January’s blog post discussed the pros and cons of various sales distribution methods. The post noted that some sales professionals find it easier to sell more standard “off-the-shelf” programs, products, or packages, while others excel at selling consulting services. This notion raises a few questions: Why? and What’s the difference between products and consulting services?
A perennial issue for any talent management firm is to pin down the nature of its offer. Should it be off-the-shelf products, tailored products, totally customized programs, consulting solutions, SaaS based platforms, implementation and subscription services, or some combination of all of these? The truth of the matter is that unless a firm can run profitably, it doesn’t matter how it configures its offer. In the end, the firm must provide compelling, relevant, and result-based solutions. My experience, however, is that this is best accomplished by focusing on a single type of offer—rather than try to be “all things to all people.”
In reality, few firms can effectively sell off-the-shelf products and consulting solutions simultaneously. Why? Because the go-to-market business strategies for these two types of offerings is completely different. It has been my observation that when a firm does try to sell both, one of the business approaches starts to subsidize the other, resulting in bottom-line profitability erosion.
Determining how to configure an offer is a very strategic decision that must emphasize how to sustain long-term client trust and loyalty. Understanding the different business models required to provide a consistently desired offer will inform this decision. So, what are the differences in these varying approaches? Let’s start by looking at the ends of the continuum, with off-the-shelf standardized products on one end and totally custom consulting services at the other. I have identified below at least a few large categories that might help sort this out.
Financial Factors
On the surface, it seems pretty clear that off-the-shelf products can be more profitable than the other types of offers—as long as they are not continuously modified. In other words, the development costs that go into creating offerings can be absorbed over the years by a large quantity of relatively high-margin sales. While these product development costs are typically amortized over a number of years, there are still significant costs to creating them, because the personnel and timeframe required can be taxing and mount up quickly. Once people start to tailor and reconfigure products, those products begin to lose potential profitability because expenses typically rise.
On the other hand, the largest costs associated with consulting services are those attributed to the people involved in selling and delivering them. There is no real inventory, per se, just intellectual property—the models and processes that are pieced together to build client solutions. The more complex the solution, the more experienced the consultants must be. This results in a higher price tag.
In practice, though, profit margins are considerably lower for consulting businesses than they are for those delivering basic pre-developed program packages. The reason? A “product” company’s financials depend on the price charged to the client minus the costs needed to produce and deliver the products. For consulting firms, the financial model (or equation) is quite different: days/hours spent consulting multiplied by the daily/hourly rate minus any costs, which are largely compensation related.
Inventory Management
Another major difference between product and consulting models revolves around managing inventory. Products need to be produced; consultants need to show up. Although digitization enables just-in-time production, some form of inventory control is inherent in the production, distribution, and accounting of products. Even licensing deals that allow clients to reproduce the material require some kind of tracking process.
A consulting business, on the other hand, just requires that the consultant be present when interfacing with a client. The only real inventory is the number of consultants on the bench. As such, these “contractors” can create a more variable cost model because they can be deployed only “as-needed” —and presumably paid for via a pre-arranged contract for services.
Selling Differences
In many ways, selling is selling—regardless of whether it is products and programs or consulting services. Certainly, some sales people can be successful in any situation, but my experience has been just the opposite. Although the skills are generally the same, the deep expertise required to sell the variable nature of consulting services is quite different than what is required to sell a product with precise features and benefits.
In the latter case, the product can be readily articulated and repeated from client to client, with only minimal alteration. But for a consulting relationship, the deliverable often starts with a blank slate, and rarely are two solutions the same. What’s more, the patience and time required to work through a true consultative solution is often greater than that required to sell a product that has specific applicability.
Scale
One of the major advantages of a product business is that it is more readily (and cheaply) scaled than a consulting practice. Once a product has been produced and is ready for distribution, those one-time costs are sunk either all at once or over a multi-year amortization schedule. The deeper and wider the sales engine, regardless of distribution approach, the costs per sale are reduced. Conversely, it is difficult to cost-effectively scale a consulting business because the unit of currency is hours billed by each consultant. The only way to grow this type of business is to hire more consultants; this approach comes with its own hefty price tag.
Nevertheless, many large consulting firms have figured out a way to scale their businesses by employing junior-level qualified consultants to do the “heavy lifting” while charging relatively senior-level fees. In this case, the senior consultants and partners are responsible for developing new business and overseeing the projects and client relationships. Additionally, labor-intense consulting firms can leverage any proprietary research, process tools, and models—engaging clients without constantly reinventing the wheel.
Personnel Skills
The skills required to effectively manage and grow product-based businesses and consulting firms are distinct. Skills for back office operations (finance, human resources, IT) are basically the same, and even communications and project management skills are similar. But consulting firms also will require people with expertise and intellectual property in a particular area. While these skills are valuable for any client-facing personnel, the level of depth required for a consulting firm is more profound.
Likewise, effective training skills are often required for those delivering off-the-shelf programs, and trainers can sometimes “make or break” a program’s success. Again, a deeper mastery of facilitation and process skills are likely necessary for productive consulting relationships, though. Furthermore, excellent analysis skills, while needed for just about any job, are disproportionately required for consultants who must assess a client’s needs and recommend appropriate solutions.
The Takeaway
The differences described in this post are the ones I consider to be most critical for either business model. No doubt, there are others. This is why it is difficult to combine the businesses—so that both flourish without one borrowing (or stealing) from the other’s success.
What are the differences you have noticed in your business? Have you found a way to combine the two effectively? Or, have you been saddled with trying to be “all things to all people” with your offer?
To learn more, check out my book The Complete Guide to Building and Growing a Talent Development Firm.
