Project business versus product business - dyou are in the office until around 23:00 in the evening, work off the open support cases on Saturday, you sell hours and at the end, if you have a little success, then you have to hire employees again. So you're stuck with the 0 to 20% margin, so the agency business can be very tedious. What if I could arrange lucrative service contracts with customers that bring in CHF 10,000 per month per product sold, which would not only cover the cost of employees, but also include a nice margin? The result: a SaaS product that can be used to win customers on a regular basis and earn money.
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Year by year and not just project by project 💰
You open your notebook on the beach of Costa Rica, right after the first surf session and answer quickly, the few requests - close your notebook again - go surfing again and have fun on the beach.
This is how you imagine it, the product business is much better. Is the grass really greener on the other side of the hill? What does it really look like to build a scalable product?
I've already experienced both sides - it's a costly, long road and I had to make drastic decisions. I really wanted to build this SaaS product and I had to specifically let 40 customers go in order to move the product forward. So the question to Valentin, what is the reality now? You've already built several software product companies - you've been product manager for several SaaS companies, that's your hobbyhorse. As founder and CTO, you built those companies, but why is the shift to this SaaS model so difficult?
The three problems in switching to product
Product or project management
This involves three big problems. First, there is the difference between a product and a project. With a project, you do everything for an individual client. Unlike a product that you have to build for quite a few customers, who then all have to use the same solution. Secondly, you have an insanely long pre-financing in product development because you also have to pre-finance the customer acquisition and the third thing is that you need a different organization. You need different people for a product company. So what does that mean?
In a product company you need to have someone who has product ownership and the biggest difference is that you are building a product that has repeatability and accordingly then scalability. In a typical project, you always have the individual customizations, so-called customization, where the customer says, Oh, I just need this button or feature or checkbox and then you build that and that's what kills a reusable product. This product can't be scalable because it's not "maintainable", because even in reality, this single feature, the single checkbox can never be needed by a second customer. But this feature is insanely expensive if you have to maintain it in the long-term product cycle. Also, a product takes a very long time to develop. I have never seen a true product-market fit achieved in 6 months for a good product. It takes years of development work to make it work.
Pre-financing
Another big issue with pre-funding is - and this is often forgotten in software-as-a-service - it's mega expensive to build a product like this. Either you have a product team or you have the CTO or co-founder who then builds it all, who helps think, who draws the product - I've been that person myself - and that's just an insane amount of stress. Plus, with that person also comes lump risk, if that person can't do it anymore or wants out, you lose all the knowledge and the company is correspondingly dead and not scalable. So the alternative is: you have 3-4 people in the team working efficiently with each other. But this is again expensive and costs CHF 300'000 or more per year. This then takes many customers until you earn that much money again. It also takes a lot of time, even if you have such a team, then you quickly build for 1, 2 or 3 years until you have a real product market fit. So you can do the math yourself, how much money it costs approximately.
Then, in addition to the product team, you have to pre-finance the customer acquisition and onboarding, so you also have to pre-finance the installations, trainings, customizations. Weil, by the time the customer pays the first bill, you have expenses for marketing, sales, customer consulting, customizations, and then finally he pays the first bill. This invoice is then much lower than a project invoice used to be - the costs have all already been incurred. Typical for a SaaS company then are the Customer Acquisition Costs, the CAC. These costs actually take 9 to 18 months until those are paid back. And that means the rest must be pre-financed. Especially in B2B SaaS, you don't have this turnkey solution, you always have to make adjustments, customize a design. For example, when it's integrated into a website or a configuration is done or people are trained. Say, you always have this high cost, with every single customer.
So if you calculate it simple example, a typical project brings CHF 100,000 and then every year you have a support contract of CHF 20,000.If you do 5 years lden support contract, then that means the total amount you earn from that customer over 5 years is CHF 200,000.And now you can divide that by 5, that gives CHF 40,000 per year. If you now win the SaaS customer, he still pays CHF 40,000, but you still have costs of CHF 100,000. That means there is a gap of CHF 60,000. If you then find a second customer, you have a gap of CHF 120,000 and with the third customer a gap of CHF 180,000. The more customers you win, the larger the pre-financing gap becomes and many people forget that! One then has the feeling, I gain more customers, then everything becomes much easier, but that is not necessarily the case.
Another point why it is so expensive is the following: Many say then I build such a great product, which then cheap and infinite people can use it. Like a Shopify for CHF 29 per month. And in reality it's not like that. In reality, the products that are so cheap have to be ultra easy to use. And ultra simple always means I need an enormous amount of development work, UX and documentation. It often takes twice or three times longer to develop this. Also, rarely in the B2B enterprise environment are there these long-tail products that just work. They are rare or it took a tremendous amount of upfront investment.
Organizational structure
The organization, you can actually divide into 2 areas: All, the Owners, Leaders or Partners, of this service business, who want to do this together, have to be well aligned that they want to do this. They have to have a long-term vision that you want to build a product company now and that's often difficult when you're multiple partners because life plans change. Suddenly you want to get married, have children, maybe you want to move or want to do something else. Then one is again interested in a next major project, the next customer or cash flow and profit. Instead of investing years in an ominous product. Even if you are alone, it is not easier. Then you also need different people in a product organization than in an agency business. You can't just flip the switch and say, hello dear agency people, new we are now a product company.
The Master Plan
You're talking about three problem areas: 1) differentiating product management from project management, which are two different pairs of shoes. 2) Massive upfront investments, so quickly once CHF 100,000 and more acquisition costs, which you have to calculate accordingly and then 3) the organizational structure, which must be transformed. But what is the plan, what is now a solution path for these problem areas?
Yes, there are probably already ways that are more proven now, or more promising than other ways.
SaaSify an existing project
In terms of the product, it's proven to take something you already know well. If you already have a project, and again several projects in a similar area, where a similar solution was built, for similar customers, that you then actually take this project and abstract it into a product. I say to that "Saasify" an existing project and that's much more efficient than if you build it from scratch. Because you already know the market, you already know the customers, you know the problems. If you build something from scratch, it takes a long time, it's costly, and most importantly, it's not proven that anyone will want to buy it. But what's important is that you then abstract it and try to find the scale and say: How can I copy this as easily as possible and onboard new customers? That's not just copy-and-paste of the existing project, but you then have to build a Saas solution, which is then also somewhat technically challenging.
Bootstrapping or spin-off
There are two paths to funding that have proven successful. The first one is more topical again now, when we're going into a recession again and it's harder to find money, is the bootstrap way. And that is working in a hybrid model where you have the same people and they work in the service business where they get charged for the hours and then afterwards they can block off certain days and that's where they work for the product. But that's a big, mental challenge. Especially also for developers who are working on long-term products and then on the short-term problem of project business, where ad hoc solutions are needed.
The second way is, you split the organization. A kind of spin-off where you say certain people work 100% only on the product and they are cross-subsidized by the people who work in the service business. That often happens as well. Of course, there is also the way with an investor and brings in external money that finances and bridges the gap so that you can work 100% on the product. That's more difficult as long as you haven't really reached product-market fit and you're not making much revenue. Then you need the money primarily for product development. Especially in the current environment, it's harder to find investor money, which then also comes with a lot of pressure.
No more friends and say no to money
The last point is the organization, which must be different from the agency. Probably the biggest difference. It's the typical agency problem: you have clients who pay you money and you also have big clients who want your time, book you your agenda, report on Friday: "I have there a new project and we must have it immediately and I pay you so much money already". Now everyone has to work 100% on that and there is that every week. Every week your agenda gets "hijacked" again and something ad-hoc comes in. Then you keep losing your long-term product development plan and not moving forward.
One big difference is that a project always has a release date. Everyone is working towards the launch of the project and then that's done, you can send the invoice and solve a few more bugs. But basically a project is then "live" and has then manageable costs. The product has to be developed continuously, because the customer can leave you every year. He pays much less and at the same time he can leave you every year. You always have to perform well so that he doesn't leave you. And that is also a mental difference. There is no one event and then everything is fine. It's always a launch event and you always have to perform well. In addition, project managers are not product managers or product owners. Product owners need to have other skills, they need to have a product vision, they need to understand the customers, they need to plan a roadmap and most importantly they need to be able to say no.
Because the customer who says: just make me this button or checkbox quickly, everybody else needs that too. That's never the case in reality, so you always have to say: no to features, no to customers and no to money - and that's hard, especially for first-time founders who almost can't do that. It's hard when someone comes with the carrot and CHF 50'00. I've often said yes there too, it never worked out. Each time the maintenance had been much too high. The feature never needed a second person, the customer never came and you make yourself very unpopular in the organization. You're always the one who says no. You have to build up a thick skin as a product manager and always have the vision in mind. So you don't have any friends as a product manager and that's tough.
The real-world examples
No more friends and saying no to money. That sounds really hard. The question I have now practical, who has made these learnings and managed to transform product, financing and organization in such a way that it finally worked out and a product was successful on the market?
I can perhaps tell a few examples that I have encountered myself, in these companies that I helped to build. One example, for example, is DigiTickets. This is a booking solution for such attractions, like zoo and museums, so theme parks. There had been a founder where he had a web agency and he has once had to build a ticketing solution for such an aquarium a large and then he has built that because there were no standard solutions and then he has then found a second aquarium that also wanted a solution and then a third and then a fourth and has so noticed: Hey, I can build that as its own product and then find many other such attractions and has then won so customer for customer and always next door continued to make web projects and built that over years. And so he has then about 4 - 5 years managed. To optimize his whole company only on the product. That's actually a mega cool case, but you also forget: He acquired all the customers. That means he slept 200 nights in a hotel, drove 100,000 kilometers in his car - every year - and still managed the projects next door. After 5 to 6 years you are slowly tired, it's very exhausting and then he also sold the company and maybe not at the best moment for him, because the company has grown, afterwards much more, but he has not had energy longer, because he did not have several people on whom he could distribute the pressure.
Or another example is for example Waldhart, a software for ski schools in the Alpine region, which almost all ski schools use. He also had a web agency for ski schools and made websites for them and then realized that these ski schools have a budget for a new website every 5 to 7 years, which is the typical life cycle of a website. And then he realized that they also need a booking solution and that he can build that for them, but always in a project business and then he started to transform that and always lowered the project price a bit more and raised the annual product prices a bit more and that over 20 years. That's an eternally long time from today's perspective. That's as long as I've been in business. But he was able to build it up that way. So he was able to win many ski schools and also build a solid business. What was a challenge was that he was alone and he didn't have the know-how of SaaS and product business. As a result, he was actually pulling way too little money from value creation. the company had not been profitable enough. He then sold the company to us and we managed to create much more value with the same customer base and with a similar solution and make this much more profitable. The problem there had been that he didn't bring the skills into that company.
Other example of Zurich is it's Divio. This has been a web agency where specialized in Python, Django and a special framework of a technology and has then noticed, there is no hosting for it or it is always very special and then they have started to build their own hosting platform on which you could make their project ideal and then so over 7 years or 8 or 10 years he has invested more and more in the hosting platform and that also financed with his web projects. So he could then build a product business, but there has always been an investment gap and taken investment accordingly. This was very exhausting for the founder. He always had the gap between the project business, which was under pressure, if again a customer has jumped off and from the investors who have found, how does it go on now in the product business and has then consumed a lot of energy to make the transformation.
Other examples are Amazee.io, which was also a spin-off in the similar case as Divio. They developed Drupal hosting as a product that they could now sell. It came out of the Drupal agency Amazee Labs.
Bexio was also a spin-off from the web agency iBROWS. One part continued to provide services and web projects, which was later sold to PWC. The other part, Bexio, has become the well-known accounting or business software.
Also a well-known example is Paymash. This is a checkout solution for small stores, like hairdressers or small stores and with an online store. This is also a spin-off of the agency Fabware, which programs financial solutions in Zurich. Paymash has many customers and that now for about 5 years is always expanding and cross-subsidized by the agency.
An example where you Marc was there. Localina, which is now a booking/reservation system for restaurants. That has also been spin-off from Astina and still external people. There, the alignment of all developers, the whole team and the long-term vision was the challenge. They had gotten an offer from Swisscom Directories, LTV Yellow Pages and local.ch and then sold it.
What is evident everywhere, in all these examples: It's usually a founder who drove it. It takes a lot of energy, from those who then have to carry it. With multiple people, the focus is on alignment, which is often a challenge.
The entrepreneurial challenge
So the bottleneck, that lies with the entrepreneur himself, he always has to think of both areas: agency business vs. product business and that tears the entrepreneur apart. However, the master plan that you have pointed out also shows me that it is an extremely long way. You probably have to consolidate the customers as well, don't you? So that the product and the service go together, what would you recommend?
Yes, it is so, there are two challenges:
The entrepreneur
The entrepreneur, he has to be aligned, with the long-term vision. He has to come up with a plan, that everyone also sees that and also work on the same. It's also important, if he's alone, that he implements that with a good management team and he doesn't suffer burnout. I have many friends who simply burned out after a few years because they took on all the problems or the financial risk was almost impossible to bear. If you have kids or an expensive life or mortgage on the house and then can come under pressure to sell the company at an inopportune time when it is not worth the most. People also often miss getting experience in the company. You miss building an advisory board. Or you get board members or small investors who have less of a financial aspect, but bring experience in. That way you have people who have been down the road before. They can coach the entrepreneur and help when it comes to follow-through or futility.
The customer
Further, you can't forget the customers. Customers all need to be similar. A product company is a bit like a zoo. You have to somewhat align all your customers and bring all your animals together. If you build a zoo for elephants and then put mice in it, you just have the wrong zoo. The same goes for the opposite case, you build everything for small mice and then you bring in an elephant that tramples everyone. It eats something else, it needs different keepers, and then you don't have an economy of scale. Because you don't have efficiency reasons and that means you really have to know what kind of customers you have and want to have them and then explicitly look for those as well and say no to the others so that the whole thing becomes consistent.
The Key Takeaways
Now what are your key take-aways, why make this transformation at all - is it really then that on the other side of the hill, the grass is greener?
I think the very most important thing, or more accurately the worst thing, is when you're neither fish nor fowl and you're constantly changing course. If you build products one year and then realize it's not going that fast, then you go back to doing project deals. Then you're just burning money and not moving forward.
That means if you're going for a product, you have a long-term plan, you know what to look for, and you're gearing the product for scale. It's also a way to do the business a little less dependent on the economy because customers are in it for the long haul. You can also make the product easier to deploy, that the entry price comes down, and you get more customers that way. Then once you've gone through the long valley of tears, then you really have a money machine that can flush money into you on a regular basis.
Alternatively, you go the other way. You focus 100% on a profitable agency business. That's cool, if that runs efficiently, then you can make a lot of money. If the market conditions are good, like the bull market we've had now for a long time, you can also sell the agency for good money.
I have more friends who successfully sold an agency and made money that way than friends with product companies. However, those who were able to sell a product company made more money. And that is understandable, because the risk is much bigger! So the reward is also much bigger for a product company.
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