The journey from being a project business to a product business is not easy. You need new competencies, and to make a considerable investment before you start earning on your products. Those are just two hurdles you’ll face.
But being a product organization has such huge advantages that the journey may be worth it. Find out for yourself!
In this blog post, you will learn the differences between the two models, and in the end, you will see more clearly which one is for you.
How project and product businesses are different
Let’s take the project businesses first. To start with, every project has a beginning and an end. In the traditional format, the customer's requests define your goals. Then, you implement the project, and the customer decides how to test the project for readiness. Once they accept the result, they release the final payment. As long as you’ve completed the project in a high-quality, timely fashion that’s within budget, everybody’s happy.
In a project business, you nominate a project manager. Their role exists only for the duration of the development project. No more, no less.
In a product business, the lifecycle begins before development. Even before the requirements exist. The product lifecycle continues until you stop the deliveries and stop offering support for the product. Some products live for months, others for decades. During its lifecycle, a product needs continuous attention, as further improvements occur over a stretch of time.
Typically, a product manager oversees the product’s success over time. Business models differ for projects and products
A project company follows a four-step process:
- You check the customer’s requirements.
- You calculate the costs and add a margin.
- You make a commercial deal.
- Customers can pay upon project delivery or based on pre-defined milestones.
In a product business, the product requirements are defined for the market. The company owns the product requirements, which must meet the needs of your most important customer segments.
Not all customers may be happy with the product because you always need to make compromises. But with a large enough customer base, such compromises can be made. For example, the ERP system you offer may not have all the features a customer wants. But it might provide a great “bang for the buck” compared to a fully tailored custom solution.
One of the hardest parts of transforming a project business into a product business is the upfront investment you need to make. But luckily, product businesses are more scalable, so you can distribute the development cost across a large number of sellable units. Eventually, you’ll be able to deliver in higher volumes, with higher margins. At the end of the day, it’s a win-win.
What is productization?
Productization can mean many things. One example includes packaging a basic product or technology into a sales channel. You can do this in four steps:
- Set up a value proposition.
- Give it a sales title (SKU).
- Create a sales package. That can be an online store and/or a SaaS service.
- Sort out pricing and sales material.
Depending on the nature of the business and product, the list can be longer.
Customized delivery with standard components
You can also think about productization more broadly, such as standardization — you standardize the delivery content. This means your customers get the same products and components, rather than customized packages. You could still create customer-specific deliveries, though, by combining the standard components in different ways (a configurable product).
As your business grows, so does the need for productization
When businesses expand, poor practices limit them from scaling. Imagine customizing deliveries for more and more customers. Or relying on emails and memory alone to document products. How inefficient would that be?
Companies operating on the project model often operate like this. But with standardization (or productization), it is a lot easier to make your customers happy, by delivering support services. With a productized model, you’re on a better path to scale.
Benefits of productization and standardization
So what benefits does productization offer?
Make sales easier
You help your salespeople. When you productize, sales costs decrease per unit. So you can focus on selling standardized products quickly, while fine-tuning materials for your most important customer segments. This way, salespeople don’t have to ask other teams about technical details again and again. Instead, they can focus on valuable, customer-facing, sales work (magic).
Lower production costs
With repetition, production costs decrease. Consider the old rule of thumb from the machine shop: If you order a single piece for 1000 EUR, you can buy two of the same for 1400 EUR. The savings increase exponentially.
The same goes for your software deliveries. Without the need for customer-specific customization, variable costs can even approach zero. You can always supplement operations with customer-specific components. But the core delivery is always productized.
Standardized products also cut delivery times. With more accurate delivery prediction and information, you can set sharper goals and support more sales. Plus, standard components are easier to maintain and track.
How to start analyzing if productization is for you?
- How much did you customize your delivery for different customers?
- Did these customizations generate real value?
- Would a more standard delivery bring good enough value?
- Is there a generic need for your product?
- Are there enough (accessible) customers having this need?
- Does your strategy include growth?
- Does your current model scale?
- Can you finance the transformation?
To sum up
Now that you have a clearer view of what the two models are, and what some of the advantages are of productizing, I want to make sure I set realistic expectations. Therefore I want you to keep the following in mind:
To productize, you need to invest. Clarifying the market needs requires hard work. And it takes more effort to develop a product than to deliver a one-time project. On top of the product and delivery capability, you also need to work on, for example, sales capabilities.
What makes it even worse is that most of the costs are created upfront. Before you can charge anything from your customers.
On the other hand, the benefits are undeniable if you solve the right problem or satisfy a need for a big enough market. Then it’s a clear win-win for you and your customers.
Published: September 2, 2022