I’m writing a short series1 of posts about observations I’ve made after transitioning from running a more direct-to-consumer focused business to running a B2B services business.
For a long time now I’ve been working to build out world class data-driven marketing infrastructure and teams, and most recently I’ve assembled a team that helps other companies do the same. It’s a services business called Yield Group that helps companies collect and use the data that will help them grow.
It’s been a fascinating experience coming off the heels of running a company that was primarily direct-to-consumer with a focused set of products. One of the most interesting differences to contemplate has been how services businesses scale.
The challenge of economies of scale
(For the purposes of this post I’ll use “product company” to refer to businesses with a specific focus, whether that be subscription SaaS, ecommerce, or a consumable service, like Uber, as opposed to an “agency-style” services business).
When you run a product company, you’re constantly working to scale revenue by selling more subscriptions to your product, more individual products or even consumable services. Because customers use the same features and/or because multiple users can consume the product at the same time, there are economies of scale in production, development or delivery, which is where you make margin and scale the business.
In most agency-style services businesses, one of the primary things you are selling is time. In other words, at some point in the process, a human is is performing some sort of task, be it writing code, creating imagery, training or even thinking. Whatever the pricing model or constellation of additional revenue streams around time, available working hours tend to have a very high impact on (or, in some cases, complete control over) services businesses.
You can see where this is headed: hours have an inherent ceiling in both volume and velocity, with the limit being the amount of time and how fast individuals in the organization can work. In a services business, scale is almost always related to headcount. The degree of relation varies by model, but in general, doing more work requires more people, which makes achieving economies of scale fundamentally different (which is why they tend to be hard to scale and grow at a slower rate).
When you run a product company, you’re constantly working to scale revenue by selling more subscriptions or more products. Because customers use the same features, there are economies of scale in production or development and you’re able to make margin. in many services businesses, you’re selling some form of time, which is usually tied directly to your employees, who all have a defined amount of inventory (hours, days, etc.). the conclusion is that scale is almost always related to headcount.
The top-of-funnel challenge
In conversations I’ve had with others running various types of services businesses, the common experience tends to be logistic growth, with early acceleration and a gradual slowing down (or, sometimes, declining) until some sort of ‘steady state’ is reached.
There are several reasons behind the logistic growth pattern, but one of the primary ones is that services are much easier (and faster) to sell in person. Selling in person is much easier (and faster) when there’s some level of pre-existing relationship, trust or reputation. Those dynamics tend to cause early-stage services companies to focus on a limited geographic area close to home and/or a limited network that they’ve already developed.
It’s common for lots of work to come in as you really leverage your network and develop a local reputation, but geography, number of relationships and actual time you’re able to devote to business development all have limits. When you approach those limits, growth slows.
When you’ve exploited your built-in advantages, filling the top of the funnel is hard. That’s true for any business, but the problem can be particularly acute for young services businesses who want to continue accelerated growth. In-person sales has the highest impact, but also has a time ceiling. Also, when you venture outside your geography and personal network, the sales cycle tends to be longer and your close rate lower. Referrals help, but are tricky to incentivize and also hard to scale.
Young services businesses tend to run lean from a cost standpoint as well, meaning that paid marketing efforts are more limited. If there is a marketing budget, both high-price point and low-price point companies face challenges (like expensive leads or a competitive market).
Perhaps the most significant challenge, though, is the fact that time spent on business development is time you’re not charging for—and that’s a challenge (especially from a cost standpoint) when time is a foundation of the business.
Up next: how these dynamics drive services companies towards various models.
1. You can see a full listing of posts in my series on services businesses here.