How to build a sustainable business by productizing what you know
After giving up my addiction to salary and two and a half years into my adventure as a freelancer I have encountered the following problem: how to extract the most value from my time?
I invite you on a journey to explore how ideas acquire value, what is the value chain of bestselling authors and what are the traits that are needed to solve the value/time problem. So you know beforehand, I have found those traits to be openness, service and design.
[Slides or Text]
If you wish you can follow the highlights of this post in the presentation below. But since you’re here, why not scroll down and keep on reading?
[Where am I]
I am wondering if striving to sell the highest amount of billable hours is the approach that creates the best value both for me and for my customers.
Let’s run the process really quickly: first you court your prospect, you propose, you sell your hours, you bill and if you’ve done your work right the customer doesn’t need you anymore. Off to court another prospect.
Even if potential clients are everywhere, and even imagining a world without this recession, this model does not seem sustainable to me.
[Let me make an intermission]
One very simple solution to this problem is to stop selling time. You can do that if you start selling your services based solely on the amount of value produced in the clients business.
This solution is well documented in the free ebook Breaking the time barrier, written by Mike McDerment, co-founder and CEO of Freshbooks. The author postulates that a freelancer should price projects based on a fraction (between 10% and 20%) of the yearly revenue that his work can contribute to the client.
Applying this principle is much better than selling time. But still: you are doing the work, getting paid and then you’re off to another customer, in need to repeat the cycle. This system is also not universally applicable as not all consultants have projects that can be clearly linked with the bottom-line of their clients.
Moreover as an idea person I can’t be brought to believe that the solution lies in the pricing strategy alone.
How do you:
- avoid the constant need for new customers that requires you to constantly repeat the sales cycle?
- consistently participate to the increase of revenue that your work is delivering to the clients?
A system that solves these two issues would be perfectly sustainable in my opinion. Let’s see how close we get to this goal by refocusing from selling our time to selling either products or services.
[Let’s cut to the chase]
Before we embarque in a journey around productization let me tell you the ending: I still haven’t found what I am looking for. I haven’t got a single solution. I am here to involve you in my process, not just to provide actionable nuggets of knowledge. Bear with me, ‘cause the exploring may actually be the fun part.
[Build a product that generates passive income]
Our journey begins in San Francisco because the first name that comes to mind if I say product is Tim Ferriss. With his influential book “The 4-Hour Workweek” he has made popular the concept of lifestyle design. The idea is to let our work be driven by the lifestyle we want to achieve, and not let our income dictate our lifestyle as we usually do. To liberate time, Tim suggests to start working on a “lifestyle business”: this business is ideally selling a product designed or marketed by us, but manufactured by others. He also allows for this product to be immaterial like an ebook, a webinar or an online community, in this case he calls it an “info product”. The rules are simple: this “lifestyle business” must provide “passive income” and not generate so much work that it absorbs all our energies.
Easier said that done: I am not a product person. I think in terms of ideas and I am not at the point of my life when I am ready to prepare one single “info product” to deliver to the world.
Besides: how does Tim Ferriss follow through if we do a due diligence of his lifestyle?
[Write a book, invest and advise startups]
To his credit Mr. Ferriss nowadays does not need a lifestyle business to provide him with a passive income. He is an accomplished writer, investor and advisor to startups. How does his model work?
His personal story – specifically a successful exit with a sports supplements startup – and his continuous tinkering with his body and abilities has provided the material for his first book. What happened next is the boost you get when your ideas become popular: more people know you, you get invited to conferences, you sell more books.
How do you benefit from this mechanism? There are many ways. Tim’s way is to go back to entrepreneurship and act as investor and advisor to startups. A job not so far away from the one of the consultant, only with a big advantage: by advising companies where he is also a stakeholder he is maximising the opportunities of having successful returns for his investment.
Write a book, your ideas get a boost, become influential, feed back your ideas in successful companies. This is a way: not the only one. Plus it requires that you start out as an entrepreneur. Plus you also need to have money to invest.
Not too easy to replicate. Let’s go look at other models.
[Write a book, grow your consulting business]
Let’s stay in the United States: David Allen’s Getting Things Done is the perfect example of the successful use of a bestselling book to build a consultancy business. Instead of keeping his productivity workshop secret, David Allen decided to give it to the world in the form of a book.
The more his ideas have become known, the more influence he has had and the more his productivity coaching and consultancy business has grown. His own success has had also a great side effect: his ideas sparked an entire ecosystem of productivity apps and systems that generate millions in revenue. This is not revenue that he directly touches, but it is value he has unleashed in the world.
What Allen teaches us is that if you let your ideas roam free, you get a lot back. But how does he monetize today? His model requires selling to companies, holding seminars, webinars, etc..
Does this scale? Sure you can hire more trainers, coaching experts and expand to different markets. But this is not the kind of sustainable product I was thinking of.
Let’s continue looking at best selling book authors and what are other ways they have found to monetize on their ideas.
[Write a book, start selling a software]
Let’s go to Switzerland to meet Alex Osterwalder. He’s a consultant and speaker that concentrates on applying design principles to business processes and is one of the leaders of the Lean Startup movement. His book Business Model Generation gives away his best invention yet: the business model canvas. A tool so widespread that even I use it both for my needs and with my clients.
He continues working as a consultant and after his book was published, his speaking gigs may have multiplied. But he did not stop there: he is involved directly in building the software tools that go together with his techniques.
What is more sustainable: being a sough after consultant with stellar rates available to few people or providing affordable software to thousands of customers? I have the impression that he could – in a way – phase out his consultancy activity and concentrate in software sales.
You can tell that 10+ years have passed between the publication of Getting Things Done and Business Model Generation. Instead of concentrating his efforts on monetizing with consulting, Osterwalder prefers to build and bill for the official software tools that go with his book, seminars and ideas.
So this looks like one of the ways to go. So is building software always sustainable?
The answer comes from Berlin, where we meet my business partner André Pankratz.
[Start as a coder, build an open source ecosystem]
André is one of those people that have received multiple gifts and have put them to extremely good use. Among many other things he is a brilliant developer. After having worked on many software projects, all successfully sold to customers, he started wondering: am I putting my value to good use? He had exactly the same question that I have right now as a consultant: you approach the customer, provide the solution, send a bill, walk away. Are you extracting as much value as you can from the relationship?
He decided to stop selling his software as a proprietary solution fully owned by the customer and start building open source components instead. This has led to the development of Vidibus, a fully featured open source online video platform. Not only André controls the open source ecosystem of Vidibus, but he also manages a successful content delivery network. He is still selling his development skills, but together with that he is able to provide the value of a much bigger system.
In this way André has developed a whole company from individual freelancing gigs. He has been able to create an entire ecosystem out of the requirements of single customers. And because he is passionate about his clients success, he also generously consults them over their video strategy.
In his case we go from code to product to consulting and in both the last examples we see that software can then be a vehicle for delivering value especially if it’s associated with ideas, knowledge and if the core of the idea is shared – in this case not in book form, but as open source code on Github.
But what if developing software is not really your thing? Let’s go to Japan to see what we could do about that.
[Start from coding, go to consulting, return to products]
Patrick McKenzie is originally a coder, but he has since unleashed his inner marketer. He know a thing or two about sharing: he runs a blog, a podcast and a newsletter, when he’s not interacting with the Hacker News community under the nickname patio11. You got to wonder if he sleeps at all.
After running a successful consulting business helping software companies make better use of email marketing tools, Patrick has now dived back into building software products. Along the way he shares (a lot) of advice on how to go by making your consulting more sustainable. His suggestions range from transforming one-offs in recurring retainer agreements, to selling the same consulting activity to many clients. Or even to stop selling time and instead package a purely informational product to the same companies that would require your consulting. It could be a webinar, a book, an interactive training. What changes? The fixed price, self service payment and download eliminates costly meeting and negotiations, plus if you want to maximize your profits you can price the same exact product 1x for the small biz, 5x for the medium firm and 10x for the megacorp.
[Start from hardware products, end up consulting]
I had recently the pleasure to meet Michele Massaccesi. He is the founder of DRC Italia, a technology firm based in central Italy. He is a product guy: he produces measuring equipment used to analyse building materials. His tools are used to build new structures, analyse old buildings, measure and learn from hard materials.
His experience comes from construction sites and this is where he still goes to watch how his tools are being used. What he noticed is that the tools he produces requires a culture of materials and understanding of principles that are not yet widely known.
Nowadays when he’s not involved in developing some new tools, Michele acts as an ambassador of the ideas that go together with his products. He does not go around selling, even though sales are a byproduct of his evangelism. He gives free consulting to existing and potential clients. This is his way to create more market potential. He demonstrates that even product entrepreneurs feel the need for plain idea spreading.
It almost seems that – based on what I have researched up until now – we could tell Michele to either open source his tools (like André Pankratz) or write a book based on them like Jason Fried did.
[From ideas in software to ideas in books]
We’ll end our journey in Chicago. Jason Fried is the co-founder of 37signals, the successful software firm responsible, among other things, for open sourcing Ruby on Rails. The way Jason and his colleagues work is not only being constantly shared through the company blog Signal vs. Noise but also in books like “Rework”, an invitation to re-think workplace habits that make us unproductive, or the announced “Remote: Office Not Required”, about telecommuting.
Jason proudly keeps 37signals independent from outside capital and from acquisition. It relies on the revenue stream of hosted, subscription based software-as-a-service products like Basecamp and Campfire, in my opinion one of the best sources of sustainable revenue. But that was not enough, there is so much culture inside 37signals that it had to find a way out not only in the form of products, but also as a New York Times bestseller.
[The map of our explorations]
I still haven’t found my personal path to productization, but I start to observe a pattern:
Openness: by being open, accessible, by sharing your ideas you can increase the value of what you do. To multiply your value you can choose the way of books, free seminars and talks or open source software. Openness seems to be the common trait of the process of value generation that we are seeing in these examples.
Service: begin of service, being more useful today than yesterday, generating your value month by month, increasing your value as your software and your ideas are being shared more. The principle of service seems to me to be a key driver of sustainability.
Design: all the people listed here are designers, as they make something complex easier to grasp. Tim Ferriss designs your lifestyle and your ability to learn, David Allen redesigns your concept of anxiety to make you more productive, Alex Osterwalder applies design to business and creates a new discipline called “business design”, André Pankratz is able to see the design under the veil of the dry “technical requirements” of his customers and thus builds an open source ecosystem, Patrick McKenzie is constantly redesigning his business with value in mind, Michele Massaccesi helps us understand the design of places we take for granted, Jason Fried drives us towards design faults of our business habits. Being a designer is a way of thinking about the world without taking anything for granted and is a key to value creation.
[Me & Dedication]
I hope that this analytical approach to productization helps some of my fellow travellers. I had in mind some very specific people while writing this post. First and foremost Andrea Volpini, fellow entrepreneur, great consultant and great product builder that is one of my inspirations: check out his work at Insideout 10 and Redlink. Daniela Berto has been on my mind a lot after her delightful visit to Berlin and is my link to the Osterwalder universe: she changes the world one customer at the time at Neuebig. André Pankratz, master designer & hacker, is letting me play with his creature Vidibus: I feel humbled by the chance to add a bit of my culture to the great insight and ability that he has put in his work. Tommaso Lana is another one of those guys to follow, we are together on the journey towards product: he ready to give a shape to his work. We always try to speak about product with Davide Dellacasa, I hope this post inspires more of our conversations. Finally I look forward to hearing what Alessandro Pedori thinks of these words and what he has to add: he’s the one guy I know who is ready to put ink to paper and strike a book deal.
What do I conclude off all this from the point of view of my business? I know what I do best: I work with ideas. In this post you can see some of them.
This is where I am: I have redesigned my website to highlight all the areas where I can be of use to others with consulting and workshops, I have had a good look at the past to list some notable case studies and have highlighted my path to the future in the (drum roll please!) aptly named products section.
I have been honest to what drives me and makes me smile. I was guided by the principles of Openness, Service and Design. And this gives me confidence that the journey will eventually lead me, through my personal path to product, to a sustainable, scalable and human business.