Why Products Instead of Services In Your Business?
In this topic I look at some of the characteristics of focusing on products in your business and see how that compares to growing a business based on services.
This topic is essentially a brief look at the pros and cons of products and services.
A Recap On Services
Recall in the very first Speaking of Products topic, What is a Product-Based Business?, where we described services...
- A service is an activity that is done by the seller.
- Sometimes services are described as being done for you or done with you or provided for you.
- In most cases, there is inherently some degree of custom or bespoke work involved in a service
Examples of services include:
- Interior design
- Fashion consultation
- Financial planning
- Mortgage and insurance brokering
- Custom software development
- Management consulting
Benefits of Services
Many of the benefits, and underlying reasons for, starting and running a business based on services are due to services being quicker and relatively cheaper to get up and running. Services can also be quite lucrative immediately, when a business is just starting out. Some of the pros for services include:
- Relatively low setup costs and low financial divestment requirements
- Ability to put your skills to use almost instantly
- High likelihood of finding a market with existing customers
- Opportunity to meet a wider variety of needs through customisation
- Reduced likelihood of needing to deal with refunds and disputes
- Often a fairly decent initial return available, i.e. through fees charged.
Issues with Services
Services can be tempting. I know this first-hand since this is how I've generated most of my income over the years up until now. However, there are some definite issues with services which can't be ignored. These issues mainly revolve around the limitations services place on a business. Some of the cons of services include:
- Very labour-intensive
- Don't scale well
- Earnings potential is limited to the amount of hours available which is definitely noticeable for smaller businesses
- Being stuck trading time to clients for money can limit your ability to do grow and evolve the business
- Peaks and troughs in cash flow, especially due to non-billable hours, holidays, etc.
- Always serving someone else and their needs
- Possibly being stretched in many directions when being responsive and supportive
- Potential difficulty in describing a service due to it's intangible and customisable nature
- Sometimes hard to separate the service delivered from the person(s) delivering it
- High prices occasionally lead to customers questioning the value they receive
How Do Products Compare?
Once again, let's do a quick recap on products.
- When we say product, we're talking about something that people can buy from a business.
- Products can be used immediately by the buyer to generate value.
- Products can be either physical or virtual.
Physical products are essentially tangible, i.e. something you can touch. For instance:
- a car
- a bottle of perfume,
- an industrial sewing machine,
Virtual products are intangible in that they don't exist in in the usual physical form. For instance:
- computer software,
- an education course,
- a hotel stay,
- a unit in an investment fund,
Benefits of Products
We're getting to the main point of this topic now. That is, how do products compare in relation to services as a focus for your business?
With products, many of the benefits relate to their scalability and potential to focus in on a much tighter area.
Some of the benefits of products include the following:
- Can scale very well
- Lower unit prices mean the market is potentially larger
- Have a relatively low marginal cost once developed
- Possible lower overheads and variable labour costs
- Very high earnings potential over time
- More stable and predictable revenue streams once a market is established
- Can be continuously improved to provide additional customer value
- Ability to set your own vision and work towards it
- The people involved can go deep and specialise heavily in areas that interest them
- Potential to positively impact and help many more people
Why Isn't Everyone Focusing on Products?
Much of the issues with building a business based on products relate to the up-front cost in monetary and non-monetary terms. These include:
- Require high up-front time and effort for initial development
- Have a very-high opportunity cost, if you are self-funded.
- Requires relatively higher investment of time and or money to get started
- The market can be extremely uncertain early on, i.e. demand is unknown
- Limited opportunity to change direction once the product is established
- Can involve much higher support and customer service effort
- Increased competition can lead to commoditisation and a race to the bottom in pricing
- Potentially involve more issues with returns and refunds
- For physical goods, storage and distribution can be a challenge
- Possibly involve higher levels of technical complexity to build and run
So there you have it, some ideas to get you thinking about why you might want to focus on products instead of services in your business.
In a related topic, I go beyond the ideas mentioned here and get more into the subjective feelings side of this question. If this interests you, head on over now to the topic titled Personal Questions to Consider When Deciding to Focus On Products.