Can a design studio become a successful product company? Yes. It’s just really difficult.

Richard Banfield recently wrote a great piece titled “The Myth of the Design Studio Turned Product Company – How a remarkable story of a small design studio unwittingly drove an industry to madness.” and there’s been some good rebuttal by Amy Hoy here and Alan Branch over here.

Banfield raises an interesting point:

“The story of 37Signal’s success provoked us into believing a few fallacies. The first was that by working on a client’s product, we were making the client rich but leaving ourselves with the scraps.”

To summarize his article, Banfield is saying that 37Signals has turned an industry into one where everyone wants to build products, get rich off products or become disillusioned. He’s saying that for a design and development shop to always be working on internal product is crazy talk.

“We’ve convinced ourselves that we have to steal time from our core businesses to pay for a dream. When did we become so disillusioned at performing our beautiful craft?”

“I think the expectation that design and development firms should always be working on an internal product is madness.”

While I agree with some of Banfield’s sentiments, I wouldn’t go as far as saying that it’s a “myth” for a design studio to turn into a product company. I certainly wouldn’t classify it as “madness”. It is possible. As long as a company realizes how difficult it is, is well informed and knows the risks, it’s possible to turn into a product company or in some cases do both successfully.

What Banfield is mostly frustrated with are the people who think it’s easy (because they read Getting Real and Rework), and who are always distracted by this dream to build their own products and get rich. Many design firms (including my own) are building products on the side and this is seen as a distraction to focusing on our craft.

I am one of the people that Banfield is talking about. But my story is slightly different. See, I’ve actually launched my own products before. It’s freaking hard and there’s never a guarantee of success. I have done both a product business and a services business. Both companies were bootstrapped, profitable and qualify to be listed on the 37Signals “Bootstrapped, Profitable & Proud” series. So I think I’m qualified to say a few things. 🙂

Here are my own opinions.

It really is difficult to turn a consulting company into a product company

From my own experiences and from a few successful entrepreneurs that I have gotten advice from, it’s very difficult for a services company to turn into a product company. It’s not impossible. It’s just challenging. If you’re up for the challenge and a lot of stress, then go right ahead. 🙂

When we founded Ballistiq, our goal was to build product and use consulting as a means to finance product development. That’s still our goal. But damn it’s hard and risky too. According to my plans, I thought that we could successfully launch a product within the first 12 months. I was wrong. It took 2 years before we launched our first product Downtown.

The problem we had? Distractions. We always had to decide between immediate revenue and uncertain revenue. When we had a client that came at us with a project and willing to pay well for it, it was just easier to take the money and deal with its consequences than say no and focus on product.

The risky part of working on products is that there’s an opportunity cost to you working on products. Products cost money to make and without the casfhlow to sustain product development until it makes enough revenue, it can really hurt and distract from your core business.

Building a successful product is freaking hard

I have launched over a dozen different products. Some were wildly successful. Some were abysmal failures requiring us to throw away tens of thousands of dollars of inventory.

When people read 37Signals books like Getting Real and Rework, it’s easy to think that making a profitable product is simple. For a good developer, creating the product might be straightforward. What’s not easy is building repeatable, sustainable, scalable revenue. That’s freaking hard.

Here are 14 questions that you should answer before you run off and start a new product (from SyncDev):

  1. Is the target customer clear?
  2. Is the need compelling?
  3. Is the lifetime value of the product high?
  4. Is the market large enough?
  5. Is the competition tolerable?
  6. Does your product fit the market?
  7. Is your advantage sustainable?
  8. Is distribution available?
  9. Are sales costs reasonable?
  10. Is the product feasible?
  11. Are margins adequate?
  12. Are risks tolerable?
  13. Does the business fit your company?
  14. Do you have a mountain of evidence to prove all of the above?

These provide a great starting point for you to think about the business aspect of your product and how you’ll navigate its production.

You can have a perfectly good services business

One question posed to me by another entrepreneur was, “Why do you want to have a product business?” He went on to say that you can have a perfectly good, profitable and scalable services business. It’s true. You can. There are many services businesses that do really well. If you want to run a good, profitable services business, I recommend taking Brennan Dunn’s workshop.

Despite this, I’ve come to realize that I still want to create products. That’s just me. While I enjoy consulting and the rush that I get from doing different kinds of work for clients, I’ve built my own products before and I know that I enjoy that more than consulting. Am I wrong for being distracted? Am I following a pipe dream? No. I’m making an informed decision and willing to take the risk.

Building a services business was easier than a product business

From my own experience, building a services business was a lot easier than a product business. The main issue is cashflow — the oxygen for businesses. When we started Ballistiq, within a few weeks of starting, I landed enough sales deals to pay salaries for me and my business partner for an entire year. With my product attempts, however, it was always more like a gamble because you had to inject cash into financing your efforts while you are building product (your time is not free). You only see cashflow when the product sells. In the case of SAAS, what’s even more challenging is that the amounts that people pay are nominal (tens of dollars a month) and it could take a couple of years before you reach a critical mass.

When people see 37Signals and how successful they were with Basecamp, it’s easy to think that they can repeat that success. They’ve done very well for many, many reasons. Some of which is up to chance (or providence if you believe in God). You just have to accept that and work hard at your own startup.

Take all inputs and mould them into your own hypothesis

We have to be careful about treating what DHH and Jason Fried says as the authority on starting and running a successful business. It is not. It is opinion substantiated by their own experiences. Each of us will have wildly different experiences, even with the same inputs.

Instead, you have to take the opinions and experiences of many entrepreneurs and mould them into your own hypothesis based on these inputs. Then test them in your own business and realize that your experiences may be different.

At the end of the day, work hard, get to know yourself, be eager to learn, be humble, love those around you. You’ll be fine. 🙂

Leonard Teo

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