Product vs Services Startups: 6 key factors you should consider before making up your mind

“Every choice you make has an end result”

 ~ Zig Ziglar

 The dilemma

Most new entrepreneurs have fallen victim to it…

“Landing” on a seemingly perfect business opportunity only to find out a few months later that the business they got into is not working for them.

Of course, that’s not the end of the world and pivoting may well ‘do the trick,’ but sometimes such accidents are preventable.

How?

By seriously considering ALL the options before deciding which type of startup business to get in.

And today I’d like to talk about the product vs service company dilemma.

Whaaat?

I know. For many that’s not really a dilemma at all because these days it has almost became ‘common knowledge’ that “selling a product is always better”, or at least that’s what the experts’ narrative appears to be…

But is that any true?

Well, not really – as you’ll see just in a bit, depending on your life goals, business aspirations and risk profile the right answer would be different.

Yep, each option comes with set of different side-effects (and benefits I may add) because as Mark Birch rightly reminds us here: “Running a service company versus running a product startup are vastly different creatures.”

So, shall we jump into the meat of today’s post and explore those differences?

Good, let’s get straight in…

6 Key Differences Between a Product and a Service Startup

Difference #1: Time to market

Can you guess why?

That’s right, the amount of time it takes to convert an idea into something sellable differs dramatically depending on the route you take.

– For the first scenario (having a product-based startup), you have a ‘model’ that requires investing time and resources upfront for conceptualising, creating, and testing the product.

– On the flip side (having a service-based startup), you can get a business off the ground and start billing for your services much, much sooner. You only have to define the service, find a customer, listen to his/her requirements, and then start delivering the pre-defined service.

Pretty straightforward isn’t it?

Difference #2: Scalability

Even though you probably heard that term a thousand times let’s make sure we’re all on the same page.

According to Martin Zwilling, scalability means your business has the potential to multiply revenue with minimal incremental cost. A software product is a classic example of a scalable solution since it costs real money to build the first copy, but unlimited additional copies can be quickly cloned for almost no incremental cost.”

And yes as you can imagine, scalability-wise, “product startups” have an advantage because…

…on the one hand you have a model that trades dollars for hours (there is only so much you can do in a day*), and another which is limited only by the amount of customers are willing to pay for that product (especially if the item is in a digital form).

* Just to be clear, of course, if there is a lot of demand for your service you can hire more people, but the extra cost can hardly be described as minimal. (See Martin’s definition.)

Difference #3: Business risk

So, which business model is riskier?

No guesses here – selling a product.

Why?

1) Unlike service businesses where you have a customer commitment to pay before you even start working, with products there is no guarantee that you’ll sell enough units to justify the initial investment. *

* Obviously, you can mitigate some of this risk by a) gauging demand upfront, b) trying get pre-orders, or c) start small with an MVP, but still it’s not the same.

2) It has much higher set-up cost compared with selling a service, because you have to commit resources to building “that thing,” rather than bill clients for a specific skill/expertise you ALREADY have.

3) Product requirements are drafted by you and NOT the customer. This is an obvious one. When you sell a service, the paying customer quite often knows exactly what s/he wants and helps you figure out the product specs; but when have a product, you have to figure things out yourself – and that often involve some guesswork.

Difference #4: Reusability

 This couldn’t be more straightforward.

A product-based business requires you to reinvent the wheel once; and then, if the “experiment” is successful, you can fully leverage it by selling the exact same product (which you obviously need to update/improve over time) as many times as the market wants it and keep profiting from it.

– On the other hand, service-based businesses deliver one-off solutions. In each instance, the result will be highly personalised to each client and that often means it won’t be reusable for the next clients.

So, in this scenario, the cash-producing asset wins!

Difference #5: Time spend on “your thing”

 If you have a service business around a core skill of yours for which other people are willing to pay, it’s not hard to imagine that you’ll have to spend a fair amount of time practising it, whether it’s web designing, career coaching, book editing, or any other type of hard skill you may have.

With product businesses, you build it once, and then if successful, you update it on regular intervals. But what about all the rest of your time? Yep, marketing and selling that thing!

I know. Some might say that’s not necessarily the case because you could always try outsourcing “that piece” and of course, that’s an option but at least when starting out not only chances are you won’t afford that external help, but in my mind it can also be a bad business decision…

Why?

Because, a) as the founder you’re the person that knows the product and the market better than anyone else and b) during this early stage having this 1-2-1 conversations with your prospective customers would be invaluable and not to be missed.

Difference #6: Control

Just think for a moment…

On the one hand you have a business model that requires you to offer a highly bespoke (and normally one-off) service to each client. On the other hand, you have to provide a standardised product that tackles a very specific problem experienced by a narrow category of people.

With a service-based model, you need to mould your solution in accordance with each client’s specific requirements. With products, it’s your job to find the convergence between what customers would accept and YOUR vision.

Your vision… you did read that correctly!

Quite a lot of entrepreneurs act like their viewpoint/vision simply doesn’t matter, because they’ve grown accustomed to the idea that “the customer is your boss.”

But in reality, it’s your business and YOU call the shots!

And just to be clear, I am not saying it’s impossible to be in control with a service-based model. I am just making the point that with a product, it is much easier to say, “This is what’s for dinner; take it or leave it!”

So, with all that said, what’s the verdict?

Well, that’s for you to decide!

As said right from the beginning depending on your life goals, business aspirations and risk profile the right answer would be different…

***

Ok, “guys”, that’s all from me for today!

If you enjoyed today’s post, check out my kinde book, The Aspiring Entrepreneur Entry Strategy: A practical Step-by-step guide for finding a validated, winning business idea that stays true to who you are, that is currently available at Amazon.

I hope to see you soon.

Best,

Andreas

“In the modern world of business, it is useless to be a creative, original thinker unless you can also sell what you create”

– David Ogilvy

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