Jason Fried co-founded 37signals in Chicago as a three-person web design shop. And while it provided a decent living for him, the work itself lacked a certain satisfaction. 'I found project-based consulting frustrating because we would work on a site for months and hand it over to the client, who would inevitably make changes and drag us through their politics,' he says. 'It was rare that what we actually built saw the light of day.'
That frustration didn't prevent 37signals from becoming successful. But as their projects grew larger and more complex, Fried and co-founder, David Heinemeier Hansson, found themselves looking for a piece of software that could help them better manage jobs among a growing network of staff and contract help often operating from different locations. Having evaluated a number of off-the-shelf tools, they decided to build a simple piece of project management software for their own internal use.
Then a funny thing happened: 37signals' clients saw the simplicity of the software and started asking where they could buy it. It wasn't long before Fried and his partner realized they had built a product that might have mass appeal. They polished it up, gave it the name Basecamp and, through their blog, announced its availability. A year later, Basecamp was more profitable than the web design business, and so 37signals stopped being a service business and started being a product business.
Today, tens of thousands of small businesses use 37signals software, and the company hasn't built a website—other than its own—since 2006.
Making the Switch
When I recently interviewed Fried, also the co-author of the New York Times bestselling book Rework, I was reminded of my former research company, Warrillow & Co., where we spent seven years as a project-based service business before we redesigned our model into a subscription-based product company. In my case, changing from a service to a product business made it more predictable, enjoyable and ultimately sellable (Warrillow & Co. was acquired by the Corporate Executive Board in 2008).
In the case of 37signals, Fried has no plans to sell but loves the freedom of running a product company. 'When you're a consulting business, you have to say yes to big clients, who end up telling you what to do. You become beholden to the giant corporation who is paying you $60,000 for a project,' he explains. 'I love the feeling of control I have now. We build the best products we can for tens of thousands of customers. We try to make decisions that will benefit all of our customers, not just one giant corporation waving a big check.'
Based on my conversation with Fried, coupled with my own experience, here are four steps for turning a service business into a product business:
Step 1: Develop a Subscription Offering
In the case of 37signals, customers buy software on a subscription model. Under such a system, customers pay a small amount each month, so Fried and Hansson can predict their revenue well into the future. Predictable future revenue diversified among many customers gave 37signals the courage and resources to eventually turn off its service business.
At Warrillow & Co., we went from project-based consulting to having a single subscription to our research, which allowed us to see how our revenue was shaping up.
Step 2: Build an Audience
37signals had authored a popular blog for seven years before it announced Basecamp to readers. With a direct line to thousands of daily readers, 37signals was able to use the blog as its primary marketing vehicle to sell subscriptions.
At Warrillow & Co., we had been running a conference since 1999, so when we made the switch to the subscription model in 2005, past attendees made a natural audience for us.
Step 3: Don't Give Yourself an Out
In a service business, clients always take priority, so it is hard to find the time to work on your product offering. In the case of 37signals, it needed project management software to better serve its clients, so it had a natural motivator: either develop the product faster or risk losing clients.
At Warrillow & Co., we did not have such a built-in sense of urgency, so we had to manufacture it: we quit accepting consulting projects cold turkey, which was made possible because we charged tens of thousands of dollars upfront for an annual research subscription. Once we had a couple of subscribers, we had the money in the bank to finance the drop in consulting revenue.
Step 4: Start Saying No
It took a year for 37signals to build up enough subscribers to start turning away projects. Fried remembers the day the company stopped offering consulting services: 'It was so satisfying to know we were in control of our own destiny. We didn't need to grovel for business and kowtow to clients anymore.'
For me, it was tempting to accept consulting projects, but saying no triggered the opportunity for us to talk about our subscription. We would explain to prospects that we did not offer custom consulting but would go on to describe how our subscription offering could help solve their problem.
The best way I can describe the feeling of making the switch from a service to a product business is to imagine completing a jib turn in a sailboat. Rather than 'coming about' and slowly stalling the boat's progress by pointing its nose into the wind, the jib requires the captain to yank the tiller toward his or her body.
The jib is a sharp, violent turn and requires a strong stomach. When things get tough, you must override your instincts and continue to yank the tiller toward you until the turn is made and you're safely on the other side.
Moving from service to product requires an equally strong stomach as customers will inevitably keep asking you to provide your service. But if you can make the switch, the reward on the other side is the sense that you own a business you control. You, not some overbearing client, decide what you sell, to whom, when and how. If entrepreneurship is about the freedom to be your own boss, then a product business is the ultimate escape.