In early markets, customers prefer entire solutions, not best in class point products. These solutions often include significant professional services and education. At the beginning of a new wave, most customers don’t understand the technology well. So, they seek experts to guide them.
Companies that provide services and education often win the early market. They develop customer relationships, reinforce their expertise with a strong brand, define the purchasing criteria in their favor and ultimately grow faster.
In the earliest days of commercial Hadoop, Cloudera educated the market through services. As they grew the user base, they developed subscription products, which now account for about 75% of revenue . In the IoT (internet of things), C3IoT and UpTake have pursued similar strategies. In the cloud native world, Heptio provides consulting and training for Kubernetes, a new infrastructure technology. In each case, the new technology is complex and understood by few.
During this early phase in the market – Carlota Perez calls it the installation phase – professional services is important. Professional services educates new buyers and grows the market. As a market matures and enters the deployment phase, the buyer refines their purchasing decision. They replace pieces of the initial all-in-one stack with best-of-breed point solutions. A few years in, they understand their needs better.
If your startup operates in a new market or champions a new fundamental technology, you have a strategic decision. Do you offer education and professional services at scale?
If you don’t offer those services, you bet that the market will mature quickly enough by itself to create a large market opportunity for you. That enough buyers will self-educate or educate themselves through other means. And, those buyers eventually come to buy your solution at that point. You may have to wait for the market to mature and that timing is difficult to predict. This is a defensive stance.
I believe it’s better to be aggressive: offer PS and education. Instead of waiting, your startup can attack the market opportunity. Selling PS means your startup will find, educate and inculcate new buyers in your philosophies and methodologies. Most of them will choose to buy your software since they’ve asked you to educate them. Revenues will surge, you’ll build a brand, and understand the market in greater depth. You’ll have many more customer interactions. You’ll also influence the speed at which the market matures.
Naturally, there is a tradeoff. Most boards and management teams steer businesses away from professional services. Services revenues are less valuable, less sustainable and consequently less attractive to investors. As a rough rule of thumb, one dollar of software revenue is worth 8x a dollar of services revenue.
But in the early phases of fundamental infrastructure and software shifts, services and education are a powerful tool to shift the competitive playing field in your direction.
This article was originally posted on Tomasz Tunguz.
Tomasz Tunguz is a venture capitalist at Redpoint and writes about startups, fund raising, SaaS companies, and best practices for founders.