There are software development companies and then there are product studios. While both types of companies deliver a piece of software, the difference lies in the spectrum of disciplines involved and the output both companies generate.
To put it simply, software is part of a product. Software development companies solely focus on building a piece of software. Some may offer more services around that, but in general this is what it comes down to. Product studios take a more holistic approach to building software products. Next to software development they tend to have a strong meta game, adding great value to product strategy and business. Secondly, product studios focus on what comes before and after software development. Think of idea generation, market validation, user experience and service design, market monitoring, business strategy, setting up user feedback loops, and so on.
One is not better than the other. But as you can see, there are differences, making both types of companies suitable for different types of projects. Tech startups, SaaS, and anything early stage is often way better off with a product studio. While core business solutions and less scalable software (one of a kind and highly specific) would probably work better with a software development company.
It's evident that specialization is key to success and high-quality output. Agencies that are offering a wide range of services to any industry tend to deliver an overall output of lesser quality. A misconception we at Eli5 have dealt with sometimes is that people perceive us as not specialized. We are, just not in a specific domain.
In the case of product studios, it's better to have a wide orientation regarding industries being operated in. Restricting yourself to one industry makes you miss out on many learnings outside of that industry. Over time, there have been many cross project learnings that improved the products we've built for our clients and for ourselves significantly.
Products come in many forms and each of them has its own pros and cons, level of technical difficulty, and necessary skill sets.
Examples: Asana, Slack, Notion, Figma
Software as a Service products are often productivity and utility solutions. Great examples of successful SaaS products are Asana, Slack, and Figma. Solutions that provide people and organizations great value by making them more efficient and by making things possible that were impossible without their solution.
SaaS products have different ways to be monetized. The most common way is via a subscription model that requires payments per week, month, or year. Another way to 'pay-per-use'.
Highly scalable - SaaS products are incredibly scalable. Whether you have 1 user or 1 million users, fundamentally the product requires the same work.
Predictable revenue - Users sign up for subscriptions that are paid per month or per year. This gives your company relatively accurate predictions about expected revenue.
Referrals are your friend - SaaS solutions are perfect for referral systems. They can offer existing users rewards for bringing in new users.
Slow growth is acceptable - SaaS products often have a lack of network effect, which is a threat to the business model. However, on the flip side, this means your product can serve its users perfectly fine even if there are only a few. The amount of users is not directly affecting the quality of the experience.
Heavy on engineering and design - SaaS products are often solving very specific problems, resulting in the need for custom software development for most parts.
Easy to copy - Most SaaS products are easy to copy by competitors. Which is not a bad thing per se, but it does require you to be on the very top of your game. It's crucial to keep offering users great value and service.
Be aware of the slippery slope of adding features - Building SaaS requires fierce determination when it comes to what kind of features you add and which ones you pass on. Building every feature that is requested will result in overkill.
Complex analytics - SaaS products require lots of automated sales funnels and highly targeted marketing campaigns. This results in data coming in from all sides, which if not managed properly can result in a massive headache, wasted money, and poor results for acquisition.
Examples: Airbnb, eBay, Etsy, Fiver
Marketplaces bring together supply and demand. Great examples are Airbnb, eBay, Etsy, and Fiver. They bring together suppliers and consumers, who are normally scattered, together in a central marketplace. These platforms offer communication tools, protected transactions, curation, matchmaking, and quality control for both sides.
Most marketplaces earn money by charging a fee on each transaction on the platform. Another option would be to charge users via a pay-per-use model. Alternatively, or in combination with the fee or pay-per-use model, marketplaces can earn money by selling ads.
Easy to build - Marketplaces are generally the same for any application, which makes it easier to build one with standardized solutions. This is especially beneficial in the early stage of operation, enabling you to move fast. However, when you find out what works and want to double down on this, it's key to set your tech loose from the constraints of standardized solutions and take control of your platform's own technology.
Network effect - Every supplier or consumer that signs up to the market place immediately increases the value of the platform. Once the network has grown to a critical size, it protects your platform against competitors.
Growing supply and demand simultaneously - This is one of the hardest parts of building a marketplace. When consumers are experiencing a lack of supply, they'll vanish. The same as the other way around. The most successful marketplaces have focused on supply first. In general, supply attracts demands. However, don't take that as the truth for any marketplace.
Examples: Facebook, Reddit, Twitter, Stackoverflow.
Social platforms bring together like-minded people. It primarily relies on interactions between users and thus users are mostly the same, in contrast to Content Platforms where some users are creators and most are consumers. If you think that it's too late to build a Social Platform, think again. More and more niche platforms are popping up to serve users in a way that the bigger and wider orientated platforms are not able to.
Most social platforms make money by selling ads to brands and companies. However, social platforms can also charge a subscription to their members or offer a freemium model by making some parts available for every user, while needing to pay to get access to other parts.
Easy to build - Digital products for social platforms are easy to build. Since they're quite generic you can easily start off with standardized solutions and templates. However, it's important to grow towards building your own technology before you take on a large scale project to avoid the technical debt of standardized solutions.
Network effect - Users bring in more users, who in their turn bring in more users. Every user you acquire increases the value of your platform. It protects you from the competition and adds social capital to your product.
Hard to scale - Scaling communities is incredibly hard. But once you reach a critical mass, the Network Effect will work in your favor.
Competing for attention - To be successful you need to hold your users' attention for as long as possible so you can sell this attention to brands and companies through ads. This makes these types of products hard to scale ethically. However, there is a growing interest among users for premium tiers that remove ads from their experience. If this trend continues it might become easier to scale these types of platforms the right way in the near future.
Examples: Uber, Deliveroo, Instacart
Everyone knows about the Uberization of the service industry. Any service you need nowadays is at the tip of your fingers. On-Demand services are essentially marketplaces with a layer of "I want it now" build on top of it. From booking massages to having your suit dry-cleaned, and from getting a cab to having a 5 course dinner delivered at home, On-Demand Services are here to stay.
On-Demand Services are mostly being monetized by taking a cut from the transaction between the consumer and the supplier. For example, if you get a ride with Uber and you're being charged a tenner, Uber takes a cut of the total amount and then transfers the rest of the money to the driver.
Network effect - Suppliers attract consumers and new consumers attract more suppliers. Once you attain a critical mass Network Effect will work in your favor.
Scalable - On-Demand Services are incredibly scalable. Uber working in one city, means it's likely to work in another city. And what works in one country, will likely work in another country.
Complex to build - It's hard to build an On-Demand Service product with some off-the-shelf solutions. You need to invest heavily in software development and design.
Growing supply and demand simultaneously - Just like with Marketplaces you need to continuously focus on having the right balance between supply and demand.
Fierce competition - There is a huge battle going on between the larger on-demand service providers. Food delivery being the most prominent example of this. While focusing on niches works very well in most cases, this appears to be harder for on-demand services.
Heavy on marketing and customer support - On-Demand Service require a tremendous amount of customer support compared to other type of products.
Examples: Skyscanner, Google Search
Utility Platforms offer access to information and services by aggregating data from multiple sources and offering it to their users and customers. A good example of this type of product is a utilities (gas, electricity, water) comparison website that allows people to compare prices and conditions of available suppliers.
Once the comparison website mentioned above has a significant amount of traffic it can eventually approach these utility companies and negotiate a fee deal. Search engines on the other hand charge companies for ads and more prominent listings.
Easy to build - Although it's hard to build a utility platform with standardized solutions, it's not incredibly heavy on software development. It's all about scraping data, manipulating it, and making it accessible to your users and customers.
The complexity of scale - The more data you scrape, the more complex your product becomes. Multiple sources might have different structures, and as soon as one changes this structure you will need to update your scraper.
Examples: Yelp, YouTube, 9GAG, Dribbble, Medium
Content platforms have lots of similarities with social platforms. However, the big difference is the structure of the interactions. Whereas the focus of social platforms is more on the interaction between users, Content Platforms are set up to facilitate interactions around content. Next to this, users are mostly equal on Social Platforms, while on Content Platforms a small amount of all users are producing content and the vast majority are consuming this content.
Most Content Platforms make money by selling ads to brands and companies. Some Platforms charge the content creators for hosting the content on their platform. Content Platforms can also charge a subscription for their members or offer a freemium model by making some parts available for every user, while users need to pay for access to other parts.
Easy to build - Content Platforms are very generic and thus easy to build with standardized solutions and templates. However, it's important to grow towards building your own technology before you take on a large scale. The larger the user base, the more you need to focus on other things than your technology. And if, by that time, you are still working with standardized solutions and templates there is a big chance your product is as fragile as a house of cards.
Network effect - More content means more users, more users means more content creation. The more users your platforms acquires, the higher the value becomes of your platform. It protects you from competitors and adds a layer of social capital to your product.
Hard to scale - Content platforms are hard to scale, especially platforms hosting heavy content such as video or other large files. Just like Marketplaces, it's important to keep the supply of content high enough to retain the interest of its consumers.
Competing for attention - To be successful you need your users' attention for as long as possible so you can sell this attention to brands and companies through ads. This makes these types of products hard to scale ethically. However, there is a growing interest among users for premium tiers that remove ads from their experience. If this trend continues it might become easier to scale these types of platforms the right way in the near future.
There is nothing wrong with solely building products for clients. In fact, it's one of the best ways to gain a lot of experience and attain specific knowledge that can be leveraged to build your own products. However, the agency model is not a great business model and unless you truly enjoy every part of it, it's wise to avoid scaling an agency. There are benefits to remaining small by design. At a smaller scale, it's easier to make a profit, you are free to pick projects that bring specific knowledge and new opportunities, and handling your operations can still be done without it requiring too much of your attention.