For all of their many benefits, professional services firms can be challenging companies to run.
We've worked with hundreds of great companies and effective leaders who all share the same challenge: growing their business is directly tied to the time, effort, and expertise of their team.
It’s a linear equation: to increase revenue you have to increase your team. Cost, complexity, and volatility grow.
In order to break through this ceiling, you need a way to unlink the value you deliver to your customers from the time and effort you must put in to deliver it. You need a way to truly scale, not just grow.
This is what productization does.
Productization is becoming table stakes in professional services
Productization takes the process and expertise that creates the value of a strong professional services company and creates a scalable (and typically digital) product that can be sold and used over and over again in a way that augments, differentiates or replaces existing services. While not all products are digital, digital products are the most scalable type of productization.
According to McKinsey research, 9 out of 10 businesses–including professional services companies–are embedding digital technology in their current business model, launching new digital business models, or both. The top economic performers are investing more aggressively than the average firm to differentiate or transform themselves with digital products.
The B2B subscription market will reach over $340 billion in 2024, and is growing at 24% year over year. While this market size includes dominant players, there is a massive opportunity for niche digital products that reflect the expertise and capability of specialized professional services companies.
The business case for digital products in professional services
A digital product allows a professional services company to unlink revenue from time and effort, enabling scale. But there are several other potential benefits when considering a productization strategy.
Create Recurring Revenue
Most services businesses move from project to project with little reliable recurring revenue. A digital product can provide stability and predictability, unhooking revenue from linear time and effort either as a stand-alone product or as a subscription embedded within existing services.
Increase Profitability
A healthy digital product company has gross margins of 75-80% or more, compared to 50% or less for services companies. Product design & development does have higher upfront costs, so leaders must understand the path to ROI and revenue of an investment in a digital product.
Differentiation
A digital product can create synergies alongside current offerings, helping professional services companies win new business compared to competitors and remain sticky with existing clients over time.
Unlock New Customers
Most firms only serve a small percentage of potential customers. Digital products allow a professional services company to serve smaller customers profitably and expand their potential market.
Increase Company Valuation
The valuation multiplier for a subscription-based business is much higher than a services company, and that valuation is less dependent on a founder’s or leader’s presence in the business at exit. Over the last 8 years, when digital product companies have been sold, they have sold for five to nine times their annual revenue, compared to one times annual revenue for the average professional services company.
Common productization strategies for professional services
There is more than one way to be successful in introducing digital products into a services firm. A single firm can pursue multiple strategies, or evolve from one strategy to another over time.
- Automation: Use a bespoke digital platform to gain efficiencies in your existing service.
- Differentiation: Create a digital product as a visible and highly differentiated component of your existing service.
- Diversification: Sell a digital product directly for recurring revenue, linked or unlinked from your existing service.
- Transformation: Become a digital product company and fully exit existing services.
Examples of successful productization
To learn more, read about how some of Highland’s clients have successfully pursued productization to differentiate or transform their businesses.
- Creative Group launched an incentive platform to gain differentiation in the $1B corporate incentive market.
- Genioo created a new kind of project management platform to unlock a $100M ARR opportunity.
- A financial services firm diversified into a digital commerce platform with more than $3B in transactions to date.
- Archer Career transformed a personalized career coaching service into a scalable career prep platform with over 20,000 users.
If you’d like to discuss digital product strategies and hear how Highland helps our clients create recurring revenue and scale, we’d love to hear from you.
