My name is Rajan Chandi, a technologist who likes to build software products, experiment and have fun. I was particularly fascinated by Google, Facebook and Tech Innovation. The reason why I quit my job was to be able to explore tech entrepreneurship and build awesome things.
It has been a great ride building, launching and monetizing 3 software products to various degrees with small teams and limited resources. I am using this blogpost as a medium to express my personal views on whether a company is a product company or a services company.
The Reason for Existence
If someone who has started to create a ‘search engine’ while doing their PhDs or someone who is building a social network to extract personal information of Harvard students, they are startingoff as a product built to serve a purpose of its users. Google renders ‘web search’ as a service to its users or Facebook renders ‘social relationship management’ as a service to it’s users. Even Evernote advertises itself as a ‘Note Taking Service’ but they’re all products built to serve a particular purpose. If a company is starting off with a great product to serve a large market, they’re definitely a ‘Products Company’.
Important factors that set apart a product company from their service company counterparts:
- In case of product companies, they EXIST because their product exists.
- In case of services companies (trying to build a product), they exist DESPITE the existence of their product.
- If people care about a company because of it’s product, it’s a product company. (e.g. Ola or UberApps or Flipkart/Amazon app/site).
- If people love a company primarily because of it’s customization/support, it’s a services company.
- If a company’s business model can scale without adding a proportionate amount of people to its payroll, its a product company.
Automated Recurring Source of Revenue
How the company makes money? is an important question. The answer tells us a lot about what their users value, what ‘sells’, how does it sell, how can they make more etc. If a company is making most of it’s money because of their awesome product then they’re definitely a Products Company. e.g. Ola Cabs came off as an App while Meru Cabs was still popular in Bangalore. Meru cabs had an army of cabs, trained drivers and all the booking/communication apparatus.
How did Ola manage to exist?
They came up with an app that connects customers with existing drivers, leverages their cabs and manages to do a transaction with minimal human intervention. They may be known as a ‘Cab Hailing Service’ but they’re definitely a product company because they generate revenue due to existence of their product. People care about them because their app works and their prices are competitive!
Product Division: Profit Center or Cost Center?
There are a number of companies with IT/Products departments to serve the ‘business’. It you need an IT division mostly to serve the business, you’re probably tilting towards a services company. If you have an IT/Products department to serve (directly) either consumers or customers, you’re tilting towards being a product company. If allocating more money in tech/product/design division of the company will boost sales, you’re clearly a products company.
If allocating more money to product/tech/design will NOT boost you sales or grow the number of customers, you’re probably a ‘services’ company losing money in the ‘Product’. If you’re investing into a product with clear growth goals, you’re likely to be a product company.
‘What’ do they do it? ‘How’ do they deliver or render their service?
Every company has to sell something to be able to exist. ‘What’ they sell is important but ‘How’ do they ‘do it’ is far more important. For example, Google sells ‘Web Search’ as a service to people, it works. They’re a product company because of the ‘How’. They do it by building a hightech product which indexes the web and makes the information available to users.
There exist a number of ‘Market Research’ companies. They also search things for you and put together a report. They do something similar to Google in the ‘What’ division by providing you information that you requested but they’re very different in ‘How’ division. Market research company has to put manual effort behind every ‘research’ they do which is farless scalable model because they’ve no product to do it.
If a company offers a specific (nondemocratized) offering which others find it impossible (or very hard) to offer at that pricepoint, it’s a product company.
The Solutions Company
There’s a thinline when it comes to selling a product+customization in case of software products. Let’s call it “solutions company” which offers software solutions of specific problems which are customized as per customer’s needs. Automating these solutions (to a SAAS) will convert these companies into a Product company. Extreme customization necessity will turn these companies into services companies.
The Extremes of Automation
The key theme with all product company is existence of a great product which is hard to be replaced by offthemarket solutions. As a personal example, my last startup Classmint.com operates today without putting more than 4 hours of my time on a monthly basis. It still has 30,000 monthly active users and around 5001000 study notes are created on a daily basis. Classmint exist because the product (website) exists and does it’s job of providing a tool to create the best study notes online. If a system is built and is useful (offers a service), it’s clearly a product company. If you’re building a company, think about amount of automation that will exist.
The Litmus Test
Quick way to classify a company is to ask a question: Will this company still exist if we take down their product or replace it with commodity software? If the answer is a clear yes, It’s a services company. Otherwise, it’s a product company with their product as a differentiator.
Special Thanks to Amar, Sharad and Ravi. Amar Prabhu contributed to this article by editing it. Sharad Sharma and Ravi Trivedi contributed to this article by reviewing it.