods) manage their supply chain with visibility tools. Currently, we are the only service provider on the platform. Customers can use the platform to manage data around their supply chain without using our freight forwarding services.
Running decoupled business models is likely a distraction; ensure both sides align.
There are playbooks for great service businesses and playbooks for great technology businesses. Neither of those will lead you to a great tech and services business. Running both is not an option. You will need to design your company to balance these two worlds carefully. If your business is a venture-backed startup, this is doubly important. Your biggest competitor is running out of time.
Building two independent businesses with one budget will set you up for a challenging growth journey. You will need to be intentional about how much you will invest in services and technology at each stage. The combination of technology and services needs to be a competitive advantage for you compared to others. If you under-invest in either the services or technology, it is easy for your business to look like a gimmick. Your technology will become an expensive marketing exercise lacking the power to let you compete against other larger service providers.
In the long term, you must decide how to generate revenue from your platform. If you bring on other service providers, you can charge them a license fee or clip the ticket for their services. If you make services an optional part of using your platform, you’ll likely need to charge the end customer for access. Finding a pricing model that covers all combinations of technology and services used can be challenging. Expect this to evolve.
You’ll need a team of both tech and service people; be mindful of the differences.
Your success is going to be tied very closely to who you hire. In a technology and services business, you will need both a traditional technology team and a team to deliver services. In all likelihood, those two groups of people come from very different worlds. If you hire well, both of those groups are going to be high performers with strong opinions. That can lead to conflict. If you manage this well, this conflict can be healthy and collaborative. If you manage it poorly, you will end up with two groups of dissatisfied people.
You are going to need very good leaders at the top of each of these arms. Those leaders might be founders or senior management. Across the board, I’ve seen no evidence that you need a technology or services founder to make these business models work. You do, however, need to plan your organisational chart carefully.
If the balance of power leans too heavily towards services, your technology team will likely become an in-house dev shop. People with a long tenure in the services world will have no shortage of gripes with current off-the-shelf software, and it is easy to build a platform that works very well internally but needs different levers to scale. Many traditional services businesses struggle to scale rapidly, and enabling that means changing workflows to leverage technology better.
Suppose the balance leans too heavily towards technology. In that case, you may build a set of tools that are too general to be useful for your internal team because service businesses typically scale with people, and there is a wide variety of practices and procedures. Building tools to service all of them means building a lot of flexibility. You may eventually need to get there, but in the early days, you should be cautious of being too generic. As you grow your business, your technology must be part of your competitive advantage.
Services start faster. Technology scales faster.
Offering services, often from day one, is a great way to generate quick revenue. If you’re bootstrapping or delaying an initial raise, this can be a massive boon. However, there are naturally some industries where this is harder. If you’re in a regulated industry or have high initial CapEx, you may not have such a quick path to dollars.
While having access to early income can certainly be helpful, this is another area that needs careful and planned balance. Scaling services is often resource-intensive and fairly linear in terms of cost, which can become fairly addictive. While on its own, it is a great way to build a business. It acts somewhat counter to building a combined technology and services business.
Another side of this to be cautious of is that when delivering services, you put a natural floor on quality. You can easily overcompensate with people and time to make up for being a new business. The software side of your business may not have the same luxury. You will need to balance the fast and scrappy nature of building software with the high-quality people expect from services. It can block your software from being released to users.
Make sure the technology doesn’t become a blocker.
When you offer technology and services, you risk alienating a subset of your customers or other service providers. Putting your competitors on the back foot can put you at a disadvantage if you want to open up to more providers later. If that happens, you run the risk that your technology will become a gimmick.
Other service providers may be wary of joining the platform because they risk sharing too much with the competition. Similarly, some of your advantages may only come from having more than one service provider in the network.
You can address this in several ways. You can let your end customers bring their own data. That helps if you’re in a naturally multi-player market. At Maxwell Plus, this helped us cover the fact that a diagnostic journey spans many different services.
On the other hand, some platforms may not allow for this kind of behaviour. Amazon, for example, gains no benefit from customers bringing their own data. You have two options in this case. If you can grow quickly enough, you can get the competition on board by being big. Otherwise, you can intentionally put very transparent limits on your service reach. You can limit yourself geographically or to one small subset of services. This limitation can signal to others that you’re open to collaborating.
Positioning is going to be difficult.
It may already be clear by this point in the post, but a lot of your time will be spent trying to balance. This balancing act falls into the broad bucket of positioning. You should be prepared for this to be difficult.
When we ran Maxwell Plus, we constantly tried to navigate being seen as an app, a clinic, a medical device, and many other things. We struggled to name and describe what we were offering for a long time. In this case, it helped that other similar companies started popping up at a similar time. These different examples helped the market become familiar with the space.
Positioning can be harder if you’ve built more around services than technology. Once you’re well established for a certain set of services, it can be hard to break from the status quo. There is a very strong and reasonable desire to keep current revenue coming. In this case, it’s best to invest in using your technology to drop your cost to serve. Once your internal business unit is more economically efficient, taking risks around existing business is easier because your margins are better.
Broadly speaking, you must consciously choose how to position your in-house services. This applies whether you’re the sole provider of services or one of many. You can choose to be a highly premium service, where technology provides the premium edge, or you can be a cheaper option at a stable, lower price. Overall, it would be best to pick one of the two. Being a middle-of-the-road service provider at a middle-of-the-road price will be a prolonged path to growth.
Decide if you want other service providers on the platform early.
Ultimately, as you grow, you will need to decide whether to allow other service providers onto your platform. If you do, you’ll trend more towards a marketplace; if you don’t, you’ll be a large tech-enabled services company. Neither option is correct in all cases and will depend on many factors.
If your platform can provide a lot of leverage per service provider and your customers aren’t concerned about one-on-one time with service providers, keeping your ecosystem closed is a reasonable option. You keep more of the market for yourself. Your revenue, in this case, has to come entirely from the end customer.
If customers expect continuity in their service provider, as is common in a medical setting, or if technology can’t provide enough leverage, you’ll likely need to bring on other providers. There are scenarios where multiple providers are the only option that makes sense, including markets where existing brands hold market share or where customers value the ability to choose between competing providers. In this case, you can find ways to monetise both the service provider and the end customer, either directly or through clipping the ticket for services carried out on the platform.
Some industries will also have very sceptical service providers. Using your internal service arm to bootstrap the ecosystem can be beneficial compared to building only a technology platform and trying to sell to two sides of a marketplace. This was undoubtedly true at Maxwell Plus, where clinicians spent a long time determining if patients would respond well to online care but became interested in participating once we had shown traction with our services.
Customers of services expect certain pricing models.
Technology and service hybrids almost always target existing services, so there is usually a well-established set of norms for pricing those services. Deviating from those norms can be confusing for customers and make it harder for you to scale.
Service Fees or other usage-based pricing strategies tend to align well when the service you are offering is irregular. Maxwell Plus offered an annual testing process, and we found that even when the total price remained the same, customers preferred to pay a one-time fee for the service over a monthly subscription, which is more traditional to technology pricing.
This dynamic also makes bringing other service providers onto the platform more appealing. While your end customers may only require services occasionally, service providers will ideally have almost constant work to complete, making a recurring revenue model more palatable and aligned with their value.
Most services are cost-based pricing. Most technology is value-based pricing.
It is often easier to price services than software. You can buy a good and sell it at a markup or work out some hourly rate and charge that out. In most service-based industries, there is a standard way to price things based on one of these two methods. In well-educated consumer segments, your end customer will likely have a pretty good idea of your COGS, which will fix the upper limit of your price.
Software, on the other hand, tends to be priced around added value. This is much harder to quantify and can be a big jump for sales folk from a traditionally services-based background. A savvy customer will always ask, ‘Can this be cheaper?’ and it's much easier to fend off, ‘Well, we buy X for $100, so there’s no way I can go below $110’. Once the software is built, assuming you have some decent scale, the incremental cost is usually meager. Rebutting these questions can be more difficult if you’re not used to solution or value-based sales.
If you’re selling software and services, I’d recommend finding a way to anchor your added value against a services-based cost. It might be, ‘This software will save you 20 minutes per job’ or ‘For less than 1% on top of your building project, you can have A, B, and C.’ This advice applies to general B2B software as well, but plays particularly well when you're looking to combine both.