Productized Services, not SaaS
Could that be a better option for Agencies?
So, you’re convinced by the argument that revenue from selling products has some benefits over pure project-based revenue. It makes the future more predictable, locks in clients and avoids the feast and famine that can often accompany the project by project approach, which according to a Forrester report in 2023 was something that 51% of agencies said was an obstacle to growth.
But if you’re not thinking that you want to build a separate product and pivot fully from agency to SaaS, could “productizing” your services be the answer?
My short answer is: it could be, but it has its drawbacks.
What is a Productized Services approach?
Mat Baxter, CEO of agency Huge said in an interview in The Drum:
The productization model is a radically different model. It’s a more stable model, it’s a more margin accretive model, it’s more generally stable for client relationship model than we’ve had in the past. And so, we’ve fully embraced it and taken it on board.
You could think about the Productization of your Services as a result of applying the Pareto Principle, in that 80% of what you do for a client follows the same format. In other words, it’s a predictable framework with a predictable outcome. And maybe, because this is something you can do in your sleep, it only takes 20% of the total effort. One reason that agencies struggle to scale is that they are hamstrung by the amount of bespoke work that goes into each project: if you won a 100 new projects next week, you can’t deliver on them because you can’t go out and hire all the people you would need overnight.
Productizing your services is about working out what that 80% is, packaging it into a simple set of services that are easily replicable and offering a professional services layer over the top.
What this isn’t, is where you take your services and turn it into a SaaS product (just to be clear). This is where you take your services, standardize them and package the repeatable parts as a product: it’s still being delivered by humans, but with some automations around the edges.
Let’s consider an example:
Traditional Branding Services
A branding agency typically offers customized services such as brand strategy, logo design, and identity development. Each project is bespoke, requiring in-depth discovery sessions, tailored deliverables, and extensive client collaboration. This approach:
requires significant time investment per client;
has less predictable timelines and revenue;
relies on expensive agency expertise.
Productizing Branding Services
Instead of offering fully customized branding packages, the agency could create pre-defined branding packages with clear deliverables and fixed pricing. After looking at previous projects they might identify common deliverables such as:
Brand strategy/discovery session
Logo design (with revisions)
Color palette and typography
Use of imagery
Some work around tone of voice
Social media and website assets etc
So they package their services into three distinct, fixed-price tiers. Maybe something like this (just an illustration, don’t scrutinize it too heavily!):
The agency streamlines its workflow to efficiently deliver each package:
Clients fill out a form with predefined questions instead of lengthy discovery calls.
Fixed timelines: clear project deadlines help manage expectations.
Instead of unlimited revisions, each package includes a set number.
Template-based workflows to reduce design time.
AI tools to generate brand mood boards quickly.
The agency builds an online checkout system where clients can purchase branding packages directly using their credit card.
You could build recurring revenue services on top of this, for example:
Simple!
Is this a better solution than pivoting completely?
I guess it depends what you are looking to get out of it. If your priorities are:
Flattening out the peaks and troughs of your income;
Giving your existing clients more reasons to spend with you;
Delivering services more efficiently (see my 80/20 point above);
All whilst keeping the ability to do unique work for your clients;
..then, productizing your services may be a really good way to go. But, if you are more interested in:
Scaling something to a significant size;
Adding a lot more new customers - ie not simply switching your current ones over to another charging model;
Moving away from building something bespoke for each client and towards building the product that you want to build;
Creating something that you could exit at a valuation way higher than a services business could command;
..then you probably need to think about a wholesale pivot.
The bottom line
I think there is a lot to be said for productizing your existing services. But the bottom line is, it won’t scale in the same way a pure product offering would. You’ll always be held back by the fact that there is a direct link between the volume of work you win and the volume of people you need to deliver it.
On top of that, the recurring element might not be as sticky. Yes, the highly commoditised stuff like hosting etc will see customers coming back, but it’s unlikely people are going to sign up for a recurring logo design service.
Which means that ultimately, you’re going to be valued more on a multiple of EBITDA rather than ARR when you come to sell. Acquirers and investors will care about both those numbers, but there will be more of a priority given to one depending on the type of business.
If you’re an agency delivering a service and doing turnover of say $10m with a 20% EBITDA, you will be primarily valued on EBITDA. You might get a valuation of 5X EBITDA, or $10m.
If you’re a SaaS business delivering $10m in ARR, then your valuation will likely be more linked to your ARR than your EBITDA. You could expect 6X-8X ARR, or $60-$80m.
I’m not saying that this makes the SaaS route better, that would depend on what you wanted to achieve over the long term. But when you start to look at the numbers you can see where the bigger opportunities might be.
