David Cummings on Startups

Professional Services in a Startup

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David Cummings

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At Pardot we debated internally whether or not we should offer professional services to our customers. Our services team did an amazing job with implementations and onboarding while our customer success team regularly checked-in with customers to proactively help. Only, customers would ask for more services like custom work with email templates, inbox deliverability, landing pages, and nurture programs. Our recommendation: work with an agency partner.

In hindsight, we missed out on an opportunity. Startups should have a professional services strategy. Here’s why:

  • Stronger Relationships – Professional services are a great way to build stronger relationships with the customer as it requires more one-on-one time and a deeper understanding of their business.
  • Additional Revenue – Professional services result in a new revenue stream. While not as high margin as SaaS, professional services often has strong margins, especially when done as a true add-on (some services are a loss leader to make a product sale). One key point: services revenue shouldn’t be more than 20% of total revenue otherwise the company doesn’t look like a true SaaS business.
  • Product Ideas – Professional services becomes a day-to-day user of the product resulting in more product ideas and use cases. This internal team acts as a new customer voice.

Entrepreneurs would do well to develop a professional services strategy for their company, especially when there’s enough scale and existing customer demand to make it worthwhile.

What else? What are some more thoughts on professional services in a startup?

Comments

3 responses to “Professional Services in a Startup”

  1. Andrew Korf (@AndrewKorf) Avatar
    Andrew Korf (@AndrewKorf)

    Thanks David. Another succinct, excellent example of your daily posts that are consistently valuable and helpful for early or late stage start-ups and more.

    Reply
  2. Doug Calahan Avatar
    Doug Calahan

    Business owners should pay close attention to your comment about not letting services revenue be greater than 20%. If you intend to sell your company, buyers will pay a dramatically higher multiple on your recurring revenue than your non-recurring services revenue. You will get little credit for your services revenue. Business owners should be to optimize your recurring revenue, not the non-recurring revenue.

    Doug Calahan
    Exit Planning Strategist
    NAVIX Consultants

    Reply
  3. Tim Brown Avatar
    Tim Brown

    Great article David, and something that doesn’t seem to get coverage very often. Professional services as a SaaS startup is a mixed bag. Despite all revenue being good revenue, professional services can affect your valuation and prospective investor profile. SaaS valuation ratio is much higher than for professional services, like five times (or more) higher. Also VCs aren’t looking for professional service companies, that is more of a thing for PE firms.

    There are also two main forms of professional services, implementation/integration and customization. The implementation may be necessary to close a great deal. Customization can serve as a way to have a customer cover the cost of developing a new feature. The feature can then be pulled into the core product and benefit all of your customers.

    Lastly you have to guard your product development resources. Any time they spend on customizations or implementations is time not spent on building your core product. The short term revenue will mask this impact. Borrowing resources should be a conscious decision, acknowledging the impact.

    Tim Brown
    CEO, Content Chord

    Reply

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