Services vs. Products: Are You Focusing on the Wrong Side?
As an entrepreneur you have basically two routes to follow: you can either provide services or products (providing both at the same time is also an option, but very few people manage to do it effectively, so let’s not consider this option for the sake of simplicity).
By “services” I mean work you’ll do on behalf of your clients. They give you some money, and in exchange you perform a certain task for them. Examples include web design, SEO consulting, hair cuts, car washing, software development, electronics repairing, house painting and so on.
By “products” I mean selling something the clients will use themselves. They give you some money in exchange for something tangible they can use to perform a certain task. Examples include ebooks, shoes, computers, courses, bread, mobile apps and so on.
Both models can be profitable, and there are millions of companies around the world on each of those camps. However, the money you can make using a product-based business model is orders of magnitude larger than with a service-based model.
Why? For a simple reason: the potential revenue of a service-based model is limited on the supply side. That is, your earnings will be limited to how many hours you (or your staff) can work, and there are only so many of them in a day/month/year. The potential revenue of a product-based model, on the other hand, is limited on the demand side. That is, the earnings will be limited to the amount of people who are willing to buy the product.
Let’s compare two companies. Company A offers house painting services, while company B produces and sells paint. The revenues of company A will be limited to the number of painters the company has on staff, and to how many hours each painter can work in a day/month/year. The revenues of company B, on the other hand, are limited to how many people are willing to buy its paint, which is potentially everyone in the world.
One could argue that company A can keep hiring/firing painters to match the demand, limiting its revenues exactly to the demand as well. But that is not viable in the real world. Hiring and managing people is far more complex and expensive than managing the process of creating products.
Obviously money is not everything, and some entrepreneurs will prefer to run a service-based company. That’s fine. On many cases, however, both models will be equally rewarding to the owner, and switching to a product-based one will increase the profits and give you more flexibility at the same time. I find this to be the case especially with small businesses.
Suppose you are a web designer, and you charge $100 per hour of design work. You work 30 effective hours per week, so 120 hours per month, with revenues of $12,000 per month or $144,000 per year. Not too shabby. Now suppose you switch to a product-based model, and you spend your next two months creating a WordPress theme. You price it at $49 per license, and during the first month you sell 100 copies, so $4,900 during that month. Over the next 10 months, however, sales grow 30% per month. By the end of the year you will have sold over 4,000 licenses, pulling a total of $208,602. Not only that, you’ll be able to keep profiting from that product for years to come.
Bottom line: you can have a viable business model either offering services or products, but the latter tends to be much more profitable, so evaluate your current strategy to make sure you are not leaving money on the table.
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23 Responses to “Services vs. Products: Are You Focusing on the Wrong Side?”
@Williams, I meant “tangible” in the sense that you get to touch or at least see what you are purchasing, like an ebook or a hammer. But yeah I agree that some products are intangible in nature.
Point to ponder – tangible or intangible?
Very simple explanation but it gives me more insight. I like it very much and this makes me sure to choose a service-based model. Thank you very much for this great posting. This adds more value for me.
I totally agree with you that a product based model give you much more revenue than the service based model.
Also, in product based model, you create the product once and get paid for months and years to come. Service based model don’t give you such luxury.
after reading your article only one thing I can say, it was not only for time passing 🙂
Very interesting post ! as always , but from my point of view it depends on how you calculate things, the 2 of them are great, product need more experience & more money of Construction , contrarily in services .
You raise some good points here. It is possible to make more money from services if you increase the amount that you charge. Whilst it can be argued that at some point there’ll be a cap on how much people are willing to pay, the key is to differentiate your service so it deserves the higher price tag.
The product manufacturing model is also attractive. The key here is to create a product that exists in digital form and doesn’t need to be ‘produced’ for every sale. The problem with your paint example is that the manufacturer still needs to have the ability to produce more paint if demand increases.
Certainly both are really good way. But you need a lot of guts and experience in the sector you are trying to deal with. The success will be yours. Indeed a nice post. Thanks Daniel.
Have to agree with Edgar and Karl’s comments above regarding the point that one is limited by the number of hours that can actually be dedicated to a service. It is limited and definitely an important point to consider.
Thanks for the intreated read Daniel.
I have been to your blog for the first time and I really appreciate your work.
Coming on to your post, I would prefer to start giving a Service and then work on creating a product as I strongly believe in getting to know the customer first and then create a product based on his specific needs.
Thanks for sharing a great post.
Great article and love reading your short emails. My opinion is that both the models can work for an entrepreneur as far as he/she knows how to do it well. I agree with you because it is true that selling products is far less complicated than providing service but if it was not profitable then there would not have been so many service providers today.
Great way to look at business model.
I personally have another viewpoint of online business model i.e. whether to earn money from the companies/agencies (i.e. advertisement placement, affiliate marketing etc…) or from the visitors/consumers (e.g. selling ebooks, paid membership services etc…).
My personal opinion is that both the models can work for an entrepreneur as far as he/she knows how to do it well. I agree with you because it is true that selling products is far less complicated than providing service but if it was not profitable then there would not have been so many service providers today.
Not only can you profit for month and months selling products but you don’t have to put the hours as you will providing a service.
Autopilot is passive income.
Good stuff Daniel!
I usually prefer to build my business by the product-type model.
When I start to make more cash through my blog, the investment will be there.
I tweeted this article for more to see!
Whether you choose to provide a service or launch a product to sell, skills are needed in both. For example, If you choose to provide a web designing service, you’ve to learn the skill yourself first in order to serve people’s need. So both are profitable for me, but you can’t expect to get good results overnight.
Enjoyed reading it Daniel.
Your article really help to take a right decision.
excellent point Daniel,
There are only so many hours in a day and you will only live so many days.
The point has to be establishing new ways to get paid without doing more work.
This is also why I think George Lucas made a huge mistake selling star wars for only $4B. He could have earned $750M/year off of licensing deals alone.
There is a hybrid model that you may want to address – SAAS or software as a service. Companies make a ton of money offering these types of services.
@Penuel, read a previous post I wrote titled “Solve A Problem. Preferably Yours”.
Karl (business blogger) Craig-West
Great advice Daniel.
I run a service business and have to accept that I have a limit on the number of hours I can physically work and this limits income potential. The problem with hiring people in service businesses is that the margins on their time can be very tight and leave little room for non-productivity.
Thus, I’m working on product development for 2013 so that by the end of the year I want to have at least 3 product offerings.
Great article and love reading your quick and short emails. Can you advise something on product based model like what kind of product to develop, can i develop any kind of product that is already available in market or I should go for something unique, how to market etc? I have always been thinking about this, it will be a valuable info.
That means product based business is much more profitable than service based business in long term.
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