Don’t Run Your Software Company Like a Services Business
Advice for Business Founders Series | Article 2
Evan Schnidman, CEO, Outrigger Group
Welcome to Outrigger Group’s “Advice for Business Founders” series, where we provide simple, no-nonsense advice on business operations topics frequently requested by our clients.
In this second installment of our "Advice for Business Founders" series, we’ll explain the differences between services, software, and data businesses, and why understanding the distinction is crucial for success.
What Type of Business Do You Run?
This is a common question, but one that founders likely do not consider often enough. Because there are key differences between services, software, and data businesses that need to be taken into account when building, marketing, and selling to clients or customers.
One of the most common mistakes I’ve seen successful business people make is assuming that their past playbook will lead to future success when starting a different type of business. Using established methods is great if you are building a similar business, but when jumping from services to software or data, failing to recognize the fundamental differences can be a fatal flaw.
Understanding the Differences
Services Businesses: The Power of Personality
Services businesses often rely on a cult of personality. In essence, the core product is the expertise, reputation, and network of the person providing the service, more so than the service itself. Consulting firms, research agencies, and professional services firms typically fall into this category. Many founders who have succeeded in services assume they can apply the same model to a software or data business but experience a rude awakening when attempting to do so, as it is a completely different sales motion and customer service process.
Software Businesses: Systematic and Scalable
Unlike services, where relationships drive sales, software businesses require a great deal of documentation and systematic thinking about how users will interact with the product. The sales process is more structured and often involves several steps including user research, product demos, onboarding, and a focus on user experience. Software businesses cannot rely on relationship-based selling the way that services businesses do. Instead, customer acquisition is driven by marketing, referral structures, and documented sales processes.
Data Businesses: Demonstrated Value and Integrations
Data businesses are similar to software businesses in the need for documentation and process, but require the additional key element of proving their value to each customer. Data sales requires a much deeper understanding of how the user will derive value from the data product, often requiring extensive case studies or backtests to demonstrate how the user can integrate the data into their workflow.
The Importance of the LTV:CAC Ratio
One of the key concepts that B2C businesses live and die by is LTV:CAC (the ratio of lifetime value of the customer relative to the customer acquisition cost). B2B businesses of all types need to pay more attention to this metric.
In most services businesses, this ratio is very low, but the cost of the product is negligible, so the business is easily profitable.
In software sales, anything over a 3:1 ratio is respectable, but very successful companies often have much higher ratios, even exceeding 20:1.
Data sales tend to have higher CAC than software, but it is yet to be proven that they consistently have higher LTV (some data products become indispensable to users, i.e. high stickiness, while others do not), so the variance is fairly high.
Conclusion: Know Your Business
Overall, founders need to know what kind of business they are building. If you are in services, lean into relationships and expertise and grow accordingly. If you are in software, focus on user experience and scalability. If you are in data, focus on demonstrating value and building integrations. Applying the mindset of one business type to another will result in misaligned goals and incentives, and will not result in a sustainable or profitable business. So, understanding these differences is the key to long-term success.
Additional Resources:
“What is a Good LTV to CAC Ratio?” - Hubspot
At Outrigger Group, we provide fractional executive support to help you achieve your version of success. Whether you're scaling, pivoting, or refining your strategy, our experienced team is here to offer support without slowing you down. Reach out to info@outrigger.group if you want to start a conversation.