Software agencies are not sustainable. Over the years, I've seen countless ones close or struggle as they grew bigger.
The problem is usually the same: at some point, during a bad period, work dries up. Without new clients, there's no money to pay developers. Without enough reserves, lots of agencies end up being forced to close.
I myself run a tiny web agency, but I do not consider it the heart of the business. Yes, it generates 99% of our revenue right now, but I'm working hard to add additional revenue channels because, in my gut, I know a recession could result in us closing down.
That said, I'm not planning to shut it down completely, even if our diversification efforts work. It's stable and predictable revenue, which lets me sleep better at night. The goal isn't to escape it. It's to stop depending on it exclusively.
Build Something That Doesn't Depend Only on You
The obvious move is to build something that doesn't need you in the room to generate money.
A product, a course, a small SaaS, something that people can pay for whether you're working or not. The agency is a time-for-money business. You stop working, the money stops. A product doesn't work like that.
This isn't a new idea. But most agency owners keep putting it off because client work always feels more urgent. The product never makes it past the idea stage.
The goal in year one isn't to replace your agency revenue. It's just to prove the model works. Pick one thing, give it a real time budget alongside your normal work, and build the habit.
Referrals Aren't a Strategy
Most agencies grow through word of mouth. Someone recommends you, you do good work, they recommend you again. It feels like a system but it's not really.
Referral networks dry up. Industries slow down. The people who used to send you work move on.
Building a public presence is the highest-leverage thing most agency owners skip. A newsletter, a blog, a YouTube channel, even just posting consistently on LinkedIn. It doesn't need to be perfectly polished. It needs to be consistent and genuine.
The math is simple: even if 0.1% of people who follow you become clients, it compounds over time in a way that referrals never will. Being known is the foundation. Everything else builds on top of it.
Make it fun. Show your work. Be a human, not a corporate account.
What Thoughtbot and Basecamp Got Right
Two agencies worth studying here are Thoughtbot and Basecamp, both built products alongside their services businesses, and both ended up with the product becoming more significant than the agency itself.
Thoughtbot built and open-sourced tools that became central to the Rails ecosystem. The tools generated awareness, trust, and inbound leads that the agency alone never could have. Basecamp built project management software to solve their own internal problems, then sold it to the world.
The pattern is the same: solve a real problem you already have, build it properly, and offer it to others who have the same problem. The agency gives you the context to identify real problems. The product gives you leverage beyond your headcount.
**How to Actually Do It**
There's a concept I keep coming back to: every small business should put 20% of its time into R&D.
And when I say R&D, I don't necessarily mean building a new product. It could be optimizing how you run projects so you actually have time for diversification. It could be figuring out where your margins really come from. It could be analyzing your services to find growth opportunities you're sitting on without knowing it.
The hard part is that client work always wins in the short term. A client with a deadline feels urgent. R&D doesn't have a deadline, so it keeps getting pushed. The way to fight that is to treat it like a scheduled commitment, not something you do when things slow down. Things never slow down. If you don't put it on the calendar, it won't happen.
Keep the scope small too. A dedicated hour or two a few times a week beats a big sprint that burns out in a month. Finish your client work for the day, then switch. Keeping them separate means you're not context switching all day, which is where most of the time actually goes.
If you're starting from scratch, keep it simple.
Pick one direction. A productized offer, a course on something you know well, a small tool that solves a problem your clients keep running into. Give it a real time slot alongside your agency work, not a sprint you'll drop after two weeks.
Build in public if you can. The marketing and the building happen at the same time that way.
Year one isn't about replacing your agency revenue. It's just about proving the model works.
Wrap Up
Agencies are great when they're working. The problem is they're fragile by design. They depend on a constant flow of clients, on your team showing up, on your own energy holding up.
Diversification isn't about abandoning what's working. It's about building something alongside it so that a bad quarter stays a bad quarter, and doesn't turn into something worse.
Client work feels safe because you can see the money. R&D feels risky because you can't. But that's exactly why most people never start, and why the ones who do end up somewhere different a few years later.
Nobody can tell you if it'll work. But you can't find out if you never try.
