Services vs. Products: Are You Focusing on the Wrong Side?

Posted: 08 Jan 2013 12:42 PM PST

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.