In a couple previous posts I highlighted that digital business models are characterized by low cost of revenue, resulting in low marginal costs. Therefore, they can generate profit margins that are not possible with traditional business models.
But what about support and professional services?
For example, implementation services that help enterprise customers to adopt a new software offering and integrate it into their existing IT landscape.
These are labor-intensive services, and therefore, they have the cost structure of a traditional business model. So they typically cannot generate the very high profit margins that a successful digital business model can produce.
Does this mean it’s always best to try to focus the business model on the purely digital part of the business, and not offer any professional services?
Fact is, at least in the enterprise software market, companies often derive a significant portion of their revenue from services. Don’t they get the cost structure dynamics? Are these companies just old-fashioned?
Well, in a recent TechCrunch article, Mark Suster makes a very good case why it still makes sense for enterprise startups to offer professional services:
“PS capabilities are important for enterprise startups because they:
- ensure your projects are more successful and thus more referenceable
- help you integrate your product with other systems making it harder for your product to be replaced by competitors
- make sure you do higher quality implementations because 3rd parties don’t have the same interests in over delivering on quality
- provide you with best eyes & ears on the ground at clients to drive upsell, cross sell and rollout across more business units
- deliver profitable revenue that, while on gross margins of 50 percent vs. software at 85-95 percent, it is still profits that help you cover fixed costs”
But professional services need to be set up in a way that supports the software business, instead of de-focusing the entire organization. Mark provides seven helpful tips and guidelines how to do just that.
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