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Summary:

If you’re an independent developer who’s decided to go solo, or even one who’s working with just a few other people, there’s one critical decision you need to make early in your company’s history: should you concentrate on products or services? That is, is it better […]

If you’re an independent developer who’s decided to go solo, or even one who’s working with just a few other people, there’s one critical decision you need to make early in your company’s history: should you concentrate on products or services? That is, is it better to put your efforts into building something for resale, or to put your own skills out on the consulting market? As with many decisions, there are things to be said on both sides of the question. Here’s how they generally stack up.

Building products is often the dream of the independent software developer. It’s easy to read the stories of Microsoft or Apple starting out on a tiny scale, and to think “if I only had the right idea, I could do the same thing!” The most attractive part of being a product-oriented company is the siren song of passive income: write the code once, and sell it again and again, without any further effort beyond counting the money as it comes in.

But passive income tends to be more of a dream than a reality. Even if you write a successful application, you still need to put effort into maintaining it, marketing it, and supporting it. The “take the money and run” attitude is likely to just lead to unhappy customers and rapidly declining sales. Good product vendors are those who stick with the product and put continuous effort into it.

Even worse, if you’re just starting out, is the unfunded ramp-up time. However long it takes you to write the software is time that you somehow have to survive with no income. It can be scary to watch savings deplete as you desperately try to get something ready to sell. Some folks try to dodge this issue by writing their software at night, after a regular day job – but watch out that your employment contract doesn’t end up giving your employer possession of even your after-hours software efforts.

What about consulting, then? On the plus side, it’s much easier to hit the ground running with services than with products. Find your first client, sign a contract, and you can see income in a month. As long as you keep the work pipeline filled, consulting can be as financially rewarding as working for someone else, with the added benefit of being your own boss.

But the consulting life isn’t that simple either. Many consultants are a few weeks or a few months away from unemployment; the constant need to locate and sign the next client can get wearing. With consulting, too, there is a fixed upper limit to your income: the number of hours you can work in a week times your hourly rate. Even if you get up to the $500 per hour level, this will ultimately bring you less money than one really successful product.

The other problem with running a consulting company is that there’s no exit strategy. If you build up a small business selling software, it has value that someone else may eventually buy: the potential of continued sales. Consulting companies have no value beyond the consultants who work for them, and thus are very poor targets for selling. Consultants tend to have to keep working, even when they feel like their company is successful.

So what’s the solution? In part, you have to choose based on your own skills and ideas: what can you afford, now and later? In some cases, the happiest web workers pursue a hybrid strategy, working as a consultant but setting some hours aside for product development. This can be the best of both worlds, giving you income up front and still leaving you the chance to hit it big in the future.

  1. Wow. I have this exact decision to make right now. I like doing consulting, and the connection with customers. However, I really want that passive income.

    I think the hybrid solution would work best for me. I need the consulting money to pay the bills, but I also need to get some passive income going.

    Thanks for this post. It really got me thinking.

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  2. I have gone through a similar decision. Historically, I’ve been all consulting. The last 4 years has been focused on Salesforce.com related services.

    My goal is to not be at the mercy of where my client wants me, so I started building products. My first is a mapping integration for Salesforce customers. My goal is to have a few products that account for ~75% of my income. Then some services work to enhance the products for specific clients and/or build custom, related tools for them.

    Consulting still, by far, brings home the bacon. We’ll see how it goes. Products are an experiment right now.

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  3. You know, consulting is nice, but you’re only as good as your current job (money-wise). Products are the only thing that you can initially setup and walk away from and rake in profits for years and years passively.

    In this way every project you work on (with products) can have a “long tail” – while consulting has no long tail, except a reputation that gets you more jobs. You might be able to charge more over time, but you can’t snowball profits out of that like you can products.

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  4. It’s tough. When you think that you’ve only got X number of hours in the day, you almost start to feel guilty if you spend some of those hours on non-billable work.

    It’s a lot like writing a book. If you calculate out hours spent vs. the advance you get, you usually end up working for peanuts. Of course, if your book does well, you’ll do well in royalties raising that hourly rate… but that’s a big IF.

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  5. I have a whole potential book’s worth of story to tell centered in no small part around exactly this.

    If you set out to do software, then do consulting to pay the bills/self-fund, it’s easy to forget the original goal. Especially if you have partners whose goals turn out not to have been the same.

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  6. One way you can raise the ceiling on consulting income is to charge by the project rather than by the hour. If you’re fast, you can charge a fair market price yet make more.

    With that said, I’ve been 100% services but am launching a product this year and am looking forward to it.

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  7. What about a combination of both? You could a product for a specific market and sell consulting services around the product. It could be something you do fo 50% of your income with the remainder coming in from other consulting gigs.

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  8. Thanks for the blog posting. One of my favorite books on the software development (“The Business of Software”, by Michael A. Cusumano) also stresses the same points. Overall, he associates product developent to “writing a book” versus software consulting, which is like “working for a bank”.

    Like many other software companies, our organization started as a consulting company but slowly transformed itself into a software vendor with the development of our online project management service (Joint Contact).

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  9. The model for corporate IT is generally a hybrid, IMHO

    You make a product and then sell ‘Professional Services’ to do the short-term integration or customization that a particular client might need — be it some specific workflow alteration or an addition to say a log file or even something simple like branding (fonts, colors, logo, etc.) for OEM

    If you need the Professional Services to fund the “Product” then you are a services consultant (paying your bills and hopefully re-investing some of your consulting cash into hiring someone to help to complete your product), after your 1.0 and customer buy-in your next “gig” is professional services to launch it. If all goes well that consultant you hired can be your first sales engineer or you can franchise out the PS work to many groups who can then act as a reseller for you… apply some generous discount to your list price and let them work for you for a commission..

    Even Open Source software follows this model. There is value in the number of users and monthly fees to use your product and there there are the non-recurring fees to setup, train, do an “in-netowrk” install rather than an ASP model.

    You can easily use the money from your services practice to fund and launch your products business and all that ‘re-investment” is great for your accountant at tax time :D

    Hope that helps

    Cheers
    Duane

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  10. Excellent post. I am sure a lot of us have faced this decision. We have learned to follow the hybrid approach as you suggested. The best part about consulting is that it exposes you to unknown domains while getting you paid. We always try to spot gaps and opportunities in these new domains for our product development endeavors. It has been working out great.

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