Pricing for Service-Led Growth
Steven Forth is a Managing Partner at Ibbaka. See his Skill Profile on Ibbaka Talent.
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Product-led growth has proven to be a very effective way to scale SaaS companies. It is built around deep customer understanding and product market fit.
In the words of Blake Bartlett from OpenView,
Product-led growth is an end-user-focused growth model that relies on the product itself as the primary driver of customer acquisition, conversion, and expansion.
His post What is Product-Led Growth? How to Build a Software Company in the End User Era from which the quote is taken gives an excellent introduction.
Product-led growth has many lessons for every company
It is not just relevant to young software companies. The laser focus on the customer and the collection of data to inform design and marketing decisions is important to every company. I include ‘pricing’ and ‘revenue model design’ in marketing, and you can see OpenView’s thinking evolving in Kyle Poyar’s recent work on usage-based pricing.
We wrote about the importance of usage-based pricing as a response to the COVID-19 pandemic in Pricing under uncertainty and the need for usage-based pricing.
At Ibbaka, product-led growth is deeply coded into our strategy. For example, on the talent side of our business, we are reworking skill profiles and open competency models to make them more findable so that our platform itself makes our business easier to find. We will be doing the same with our database of value drivers and pricing/revenue models.
However, product-led growth is not a universal solution and is not directly relevant to many companies and large swaths of society. It tends to assume that rapid, frictionless growth is the most desirable state and that capital is available to companies that can attain this state. This is not necessarily true.
There are many human, social, and business problems where software is not the whole answer
Capital is not uniformly available, there are many places and social groups where access to growth capital remains a challenge
Growth is not an end in itself and as demographics and the business environment change the quality of growth becomes important
We need an alternative to product-led growth. This will help us clarify the key ideas of product-led growth and guide us when product-led growth is not the right answer. One alternative is service-led growth.
Service-led growth
Service-led growth can provide exceptional value to customers, in many cases far beyond that which is available from a product alone.
The value comes from the interplay of the services, the software platform, and the data. Far more than just professional services are required. This is an integrated approach. The initial value is provided through professional services, this is sustained and extended through software and then deepened with data-driven insights.
For the vendor, the professional services get the revenue flywheel turning, subscription revenues provide a long tail while maintaining the customer relationship, and the insights lead to opportunities to sell additional services and expand the relationship.
The axle of this flywheel is understanding, trust, and value.
In delivering a service one develops (or should develop) a deep understanding of the customer. Working through the challenges of a significant professional services project builds trust on both sides. The professional service is only successful if it provides value and there is a shared understanding of the nature of that value. Understanding leads to trust based on value creation, communication, delivery, and documentation (key spokes of the value cycle).
The professional service alone is not enough in today’s world.
In order to build a long-term relationship with the customer, a deeper connection is needed. The path to that connection is a software solution. Many professional services companies are already moving in this direction. So are hardware manufacturers, who are moving from selling physical goods to delivering solutions. Even born in the cloud software companies are finding that they need to weave together professional services and software to make sure that their users are getting the value promised (sometimes these services are buried inside the customer success function).
There are 3 main ways to combine professional services and software.
Deliver the service through software … rather than provide a set of spreadsheets and presentations, have an application that supports the presentation, analysis, and implementation of your solutions
Provide a dashboard that collects the impact data (I borrow this term from Marco Bertini and Oded Koenigsberg and their excellent book The Ends Game) … impact data is the data that measures the actual outcomes of the professional service (or any other product)
Add value to third-party data and integrate it into the dashboard or service delivery platform … this can be done directly or by building your own AI (increasingly easy with tools like Keras and Tensorflow)
There is a fourth approach, of course, one which has dominated for the past few decades, implementing software solutions. There are many IT services companies built on this business model. They understand that this is not the future and many are transitioning to managed services. In fact, managed services are an early, if incomplete, example of service-led growth.
The third part of the service-led growth flywheel is data. The flywheel will not turn without data. Collecting data and developing it into insights is part of the ongoing work that drives the flywheel. The pattern
Data ⥂ Insight ⥂ Action ⥂ Outcome
is at the center of service-led growth thinking. In some cases, the Insight leads to Actions that are delivered through professional services. This is how service-led growth becomes a flywheel.
Growth flywheels
Service-led growth is an example of a growth flywheel. Flywheels are central to business strategy design. Here are some examples from Future Blind, which has an excellent introduction to the concept.
Think of the service-led growth flywheel as a general pattern. You will want to elaborate on it for your own business and to add in additional flywheels specific to one of the elements or connecting them. Ask about the additional feedback loops.
How does the data being collected make the software more valuable to our customers?
How do the professional services drive data collection and interpretation?
Growth flywheel design and activation is an important emerging skill.
Systems thinking
Anytime one sees a set of feedback loops one starts thinking in terms of systems and applying systems thinking approaches.
What happens when one or more of the feedback loops are negative?
It could happen that the service is delivered in such a way that the results or recommendations cannot be supported by the software applications, creating at best a disconnect, and possibly a negative feedback loop.
Or the data from the insights may show that the original professional services work delivered the wrong recommendations. This is a bad state of affairs, but as my doctor pointed out when reviewing some tests ‘it is better to know than not to know.’ And services companies are fooling themselves if they think that the client is oblivious to the outcomes.
Pricing and feedback loops
Designing pricing for service-led growth requires some thought on how the different pieces interact to create long-term value. We covered one of these interactions when we discussed Why service companies discount software ... and why they need to change. There we advocated giving a professional services credit based on the scale of the subscription rather than giving a discount on the software subscription, as many companies tend to.
Another question that frequently comes up is when to charge for insights from the data.
We considered this when we answered When to price predictive analytics. In the service-led growth approach, one generally does not try to monetize insights from the data being collected. One provides these as part of the overall relationship and uses them to propose additional professional services. In fact, it is these insights that power the flywheel. Charging for them can bleed off momentum.
The subscription pricing should be closely tied to value. This means having a value model that informs your pricing model. Ideally, the software captures the impact metrics that are used to measure the outcomes of the professional services provided and the value being provided by the software itself.
One test of your usage, value, and pricing models is to see if there is at least one variable that shows up in all three models.
Service-led growth requires investment and commitment
Service-led growth is fundamentally different from a professional services strategy or a product-led growth strategy. It has the potential to deliver long-term customer relationships (the key to customer lifetime value).
More reading for you
Other posts on our Service-Led Growth series
Pricing for Service-Led Growth (this post)
