How to Test if your Service-Led Growth Flywheel is Spinning
Steven Forth is a Managing Partner at Ibbaka. See his Skill Profile on Ibbaka Talent.
The Service-Led Growth (SLG) model is a powerful alternative to Product-Led Growth (PLG). It let’s companies scale efficiently while developing a deep set of customer relationships and is much more capital efficient than PLG. It will be the standard way to grow businesses that integrate systems to create new forms of value.
Venture capitalists prefer the PLG strategy as it is fueled by capital and that is what VCs have a lot of. Their job is to deploy capital and get above market rates of return. They do this by deploying ever growing amounts of capital at above market risks. This is a good strategy and fits the PLG model well.
It can only support a narrow range of companies though, who are selling a constrained set of solutions. An alternative is service-led growth. This model builds momentum by delivering an initial set of services through a platform, making a subscription to the platform part of the initial work, and then using insights from data used by the platform to spark additional services. The result is a flywheel that drives growth.
One of the best examples of service-led growth is the SAS Institute. This is the iconic company that Google turned to when it wanted to learn how to build a corporate culture. There is a lot more to learn from SAS Institute than just corporate culture. It is also a good place to study the diffusion of innovation and alternative business models.
Just because you have professional services, software subscriptions, and data, it does NOT mean you are driving a service-led growth model. There are many companies that do this. The services and subscriptions are independent of each other. The subscription is an afterthought. There is no positive feedback loop between the services and subscription and in fact the two could be offered by two different companies. If any of these are the case, you are not executing on service-led growth.
You have service-led growth when services predict subscriptions and subscriptions predict revenue. Prediction is key. To really get the crank turning, data is also monetized and the platform is constantly reducing the cost of service delivery while increasing its value. Let’s break this down.
Service Revenues Predict Subscription Revenues and Subscription Revenues Predict Service Revenues
Service-led growth works best when the service is delivered through a software platform. One way to measure a service-led growth strategy is by estimating the following. Part of the value …
contributed directly by the platform
contributed by data accessed through the platform
created directly by human effort but delivered through the platform
created by human effort and delivered off the platform (in conversations, presentation and documents)
Of course this is too simplistic. Value is also created in other ways, by establishing relationships for example. And these different value functions are generally not additive but show many interactions and feedback loops.
Figuring all this out is important,, but we also need a simpler approach. Given the power of the current generation of artificial intelligence to make predictions, the co-prediction of services and subscriptions is a good place to start.
(P is used for prediction rather than the correlation coefficient R as (i) there are numerous ways to measure predictive power and (ii) prediction implies change over time.)
Can you build a model that uses services revenues to predict subscription revenues? That gets you halfway there. If services revenues predict subscription revenues then your services are generating subscription growth. But this is not a flywheel. Momentum is not being built.
To demonstrate that a flywheel has begun to turn, subscription revenues should predict services revenues.
Once you have services predicting subscriptions and subscriptions predicting services you have the beginning of a service led growth system.
Adding Usage Gives Better Predictions
Usage-based pricing is a hot topic these days, and usage is directly relevant to the service-led growth model. Ibbaka is a leading designer of usage-based revenue and pricing models.
By making usage a formal part of the service-led growth model one can greatly improve predictive power. That is important but it is not the most important thing about formally adding usage.
A focus on usage of the software platform changes how the company thinks about itself and forces people to care about how the software is actually used, internally and by clients.
To be clear, both subscriptions (a commitment to paying for access to a service for a period of time) and usage (a commitment to pay based on the level of use) can both be parts of the pricing model. See How to introduce usage-based pricing.
This becomes powerful when usage of the platform starts to predict the volume of professional services. Companies that get this far have a mature service-led growth business, one that can be self funding and that can scale rapidly.
Data is the Multiplier
What role does data play in all this? It is at the center. Each part of the service-led growth models needs to
Contribute data
Use data
Improve data
It is data that connects the different parts of service led growth into a system of positive feedback loops. As part of your service-led growth strategy develop a data plan that answers the following questions:
Service side
What data does the service require for delivery?
What data does the service generate?
How is that data used to jump start the value of the subscription?
Subscription side (software platform)What data does the platform need to deliver value?
What data does the platform gather?
How does the platform process that data to create value?
What data is used to generate the insights that lead to new services work?
How is data on the platform used in the delivery of services work?
Usage (a special class of data)How does usage of the platform generate data?
Can that data be used to increase the value of the services?
Can that data be used to increase the value of the platform?
Can that data be used to increase the forms of usage that are generating value? (the value paths)
Service-led growth is built on positive feedback loops between services, software and data. Without those positive feedback loops there is no flywheel. Just a set of disconnected businesses that are hard to manage. This does not happen by accident. It requires design, intent and commitment. When successful, it is one of the most powerful ways to build a valuable company that is both resilient and adaptive.
Read other posts in the Service-Led Growth series
Product-Led or Service-Led Growth: Which is a Better Fit for Your Business?
How to Test if your Service-Led Growth Flywheel is Spinning (this post)