Service Agency vs Software Product Business

The grass is not greener on the other side of the hill. It is just expensive in a different way.

I have lived both sides. Agency and product. To actually build the product, I had to deliberately let 40 customers go. This is not theory from a book. It is a decision that hurt.

What you take away here:

• Why the agency margin keeps you trapped and the product pre-finances you.
• The three traps when switching to product.
• Why I build systems that stay instead of dependency.

My thesis: the agency sells hours and creates dependency. A product is a system that stays. I leave, the system stays.

🧨 Year by year instead of project by project

The agency business feels safe. Cash flow from the first project. But you are in the office at 11pm, working off support cases on Saturday, selling hours. If you succeed, you have to hire people. And you stay at a 0 to 20 percent margin. Tedious.

The product flips the math. Instead of project by project, you collect year by year. Recurring revenue that compounds. But it arrives late.

The difference shows every 1 January. The agency starts at zero and has to sell the year again. The product company starts with last year's revenue and builds on it. After a few years that is no longer a detail. It is the company.

📊 Rule of 40: the sober yardstick for a product business

The SaaS world has popularised a sober formula for when a product business is healthy: the Rule of 40. Growth rate plus margin should add up to at least 40. Stijn Hendrikse cites it in T2D3 as a definition of sustainable SaaS success, next to the hypergrowth path.

The useful part: the formula gives you a choice. 30 percent growth at 10 percent margin passes. 10 percent growth at 30 percent margin passes too. You don't have to be a hypergrowth startup. A profitable, calmly growing product company passes the test just as well. For bootstrapped DACH companies that's the more relevant yardstick than any triple-triple curve from the VC world.

Now hold the agency next to it. Its revenue is utilisation times day rate. Both have a ceiling. You can't be more than fully booked, and the market negotiates your day rate for you. Growth almost always means more people, and more people push the margin down. See above: 0 to 20 percent.

An agency can make a good living. But it can structurally hardly beat the Rule of 40, because growth and margin hang on the same lever: sold hours. The product decouples revenue from hours. That's the only reason it can move both sides of the formula at once.

🛠️ The three traps when switching

1. Product instead of project management. In a project you build what the one customer wants. In a product, every special request is poison. A single checkbox that only one customer needs costs a fortune to maintain over the long product cycle. I often said yes when someone came with the carrot and 50,000 francs. It never paid off. The maintenance was too high every time.

2. Pre-financing. This is where most people miscalculate. A project brings maybe 100,000 francs plus 20,000 support per year. In a product the same customer pays around 40,000 a year, but you pre-finance the development. With the first customer there is a gap. With the second it is twice as big, with the third three times. The more customers, the bigger the gap. On top of that, CAC payback of 9 to 18 months. And I have never seen a true product-market fit in 6 months. It takes years.

3. Organisational structure. A good product team is 3 to 4 people working efficiently. That costs 300,000 francs a year and more. If everything hangs on one person, you have a lump risk. If they drop out, the knowledge is gone and the company is dead.

All 3 traps share the same core: project reflexes in a product business. The reflex to say yes. The reflex to want revenue now. The reflex to hang everything on the strongest person. In project work these are virtues. In a product business they are expensive habits.

🤖 The master plan

Do not build from zero. SaaSify an existing project. Take the solution you already built for one customer and turn it into a reusable product. DigiTickets came out of a ticketing solution for an aquarium that way. Bexio, Paymash and Localina came out of agencies. The pattern repeats.

SaaSify does not mean renaming the code. It means peeling the generic core out of a special solution: the part many companies can use in the same way. The rest stays out or becomes configuration. That is product work, not project work, and it's exactly where most attempts fail.

The worst version is being neither fish nor fowl. A year of product, then back to project work because it is too slow. That just burns money.

Today there is a lever that did not exist before. I call it Get Multiplayer: how people and AI agents work together. A hyperlean team, a few pros plus agents running around the clock. Three instead of thirty. That shrinks the 300,000-franc team and the deep valley of tears. The agents run on the Context Engine, your company's business and code context. It is exactly that context which walks out the door when an agency leaves.

🧩 The honest middle path: product plus services

Between agency and pure product there is a middle path that often gets talked down. Wrongly. A product with a tightly packaged service offer on top can be the bridge that carries the transition.

Hendrikse describes it in T2D3 as a "Premium plus" bundle: the software's top plan plus services like onboarding or content. His experience: such a bundle can sometimes lift revenue per customer by 50 percent, without additional product development. That's his number from his own consulting work, not a law of nature. The logic behind it is solid anyway: the customer buys an outcome, not a licence.

For the agency switcher this is doubly attractive. You can do what pure product companies have to learn the hard way: deliver. Onboarding, integration, training are routine for you. Package them as fixed offers at fixed prices, not as open hours. Otherwise you'll have an agency again within a year, just with software in the shop window.

One detail makes the difference: bill services on a recurring basis where you can. An onboarding is one-off. But review sessions, reports or supported analyses can be tied into the annual subscription. That way the service pays into exactly the metric that carries a product business: recurring revenue.

The boundary is clear. Services may feed the product, never replace it. Every package must be standardised and pay into the product. Individual special requests remain poison, see the checkbox above.

💰 How do you finance the transition?

With the agency's cash flow. The project business pays for product development until the product carries itself. But that only works with 2 hard rules: a fixed time budget for the product and one person who owns the product. Otherwise the customer who happens to call always wins.

The time budget has to be concrete. Not "we work on the product when there's slack". There never is. Instead: defined days per week with defined people, and those days are blocked for client projects. If a project is on fire, it burns without the product team.

And do the margin maths honestly. Your own hours aren't free just because no invoice arrives. Fund the product build with unpaid evenings and you're lying to your own metric, and you'll notice too late that the transition doesn't hold.

And the product needs an owner with real power. One person allowed to say no, even to the agency's best client. Without that owner, the worst version from above happens: a year of product, then back to project work. Not because the product was bad. But because nobody's only job was to defend it.

Be honest about the duration. I wrote above that real product-market fit takes years, not 6 months. That means the agency has to carry the transition for several years without the product people sliding back into projects. If you can't sustain that, better to choose the agency deliberately. That's a legitimate business too.

The rest is sequence: first a paid pilot, then a narrow release, then the next customers. How tight that loop can get is in SaaS product in 90 days. I collect more decisions like this in the entrepreneurship hub.

🎢 Highs, lows, warning

✅ What works: a product scales, an agency does not. More customers do not need more hours. The people who could sell a product made more money in the end.

❌ What does not work: the Costa Rica fantasy. Open the notebook on the beach, answer two requests, go surfing again. No product runs like that. It is always a launch, always high performance required.

⚠️ Warning: a product company is like a zoo. You have to align your customers. Build a zoo for elephants and put mice in it, and you have the wrong zoo. And: as a product manager you have no friends. You say no to money. That is hard.

Why I still choose the product: the agency creates dependency, the knowledge stays outside. I build a system that stays installed in the company. The risk is bigger, the reward too. I leave, the system stays. If you want such a system built for you, take a look at Pedalix.