An Introduction to Service-Led Growth
Liam Hannaford is the Marketing Associate at Ibbaka. See his Skill Profile on Ibbaka Talent.
“My piece of advice is for any business to recognize the importance that pricing can play in reaching their growth targets and objectives and making sure that they recognize that pricing has to be rooted in value.”
What is Service-Led Growth?
Service-Led Growth is one of the six growth models that Ibbaka tracks. Choice of a growth model impacts pricing as it has a big impact on how value is communicated and delivered.
Let’s go though the basics of service-led growth.
What is Service-Led Growth? - A Simple Definition
Service-Led Growth Examples
The Service-Led Growth Flywheel
Who Should Use Service-Led Growth?
Service-Led Growth Metrics for Professional Services
Service-Led Growth Metrics for Software and Subscriptions
Which is better? Service-Led Growth, Sales-Led Growth or Product-Led Growth?
Advice on Pricing for Product-Led Growth and Sales-Led Growth
What is Service-Led Growth? A Simple Definition
Service-led growth is a new way to think about how to create a growth flywheel from a combination of professional services, software and data. It is most suited for complex solutions that require partnership and trust between buyer and seller.
Service-led growth is an alternative to sales-led growth and product-led growth that is less capital intensive, delivers profitable growth with enhanced cash flows while deep trusting relationships with customers.
Service-Led Growth Examples
MedTech
In the field of medical technology, a lot of businesses are switching from selling items to providing more comprehensive solutions. Companies are that once sold needles are now selling sample collecting systems and drug delivery systems. These systems are sold as packaged solutions that include consulting, hardware, software and consumables with the consumables often sold as part of a subscription.
Data is collected to make sure that the solution is providing the value intended and can be adapted to the unique circumstances of each hospital and evolved as technology and requirements change.
Environmental Engineering
Site remediation is becoming more and more important in the field of environmental engineering.
To put it another way, this refers to preparing a site that has been contaminated by previous industrial use for new uses when the level of pollution is undesirable.
In this instance, the initial service will probably consist of a site assessment and remediation plan. The plan will be delivered through a system that instruments the site, collects data, and tracks the impact of the interventions. The insights will consist of the impact of the interventions and other site properties that will determine how to design for future use.
The Service-Led Growth Flywheel
Three components must be present for the model to work and the service-led growth flywheel to turn.
To ensure that value claims made by marketing and sales are met, the underlying software or other product is wrapped in services.
A subscription charge is required for the software platform that provides the services (or some other mechanism for generating recurring revenue).
The software gathers data in order to produce insights that result in new services.
The flywheel is built on interconnected, constructive feedback loops.
Subscriptions result from services
Subscribers produce data
Data yields understanding
Opportunities to provide more services are created by insights
The mechanism of the service-led growth flywheel is as follows:
Professional services are provided to solve a key business problem
The services are provided through a software platform (this is critical and is the reason service-led growth companies are not just professional services companies with some software)
A subscription to the software platform is included as part of the delivery of the professional service
The software platform collects data that is used to generate insights
The insights lead to new professional services
These services advance the evolution of the software platform
The subscription revenue expands
One does not have a service-led growth model if one of these linkages is broken.
Who Should Use Service-Led Growth?
The service-led growth model can be used by professional services companies to direct their development and generate more predictable revenue. These companies need to discover a new model that makes use of software and more detailed data.
Conventional software firms can shift their legacy software into the service-led growth model and boost revenue and profitability. These organizations are under pressure from the competition to move away from licenses and on-premise software (to migrate into the cloud and offer subscriptions).
Product-led growth businesses whose products have matured to the point that their consumers require a wider range of services that cannot be provided only by software and data.
Service-Led Growth Metrics for Professional Services
Metrics for Service-Led Growth
Service-led growth metrics come in three buckets:
Metrics for the professional service
Metrics for the subscription: annual or monthly revenue (ARR and MRR), net revenue retention (NRR), retention
The critical business outcome, such as growth in aggregate customer lifetime value (LTV)
The goal of these metrics is to measure how services drive subscriptions and subscriptions drive services. These need to be connected to have a service led growth flywheel.
The service-led growth metrics for professional services measure the degree to which the services lead to subscriptions. Effective metrics will help predict future subscription revenues.
Key numbers to track are as follows:
Probability a service contract leads to a subscription
Percent of service to subscription revenues
Percent of service customers with subscriptions
Perhaps the most important metric is the direct contribution of professional services to customer lifetime value.
A couple of notes on this.
It is important to use Net Customer Lifetime Value, which is Revenues - Cost to Serve or the Gross Profit on the Service. This makes it possible to compare Professional Services with the Subscription.
If repeat business can be predicted with confidence, it is perfectly acceptable to attribute a customer lifetime value to professional services. (In Jeff Robinson’s excellent new book, Pricing for Growth, he calls these ‘repeat-customer businesses.’)
Service-Led Growth Metrics for Software and Subscriptions
The service-led growth flywheel only works if subscriptions lead to additional services. The mechanism for this is the insights generated from the data collected by the software platform. These insights provide the opportunity to propose new services.
Probability a subscription customer generates additional services
Gross margin on the additional services
As with the service side of the business, the contribution to growth in customer lifetime value is the most important metric. This is normal for subscription businesses. David Skok SaaS Metrics 2.0 provides a good introduction and be sure to click through to the detailed definitions for guidance on how to calculate these metrics.
Which is better: Service-Led Growth, Sales-Led Growth or Product-Led Growth?
Growth models are often combined. Few companies will rely on just one growth model as they scale to maturity.
As they scale, the majority of Product-Led Growth businesses layer in Sales-Led Growth.
Consider all the pricing websites you have seen with a package for "Enterprise" or "Large" customers on the far right. When a potential customer clicks "Contact Us" or "Learn More," sales is activated. This is the point at which sales-led growth is replacing product-led growth.
Sales-Led Growth companies can use Product-Led Growth approaches to generate PQLs (Product Qualified Leads) for there sales teams, and they can do this with both new and existing customers.
Service-Led Growth often comes to play when a new solution or even category is being introduced. It is used to build customer understanding and trust and to demonstrate that the solution actually solves the problem. Service-Led Growth is also common as markets mature and companies move from standalone packages to more comprehensive solutions that need services to ensure that value is being delivered and documented.
Multiple pricing models can be supported by Ibbaka Valio, and they can be linked to value models. This makes it an effective platform for businesses that must address both sales-led growth and product-led growth.
More Reading on our Service-Led Growth Series
An Introduction to Service-Led Growth (this post)
