Lean Startup Principles and Services Businesses

by Whitney Baxter (@whitneybaxter) & Dave Krasik (@davekrasik)

Our project focused on building out the sales and marketing strategy for a growing tech‐focused service firm. We attempted to apply many of the LTV principles to this service model and found them quite useful. Some we found could be applied interchangeably with between product and service based firms, while other required modification or adjustment. We’ve focused on the later for our post, but in both instances the principals were useful lenses through which to examine the business.  

We’ve observed that services firms can successfully apply some of the most important concepts of lean startup methodology, including minimizing startup costs and iterative hypothesis testing.

Resource Constraints

Launching a service firm can require significantly less capital than launching a product firm but may be much harder to scale at the high rates achievable by product firms. The costs of resources to create lean product‐based startups are becoming increasingly less prohibitive. Launching a product firm requires fewer owned and captive resources. New tools, like Amazon Web Services, allow resources to be leased and utilized on‐demand helping to reduce the equipment and employee startup costs. Online communities and tools enable founding teams to modularize their product or engineering development processes and increasingly leverage a global talent pool.

While the same dynamic holds for services firms, it is most applicable to their ancillary tools or overhead costs. For most service firms, the customer evaluates the capabilities of founders directly when making an economic decision. In product firms, the founders are indirectly evaluated through the products they create. Logically, service firms are more constrained by their founders’ time and capabilities rather than monetary and tangible resources. As a lean service‐based startup begins to scale, it becomes more resource constrained by the founder’s customer acquisition and engagement time. Product based firms can scale to astronomical levels by fueling their marketing and engineering efforts with more money. The fuel of service‐based firms, talent, can be much harder to acquire and rapidly integrate.

Service‐based startups can also have more financing flexibility than product‐based startups. In a recent blog post, Mark Suster recently addressed the types of financing applicable to service firms: angel, bank, “customer,” and vendor.1 Because service firms are less constrained by money (i.e. revenue is primarily generated by founder time while most other costs to serve are relatively small) they are less beholden to certain forms of financing (high risk, reduced control VC money).

Hypothesis Testing

For services firms, a lens of market need / internal competency / passion can be a helpful evaluation tool. Using lean principles, service‐based startups can test hypotheses to better gauge opportunities and tradeoffs within this framework. Service firms can be as flexible as the talent that they bring to the table. This allows them to reach out quickly to new market needs and learn new internal competencies, but it also requires them to account for potentially constraining motivations of their employees.

While selling services can be much easier than selling B2B products, feedback from the selling process can often be less conclusive and appear more slowly. Engagement and selling processes are slow and the custom needs and expectations of clients can vary widely. A broad testing campaign is often required, as service‐ firms often want to avoid overspecialization at the outset. A service‐based firm’s internal competency is refined with repetition, like product‐based firms, but customization in service offerings can require more exhaustive testing and leads to less conclusive results. As a result, it can be more difficult to identify your customer within the market and your evangelist within firms.

Scaling a Tech Services Firm

Concurrent with a services firm’s efforts to test different internal competencies, a firm must also efficiently scale into new client markets. New markets allow for a broader set of revenue streams and defend a firm against pigeonholing and obsolescence. Firms that fail to extend into new markets may see their niche become commoditized or hyper‐competitive while more flexible firms continue to grow as market demand shifts.

Referral Rings

Due to the high importance of referrals and references in the relationship‐based customer acquisition process for service firms, it is useful to view scaling in terms of network rings. The inner ring consists of a firm’s initial professional contacts. In the case of our project, this would be the founders’ academic network and the first companies to which this network connected them. The next ring consists of companies and decision makers to whom the inner ring can provide referrals.

Referrals and reference to completed projects significantly reduce a client’s perceived risk and customer acquisition costs.

Grabbing a Beachhead

In light of a new client’s risk perception, there are two additional effective techniques for extending into a broader client base. First, a firm should lead with their strength. If a firm has built a credible portfolio in a particular competency they should initiate their relationship with a new client through this competency. There are several advantages to this technique:
  1. The firm already knows how to sell the service. They’ve given successful pitches before. They know the key decision points and they know the key decision makers. 
  2. The firm can reference similar projects from their portfolio, outline expectations, project ROI, and refer to past clients. 
  3. The firm already knows how to execute. They are not learning on the fly. They know the potential pitfalls and can quickly overcome them. This presents a credible first impression that the firm is able to execute on the services that they sell. 
The next technique is to give away new services, provide discounted services, or provide services with the option to pay following completion. The advantages include:
  1. Reduced financial risk for the economic buyer. 
  2. Increased project cycle time because lower and zero cost projects require less red tape. This can speed up iteration and the learning curve. 
  3. Build deeper relationships with key decision makers. This informs future sales pitches and can improve the operational success of follow‐on projects. 

Both techniques aim to create beachheads within new client bases. As beachheads are successfully created, the firm can expand to greater project scope and scale within each client organization. As they scale, firms can use these techniques to build new competency portfolios that again allow them to extend to further network rings and clients.

Branding: Perception and Timing

Another important consideration when scaling involves branding. Young firms are generally valued for their technical competency and ability to execute on an RFP. Due to lack of experience a firm is often viewed by the economic buyer in terms of the ROI that its’ services provide for each one‐time engagement. Attempts to sell based on brand have little impact on the buyer. As firms mature, broaden their portfolio, and generate a proven track record, they begin to build credibility in the marketplace. At this point they can begin to build a brand that aligns with their reputation and existing portfolio. This branding can become a strong differentiator as they grow, markets mature, and new competition enters the marketplace.

While external strategy is expressed through branding, internal strategy is represented by the processes and objectives that the firm intends to carry out within their own organization. In our firms case, they attempt apply IDEO‐style design concepts to their engagement process. While they have seen these as successful methods for creating solutions that their clients highly value, they have noticed that clients do not have an appreciation for the methods or internal strategy that the firm uses. Attempts to sell this external strategy are at present unproductive but this does not mean that the firm should deemphasize the design concepts in their internal strategy. These indeed could become the foundation of their brand strategy as the company matures.