Moving From A Service To A Product Company: The Pros And Cons

Moving From A Service To A Product Company: The Pros And Cons

This is a guest post from Zach Hoene, Associate, Underwriting, Lighter Capital.

A big trend in the software world today is service-based consulting companies making the move to a subscription SaaS product offering. Founders can sometimes find that they end up solving the same issues repeatedly for their clients, and in turn decide to capitalize on that demand by creating a much needed product solution. In other instances, entrepreneurs start with a SaaS product in mind, but decide to scale by generating a steady stream of considerable income from consulting.

A SaaS business can be much more lucrative compared to a consulting company in the long run – if you are successful. As always, however, success is never guaranteed. If you think you are ready to make the jump from consulting to SaaS, it is important you know the pros and cons going in. If you are reading this and have already made the commitment to switch, you may want to learn more on transitioning from service to product company successfully.

Moving To Saas: The Upside

Moving To Saas: The Downside

Accounting Differences

There are accounting differences that you should keep in mind when it comes time to make the switch from consulting to SaaS. Make sure you are aware of those differences and that you are financially prepared for the transition. Here we will take a look at the accounting differences between these types of revenue under accrual accounting.

Consulting revenue is made up of the stand-alone purchases of services. Clients normally pay after completion of a smaller project, and then choose to renew or not renew your contact. If this is the case, revenue and an associated cost of services is recognized at the time of purchase. In the case of delayed payment terms, you would recognize an account receivable as a result of this transaction, but generally your clients will be billed at completion for cash. Additionally, if it were a longer term consulting contract, you would probably charge progress billings, which essentially divide a large contract into smaller pieces. With progress billings, you usually collect payment when pre-defined milestones are met. The associated accounting would recognize an asset called unbilled revenue, which operates similarly to accounts receivable.

In the SaaS model, your clients will be paying a recurring fee for access to what you have to offer. In return, you agree to keep the software updated, as well as to provide ongoing support for subscribers. As a matter of payment you would provide access to your software to a client and immediately charge them for that access upfront for the entire billing period. This will result in unearned revenue – a liability under accrual accounting that recognizes the fact that you have been paid for something that you have not fully delivered, which is a certain time frame of access to your service.

A Good Move – For Some Businesses

Over the long run, moving from a consulting model to a Saas model can be a huge payoff. It’s not going to be easy, however, especially if your consulting clients are transitioning to your service before you have enough new SaaS customers to make up for the lost income. This is why the transition is ideal for businesses that can either (a) get adoption of the SaaS product quickly among their clients, enabling them to ditch the consulting side of their business entirely; or (b) bring in enough new business to their SaaS offering that they can afford to run both companies simultaneously.

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