What is Service-Led Growth?

September 7, 2021 Steven Forth

Steven Forth is a Managing Partner at Ibbaka. See his Skill Profile on Ibbaka Talent.

A simple definition of Service-Led Growth

“The purpose of a company is to create customers” (Peter Drucker) and the relationship most companies want with their customers is one that unfolds over time. The ideal is that both the company and the customers will become more reliant on each other and that more value can be created through these enduring relationships than in a more transactional world.

Enduring relationships where value to customer and the lifetime value of a customer both grow as the relationship deepens are the goal of service led growth.

The phrase ‘service-led growth’ is relatively new, as are the mechanics of how it is delivered, but companies have been combining services, products and information for as long as there have been companies.

We developed the model for service-led growth for two reasons: we recognized a pattern amongst certain of our customers; and there was a need to counter the product-led growth model that has become the focus of so much marketing and investor interest over the past few years.

Service-led growth has three aspects, all of which must be present for the model to function and the growth flywheel to spin.

The underlying software or other product is wrapped in services in order to ensure that value promises made by marketing and sales are kept.
The services are delivered through a software platform for which there is a subscription fee (or some other mechanism for generating recurring revenue).
Data is collected by the software that generates insights leading to additional services.

This is a system of connected, positive, feedback loops. Services lead to subscriptions. Subscriptions generate data. Data leads to insights. Insights create opportunities to offer more services. If any of these connections is broken one does not have a service-led growth model.

Such a system is only sustainable over the long-term if both parties experience a growth in value. That is to say, the Value to Customer (V2C) and the Lifetime customer value (LTV) both increase over time. If one or the other start to falter, growth will grind to a halt.

Customers will not continue to pay for the service, renew their subscription or commission additional services, if the value they are getting has begun to decline.

Vendors will not be able to continue to provide the service if it is not contributing to growth. (Perhaps in the future, as populations decline, we will learn how to better design steady state or even condensing organizations, but for the time being, most companies need to grow in order to survive).

Examples of Service-Led Growth

An early version of service-led growth can be seen in the design, build, operate model for certain infrastructure. To take a simple, if unpopular example, a large firm may see the opportunity for a new bridge. It negotiates with the local government for permission to build the bridge and connect it to the existing roads. It will then design the bridge and supporting infrastructure, build it, and begin to charge for use. Sometimes it will make money by charging a fee to cross the bridge, or it may make money by developing land and other business opportunities at either end of the bridge.

Japanese railway companies were masters of this design, build, operate, expand approach. Many privately owned Japanese railway lines are part of larger, integrated business groups that will include housing development, amusement parks, hotels, and these days spaces for people to start new businesses or conduct local manufacturing. A good example of this is the Seibu Group.

In the medical technology space, many companies are moving from sales of products to offering more complete solutions. Companies that once sold needles now sell sample collection systems and drug delivery systems. In both cases, they also handle the waste generated by use (for example - used needles). As data collection becomes cheaper, through the use of QR codes or embedded tracking chips and sensors) they are collecting more and more data. This data is being analyzed to improve processes at hospitals and to find opportunities for better patient care.

In the environmental engineering sector, there is a growing need for site remediation. That is to say, taking a site that has been contaminated by past industrial use and making it suitable for new uses where the level of contamination is unacceptable. In this case, the initial service will likely be a site assessment and remediation plan, the plan will be delivered through a system that instruments the site, collects data, and tracks the impact of the interventions, and the insights will be the impact of the interventions and other properties of the site that will determine how to design for future use.

Professional organizations in several disciplines are trying to lead their members to a service-led growth model. For example, CPA.com, a company created by the American Institute of CPAs, the world’s largest member organization representing the CPA profession, is supporting the development and operation of software platforms for managing an accounting practice and building subscription revenues. It is both an example of service-led growth itself and an enabler of service-led growth for CPAs.

Service-Led Growth or Product-Led Growth

We developed service-led growth in contrast to product-led growth.

Old business models for software companies often have three distinct functions:

The product (that once upon a time was sold as a one-time license fee and is now sold as some kind of subscription
Professional services, often associated with product implementation, integrations and upgrades and occasionally as consulting in the relevant business domain (think of all the consulting services a company like IBM offers)
Customer service, which was basically a form of user support.

Product-led growth has transformed customer service into customer success and replaced license fees with subscriptions. The continuity that used to be built through the ongoing professional services needed to implement regular upgrades and to keep integrations functioning has been replaced by customer success teams that are accountable for renewals, up sell and cross sell and by data, data, data. The goal is to take humans out of the equation and to achieve friction-less growth.

The product-led growth model tends to be capital intensive. Companies are expected to invest heavily in marketing inbound, content marketing), in product, to remove friction and to ensure a great customer experience with a minimum of personal interaction, and in data to pull the threads together. Anything that slows growth or requires human relationships needs to be scrubbed out in the name of rapid growth.

The appeal of this approach to venture capitalists is obvious. It is capital intensive, and capital is that venture capitalists have to offer. Companies that are able to execute on the product-led growth model will do extremely well. In a time when skilled staff are in short supply, it makes sense to make the best use of available talent by having it focused on the general rather than the specific.

The key characteristics of product-led growth companies are as follows:

Some form of subscription model (sometimes complemented with a usage or transactional pricing model)
Heavy investment in product experience to eliminate blocks to use
Customer success and not just customer service
Data that can leveraged across customers

Strategy consultants, McKinsey being the most famous and most successful, offer an alternative business model. Consulting companies excel at three things:

Making sense of the confusion in the marketplace and guiding people to making decisions
Developing the formal frameworks need to scale advisory work so that junior consultants and new MBAs can do much of the work
Building long term relationships with customers, including seeding former consultants into senior positions at clients
Data that is used for just one customer or for generalized industry bench-marking (there is a missing middle)

Service-led growth is a blend of the product-led growth model with the strategy consulting model.

Like product-led growth, service-led growth relies heavily on data to generate insights and on subscriptions to build a long tail of revenues and to ensure an ongoing relationship.

Like strategy consulting, service-led growth uses skilled people to develop insights specific to the customer and to build long-term relationships. The personal relationships and the subscriptions are mutually supporting.

Who Should opt for Service-Led Growth?

Professional services firms that need to find a new model that leverages software and more granular data can use the service-led growth model to guide their development and win more predictable revenue.

Conventional software companies under competitive pressure to move away from licence’s and in premise software (to move into the cloud and to offer subscriptions) can reposition their legacy software into the service-led growth model and increase revenue and profits.

Product-led growth companies whose products have reached a level of maturity where their customers need a more comprehensive set of services that cannot be delivered through software and data alone.

Service-led growth gives companies a new model to drive high profit and predictable revenues. It requires less capital and has less risk than product-led growth. If the problem you have fallen in love with requires human contact with your customers, long-term relationships, but can be delivered through software, that gathers data and leads to insights, well, then consider a service-led growth model.