The Pros and Cons of Productized Services with Meryl Johnson – MicroConf On Air

0:00[Music] and we're live welcome to this week's episode of microconf on air as always i'm your host rob walling every wednesday we live stream for 30 minutes and we cover topics related to startups ambitious startups but not the venture track ones startups that we build to get purpose freedom and relationships i said those out of order today for some reason but these are not typical silicon valley startups we um you know where fundraising is a goal and just all the things you think about uh we really are building businesses for ourselves and maybe not to change the world but to change at least our little corner of it

0:37so welcome again today i have an amazing guest on today very accomplished entrepreneur named merrill johnston who will join me in just a second i want to kick us off by making a special announcement though and uh this is one of the early times you will hear me talk about this microconf remote is our online only event it's an online digital event it's going to be august 26th and we know that there's a bunch of virtual events going on right now and we have always from day one wanted microconf remote to be different than those so more details on how it will be different will come to you but just trust me that

1:14it's it's not going to be that you know the typical switching from speaker in an apartment speaking to a webcam to the next one to the frazzled host to this and that like we producer xander and i have been doing a ton of thinking about this and i think we got something really special cooked up for you so mark your calendar april 26th and um head over to microconf remote.com if you want to get registered i'm pretty stoked for this hope to see you there okay let's uh call our guest onto uh microconf on air merrill johnston is the founder and ceo of b ninjas and host of the b

1:49ninjas podcast so b ninja b ninjas is a productized service providing bookkeeping services on the xero accounting platform and she is coming to us all the way from australia welcome meryl how are you hey ron yeah it's good to be here absolutely it's great to uh i was meryl and i were talking offline real quick and this is the first time we we've run in the same circles i've heard her on tropical mba a number of times and even sticker there's a sticker for b ninjas that is like on my kid's laptop that sherry got at a conference but marilyn i had never met so that's one of the amazing things about

2:28you know running a podcast or a live stream is that you're able to to meet good entrepreneurs like this so we are going to be talking today about the pros and cons of services and you know our service is underrated in the microcomp space and especially in the microsoft community where it's it's more heavily weighted towards developers and i think that that a lot of developers think as i did too in the early days i don't want a human to be involved because that's messy and it's cumbersome and it's expensive and it requires management it requires my time and i really just want to write a bunch of code to automate a bunch of

3:00stuff and charge people for that and so that's what we're really going to dig into today and you know i think the conversations um there's going to be some twists and turns it's going to be fun so i think to kind of couch like just to kick us off merrill is how can founders think about adding services to an existing offering whether that's software whether that's you know anything else how can how should founders think about adding services to help fast track revenue growth because as folks probably know services tend to you can charge a lot more for a done-for-you service than you can for just a piece of software

3:34so i'll let you take it away from there i think to start answering that question it's important to think about what are some of the advantages why would you want to offer a service and i think you've you've covered a couple of the ideas there that you can charge higher prices which are really good for cash flow which is particularly important in the early stages of growing in business where either you're trying to cover your own wages so you can work full-time in that business or you're trying to hire other staff or invest in marketing so one of those reasons is around cash flow but i think there's other advantages too

4:08and when delivering services you're talking to your customers in detail so you're getting a really good understanding of what problem you're solving for them and you're getting paid to do that you're you're not asking for favors or asking for people to give you feedback you're actually diving in and solving a problem for someone getting paid to do that so i see though those as a couple of reasons that there's probably others that we we could explore if we get into the mechanics of how when you're offering software and as a customer of software products the more complex the software is the harder it is to implement into your

4:42business if you're a team then there can be a change management piece and training and sometimes there's a lot of effort in actually adopting that software so as a business owner myself i know that i've paid for implementations of software just to have a great experience and i've been really happy that i've done that so as a customer of these products i know that i'm willing to do that if there's there's value it's going to help my team so as a sas founder there might be ways that you could help your larger clients implement your software and really understand what problem you're solving with your software product and other

5:18additional services that can be added on to that and when we're talking about services i'm not necessarily saying but go and do consulting in a completely different field but how can you add something on that's going to help grow your main business yeah it's interesting i do kind of think of it in terms of maybe two options or two buckets if if you were to have a sas or software offering there's that upfront implementation which can often be like a flat fee like we see i think infusionsoft charges two thousand dollars for onboarding and some other stuff uh i'd imagine uh a lot of the like

5:49salesforce and all these other have these whole consulting wings that you know make tens if not hundreds of millions of dollars so implementation is one thing and i think that's super valuable because it not only brings in revenue but it also means that people get set up on your software and don't just bail during a trial right yeah and then the second piece to that is the ongoing and that's more of what like being ninjas you're you're an ongoing monthly service where every month you're helping founders do you think about it in in the same way of kind of there's upfront implementation and ongoing i don't know if that's too

6:21simplistic of an overview i've never never run a productized service so i i think that's another option as well and i think some people call it swats where it's like service on top of software and i haven't necessarily would have been in just in that light but you could say that that's what we are we are built on the back of the xero accounting platform and then we have a service that sits on top of that and i think there's other examples of that i know um businesses that do something similar with shopify or wordpress and so it's a service that's built on top of that software platform

6:54but you might actually develop that software or run that software as well and i think implementations are definitely useful for helping your customers have a great experience and then if you've got a service built on top there's the added advantage of recurring revenue which you might not have if you're only doing implementations yep that's right and i don't i mean personally i don't think it matters if you own the software or not right i mean you're built on top of zero but as long as xero isn't gonna you know there's always platform risk when you do that but as long as they're not gonna shut out their bookkeeping partners or

7:25replace them or somehow you know start charging a bunch of money like aside from that that small small risk i don't see a huge disadvantage i guess you can't you know you can't build the features in the software but then that it's not your problem like that's to me that's an advantage because i've run software products and just hearing all the future requests you know and having to manage all that is actually a pain um so i i mean i think ultimately yes it would be amazing to have a software software product that you own a sas that you own and have services on it but

7:53there's this this there's also the idea of stair stepping you know of of maybe you don't spend all the time to build that you didn't you didn't spend the time to build zero and yet you've built b ninjas to what i'm assuming is you know quite a bit of revenue based on the notoriety you have yeah that's that's quite interesting and i i sometimes talk about the back story of being ninjas and having a consulting business prior to that but what i often do i don't really mention is that for a very short time i was involved in a tech a health tech startup and we'd want to uh start up weekend and

8:26go on into an accelerator and i quickly realized i don't have any experience or network in this industry we don't have any capital and it's going to take a very long time for me to be able to replace my income in this business and i'm going to have to keep on working a full-time job and that was when i realized for me that first stair step was how do i replace my income and to me the fastest way to do that was consulting and that didn't take long at all and when i was consulting i was able to work less hours a week so i could

8:58work 20 hours 25 hours a week and replace my full-time wage and then had time to then go and build a productized service and so that was my path of thinking well maybe one day i'd like to do something in the tech space but really i want to create an income stream first free up my time build my entrepreneurial skills build a network and an audience and i've been working on that for five years so far and then in the future that that might be an option for me but having tried it for a couple of months i realized well this is a very hard road if i'm not an experienced

9:30entrepreneur don't have money and and don't really have knowledge of an industry and a network yep i would totally agree with that and i mean i can i could probably name five examples off top my head but one that i i reference frequently is a podcast motor which was founded by craig cuo while he was working a day job as like a sales account rep uh for pharmaceuticals or medical devices so he's he starts podcast motor which is podcast editing as a service it's monthly fee you know whatever it's 500 a month to like edit and produce your podcast and he built that i believe he talked

10:01about it on maybe when i interviewed him but he built it to like 20 or 30 thousand dollars a month in like not a long time and the margins are good you know they're not quite sas but they're not yeah you're nodding it's like i know these that's the dirty little ticket of productized services is it seems like when we think of consulting we think of sas i think all right 80 90 net margins like 30 to 50 percent gross margins at scale and when i think of services i think of much much less than that but these productized services are ingenious blend of that and when you do get the sops you

10:31know in place um i know that that there there are really good uh margins in there is that something you've found as well yeah i i feel like productive services are a great step from consulting so consulting for me didn't really feel like a business it was me selling my expertise and then that transition into a productized service where you're building something that is delivered outside of you so you're forced to build a team procedures and building a brand and also a marketing system so not relying on your network to sell it and to learn all of those skills and i felt like that was the next

11:05stair step and also the the margins can be nice it generates cash flow and i i think you can still work with the end in mind which might be creating financial freedom it might be building software or having a sas but you don't necessarily have to to start with that yeah and again craig's a great example a great example of using the knowledge that he built generating cash flow and then going on to solve another problem with software in that same industry right to start castos which is podcast hosting and then grow that and then got funded by tinycity who's part of batch one and now you know podcast motor is like the

11:47back end for castos productions which is this you know he's now the only podcast hosting service that has editing and production coupled with it which is a real value add for some people and and he would you would i wouldn't say you'd never build that from scratch but it's just it's really fortuitous to be able to to combine those and like you said it got him to quitting his job so much earlier because building a sas 10 20 30 a month to pay your you know 8 000 a month living expenses or whatever they are it just takes forever right it does i've lived it myself many of us have so

12:20very cool so yeah we we um touched earlier on how you know you said if we get into the how of it like the implementation of how to like you know get services going uh talk talk to me about what you were thinking about there well i can look back to how i got with consulting and then how i got going with productive services and with consulting for me that was just talking to business owners and understanding i basically go in and try to understand what the problem was and then see if i could create a solution so if you already have software then you're probably already

12:54talking to customers and understanding what problems you're solving and there might just be ways that you can go in and say well would you like me to help with this and kind of see where it goes i'm a believer in in just trying to get something going move move quickly and yeah see where you can add value so i say we'd all start with conversations and really try to understand what yeah what the problem is and i also don't think necessarily at the beginning you might not be trying to make a ton of money out of it you'd be trying to figure out what is the best kind of

13:26service learning experimenting and then you might figure out whether it's the implementation whether it's the service on top of the software that's more of a recurring basis might take a bit a little bit of time to figure that out but you iterate and learn and and yeah away you go yeah so i'm gonna i'm gonna give an example of a company i know who's done just that and then i'll ask you for one so i'll give you a second to think about it while i talk but there's a company in in batch one tiny seed called gather and therefore interior designers and architects they're sas and they were growing well but they

14:00realized that there there are only so many of their customers and their long longer sales cycles because it's enterprise sales and so they started thinking of this idea of of offering service value ad and they originally wanted to do it purely productized and be like hey it's whatever a thousand dollars a month for this many hours or this much help and they found that there was real friction there that that everyone was trying to back in to the hourly rate and then they're like what if i don't use all that you know it just it wasn't working in the way they were trying to sell it then they they just made adjustment

14:32right so to your point of iterating um they started saying okay well we will do it for an hourly fee but you know they raised the fee up and they um i don't know put a minimum there they made adjustments right as entrepreneurs have to do to almost find product market fit with just that little offering and they started getting more interest this is this may or may not be something they want to do long term but it is it's like a short-term cash infusion they are learning a ton more about their customers how they work their you know their processes because they're they're having to now pull data into

15:03their own software and the way their customer would they're helping them do stuff and so it's a like a phenomenal learning experience for them um so i'm curious if you have you know a similar story or stories that you can regale us with yes i think brian castle's doing something similar at the moment he's building a software product called process kit but also is doing some paid invitation um so most of their customers i believe are going in and setting setting up everything themselves but those that want a bit of extra help are paying for that implementation and i don't think he's doing tons of them and

15:37that's not the business model but it's definitely from what he's described it is great for cash flow but also good for learning in these early early stages very cool and have you so did you go from consulting because well i guess my question is this i know b ninjas as a productized service do you also add like offer one off consulting to within b ninjas are you pretty tight to like no this is the product we offer for this price that's an interesting question because if you'd asked me a year ago we were very tight with the product offering and to me that's one of something you have

16:16to be very careful of with a productive service because it's very tempting when people think they're buying services they always want to add this on or try and add that and if you're trying to sell a productive service then in the early stages for me it was learning to say no to a lot of things to really define well what are we offering where's the value who who are the customers that we're selling this to but it's something that i've been rethinking now that we're almost five years in and we don't want to go down the full custom consulting route but what we've been we looked at well

16:50bookkeeping the value there is in the data the financial data but the value is in using that to make decisions not just sending reports to founders that don't look at anything so originally the the way that we solved the problem of founders not using this information to make decisions was through creating courses and i like that because it felt like we're creating a product scalable and and that definitely helped but there were also people at the other end they just wanted someone to do it for them don't teach me how to build a cash flow forecast or a dashboard can you just do it and so we're

17:26exploring that at the moment i do have a higher priced option it's still i'd say it's in between consulting and a productized service it's more custom there's some custom elements like calls where you go through and and talk through the numbers the story and also build things like cash show forecasts which requires a much higher uh technical expertise from the accountants that do this but it's still not consider consulting going into a business to understand all the problems and then coming up with some kind of custom solution so it's not that but it's not quite a productized service either sure true and the way that i yeah i was i was just

18:08thinking about uh with productized services i think of them as a nice kind of layer in the middle with a business model and then with their courses which is more scalable that we would want to have a lot of a lot more customers buying those that then feed into the product type services and then just a smaller number at the top of the consulting clients because not all of our our customers are going to need that but i think it's nice to have more diverse diversified revenue streams but within the one business right like a funnel it's a funnel within your own your own company or i believe i heard it a product ladder

18:43at certain points where you buy one and you kind of step up to the next um yeah that's interesting so i you know as let's say that i'm a software entrepreneur i've built a sas app on the side it's doing five grand a month i've done an amazing job because even getting there is really hard and let's say that you know i serve um it's a good example you know construction firms like electrical construction electrical contractors who are wiring houses or who are putting you know i mean a niche is the real point but and and i'm finding out that yeah they're having trouble getting their estimates

19:18in or having trouble you know doing some stuff and i start to see a pain point where they're kind of fumbling every time um how would you think about like what's the first step let's say i've had con i've had conversation with customers and i know there's a pain point there is the next step to think about hey let's do some one-off let's hire someone to do one-off consulting with them like uh or to start with product ties at the start like is there a you know a procession there also do you think the founder should try to do it themselves at first or bring in like a contractor or an

19:49employee right away to kind of implement that yeah that's an interesting question so if it's if i was building a productized service then i would not want to and we're a couple of years in or we've been a little while into the process then i would want to hire a contractor to do that straight away and that's something we tried to do at b ninjas was i wanted to remove myself from delivery as soon as possible but if part of the reason for this is learning which it sounds like it might be if the core business is sas then there's actually a lot of benefit in delivering

20:25that in talking to these customers and and really going deep with them and so as the founder i'd probably if it was me i'd probably go and do that myself at the beginning just to understand it and i probably wouldn't go in with a productized service or frame it that way at the beginning unless i thought that it would be easier to sell if it was here are two options this is the price there's a deliverable sometimes it's easier for customers to buy that then let me come in and do consulting and i don't know what that means or how much it's gonna cost and and whether they even want to

20:57do that so i just think about who i was looking to what the best way to communicate value to them and i'd probably do it myself in the early days yeah it feels like it would the real mvp would be just that wouldn't it it'd be having a conversation and saying well i can give you five hours this month even though you really don't want to do it especially a sas founder is not going to want to do it but yeah you're doing it for the learning and i mean maybe in construction it wouldn't work but there are industries where you can charge a pretty penny for it like let's say you have an

21:27app that does like you know i.t security and suddenly you're dealing with you know you can charge 150 an hour 200 hours to do like consider you know 200 an hour to do security consulting at that point it does become a little more worth it even if you don't want to do dollars for hours um it's just a little more lucrative to get it done what's your take on you know all things being equal if you have folks doing these services let's say you get later you're 20 30k mrr and you have you know two people now implementing services you know whether it's part-time or full-time

21:59what's your take on like the contract versus employee handling those for you i'm curious how you get maybe how you structure it and if you have opinions on it you know at different stages is it you start slow with contractors you know and they're part-time and you get them up to full time and then you hire them as in the us it's w-2 but it's just an employee an official employee or what's what's the model how do you think about it i think or what what i did with binges was contractors at the beginning and then moved to employees i think one of the main advantages of contractors is that you

22:31can really control your margins especially if you're paying them per job so if you're writing articles and they get paid a fixed price per article then you're always in control of your margins and know what what you're making per whatever it is that you're selling and that's much harder to manage with employees the reason we move to employees with b ninjas and having full-time staff was that a lot of our contractors had things on the side so it didn't feel like we were the main priority we were kind of fitted in around that and we wanted to build a team culture where we had committed staff and also we found it hard to build

23:08a leadership team when people were contractors and had other things going uh it was fine for individual workers who were responsible for an output so a bookkeeper managing their own workflow worked well but when we wanted to put in place managers and training and team meetings and everyone had you know 10 or 15 people with different schedules and part-time that became a bit of a nightmare and and for us at bootstrap business we did get some small investment later on but we were already trying to make that transition to employees and full-time staff and it took a couple of years we didn't have enough money just to

23:42switch straight from contractors to employees so that was a gradual thing over a couple of years but a decision we made to to help us to scale up the business and build that leadership team yeah and i think that's a really good point people shouldn't note is if you look at if you read any venture capitalist or silicon valley investor you'll see things like you need to have an office in the bay area you need to have an office at all you need to hire only w2s never hire contractors to build yourself you know you see these real nevers and always you need if you're not

24:14going to do that if you're not going to raise venture funding like step away from that like you're a bootstrapper or maybe you raise a small angel round whatever it is it's different mindset and my rule of thumb is is exactly what you've said is hire contractors early it is a little bit of a pain deal with the pain because it's way cheaper and there's less risk you know and and you can find them and they're part time and yeah it'll be a pain in the ass but you'll figure it out that's what we do we're entrepreneurs we do hard things that are kind of messy you know and if

24:42you don't want to do that then go go get a great job because it'll probably make more money from that for the next for the foreseeable future but then and then you ratchet that up and i've done this i don't know countless times where i hire a bunch of contractors doing different things and they're part-time and then certain ones are just better than others and i want they wind up becoming full-time magically over time and we work really well together and the other ones kind of drift out and you almost like craft your own you know employee force like a contract to hire uh in a bit and to your point about um

25:12leadership team when i'm at 5k a month and i'm solo i'm not thinking about that but that becomes a real concern when you start to scale and you have 10 20 30 people on staff you don't want to the point of this is not to to be managing a bunch of people the point of this is to be an entrepreneur and work right on the business instead of in it so i like uh i like that you that you have put a management team in place uh where do you remember like the head count where you decided to to start getting that going i think i had 10 contractors so 10

25:43contract bookkeepers if you looked at an organizational chart my name was in every single box apart from bookkeeping which was the service and then they all reported to me and so that was just a nightmare to try and get anything done answering questions reviewing work it was just terrible and so that was when we started um first it was a matter for the bookkeeping team and then i drew out an organizational chart and i wanted my name just to be in one box and then it took four years to gradually hire different team members to be to take on tasks but to take on responsibility for

26:19different areas of the business and that was a very intentional process and and quite painful at times because sometimes you'd find someone that was great and then it might not work out so it was a slow process but yeah very worthwhile yeah that's fine yeah i've i believe i heard someone say that i say this now so either i made it up or someone else did but it was like i said you know as as a founder i just find i'm constantly firing myself from any job i do and that's what you should be doing right is it's like when you're a founder there's one or two of you

26:53you're doing 20 boxes on an org chart like once we got acquired by elite pages which was 170 people at the time i couldn't believe the specialists you know it's like this one person is just writing articles for just the blog and i was like what we have like we have one person doing six things you know but that's at scale you become extremely extremely specialized and so uh but before that you're just you know a jack or a jill of all trades and you're doing all the things and i think being aware of that and learning to like fire yourself from that is pretty um it's it's knowledgeable right it

27:26shows that that you have experience with this if you decided to hire a leadership team and not just manage 20 people yourself which i've seen folks do which is you know really tough and i find that challenging especially because some of my professional reputation so before i was running b ninjas i prided myself on being a great accountant and then we're selling accounting services which had a productive service so very different prices to what i would charge as a professional accountant but some of my reputation my own views about that were tied up in the service we were selling so then was trying to deliver the level of

28:02service i would as a consultant for this cheap uh that we were trying to do wp curve style pricing at the beginning 99 bookkeeping which i realized did not work but that was a really big learning exercise for me in separating myself from that and thinking trying to think like we're selling a product this is not my professional reputation this is a product business with a separate brand and then allowing different members in the team to have their own management styles to make their own mistakes and just try and allow that and also put in place things to mitigate risks around that for example if someone makes

28:39a mistake with accounts that's different to having maybe a spelling mistake in you know blog posts that we can go and fix so we need to actually there's good uh quality controls and things like that so if people do make mistakes we're going to pick up the things that really matter yep i think that's a good lesson i mean kind of as we wrap up here like what you pointed out is and this is something i see with developers as well or anyone who's a subject matter expert is the beauty is that you can sell the service i bet as an accountant you selling b ninjas was no problem you can

29:10talk the lingo you know all the verbage you know the double entry and all the stuff but the downside to that is you kind of want to do the work yourself or you want to be really involved and you want it you know you want to micromanage i mean that's how i was as a developer when i would hire the first developer on the software it's like i should not be in the code but oh my gosh what a mess this person just created i need to fix it and that's it's something you have to get over if you want to eat not even to scale a

29:35business to millions but just to scale up past a point where it's just a job for you you know so that's excellent well thank you so much merrill we are at time today um if folks want to keep up with you obviously beanninjas.com if they want to see what you're up to and of course if they have use zero accounting software and want uh bookkeeping up with that you're there and then on twitter you are at johnston underscore merrell and we will uh link that up any any closing thoughts you want to say bye to the folks yeah it's been great chatting with you i've been involved in the slack

30:11community and found a cafe for a while and enjoy interacting with people as part of this community i really like the mindset around building these businesses which we love and enjoy running but also it's not you know we're trying to not sacrifice things like our health and family so i love the ethos of the community it's great being part of it awesome thank you so much and if folks want to connect with you you're in microconf connect as well and there's a tropical mba interview that i think went live like maybe two weeks ago as of this airing uh called are productive services overrated right and then you're in there so if

30:47they want to dig in further you can hear dan and or ian talk to you for for an hour about that so thanks again merrill thanks for coming on thanks a lot [Music] you