Updated: May 5
IT services companies are an excellent path to starting entrepreneurship, but the founders often struggle to see an exit. This can lead to either becoming less aggressive in growth or taking on the risky journey of pivoting to a product company. The former destroys the equity value in the business, while the latter risks the business by taking away its leadership mindshare, engineering resources, and cash. Unfortunately, with few notable exceptions, all of these pivots fail.
In this post, we will discuss how equity can be built in services companies. To answer this question, you can work your way backwards from typical levels that drive valuation (see our series of blogs on this subject here). Among all the different drivers, one that is very impactful is gross margin since it impacts other drivers. It directly impacts profit as higher gross margin leads to higher net margins. It also impacts revenue growth: a high gross margins means more budget can be spent on hiring ahead of time and lead generation, leading to faster growth and higher revenue. While gross margin mathematically can be increased through increasing prices or cutting costs. Cutting delivery cost, without degrading customer experience is no easy feat and the yields are often limited.
This is why a better option is to raise prices. In services, raising pricing requires differentiation. A clearly differentiated service, that solves a real customer problem at a time of need, to their liking, is priceless to the customer. They are willing to pay a high price. And, since you are unique, they do not have comparison points or levers to drive pricing down in negotiation.
The Importance of Developing a Unique Value Proposition (UVP) for Services Businesses
This is where a UVP comes in. Having a clear and differentiated UVP is critical for services businesses to build equity value and achieve an exit. A UVP answers the question, "Why should customers choose your business over competitors?" It should be unique, compelling, and clearly communicate the benefits of your services.
When developing a UVP for a services business, it's important to consider the following key elements:
Your target market: Who are your ideal customers and what are their needs and pain points?
Your competitive advantage: What sets your services apart from competitors?
Your value proposition: What benefits do your services offer to customers?
A well articulated UVP in an elevator pitch is what opens more opportunities and enables pricing to be increased.
Next Steps: Attending the Panel, Workshop, and Sales Pitch Competition
Current or aspiring IT services founders can learn from a panel of experts who have built and successfully sold services businesses. Moderated by Jamil Goheer, the panelists will share their experiences with the audience and provide insights into the path to building equity value in services businesses and achieving a successful exit. You can register to attend this panel here.
The panel will be followed by a workshop in March to educate services founders on how to develop a Unique Value Proposition (UVP) and communicate it through an elevator pitch. Lastly, we will conduct a sales pitch competition where services founders will present their pitches and the best pitch will win a cash prize.
Building equity value in IT services companies is a challenging but achievable goal. Attending the panel and workshop, and participating in the sales pitch competition, is a great way to learn from experts, develop your UVP, and take your business to the next level. We hope to see you there!