Product-based vs. service-based company. Which one to choose? | Business strategies #1
Product-based vs. service-based company
To make sure we’re talking about the same thing, let’s start by defining what a service-based company is and what a product-based company is. A service-based company provides customers with a service, something intangible that doesn’t come in a box, like legal advice or building a website. A product-based company, on the other hand, produces and distributes goods – both physical and digital, such as video games. Both ways of delivering value to the marketplace come with certain constraints and opportunities that you should consider when deciding which form to take.
Service-based company – limitations and opportunities
Limitations
People. A service business is built on people, so it’s only as good as the people you hire, and good people cost money – often a lot of money. What’s more, if you sell services, you should be prepared for HR problems. Lateness, underperformance, illness, unforeseen absences, departures, and rising workplace expectations are just some of them. They need to be taken care of so that the service is delivered carefully and on time.
Scalability. Scaling a service-based company is often more difficult than scaling a product-based company. That’s because scaling in a service business is achieved by acquiring more customers and hiring new people to join the team, which is sometimes problematic. Mainly because as employment increases, costs increase in the company – not always in proportion to profits. On top of that, late payments, lack of recurring revenue, and difficulty in developing standards for service performance are obstacles to achieving economies of scale.
Prices. Due to a low barrier to entry, competition in the service sector is fierce. As a result, competitors compete in the market with prices, lowering their margins to get more customers. On top of this, the price difference range between services is so wide that the customer will almost always find “something” cheaper. Therefore, when building a service-based company, it is necessary to look for other differentiators, as well as to educate the market to increase awareness.
Opportunities
Low barrier to entry. Starting a service-based company is simply easier and cheaper than starting the production of any goods, and this is undoubtedly its greatest advantage. You know how to do something (physically, intellectually), you know how to attract customers, and so you can set up a business selling services. What’s more, you don’t need a lot of startup capital, and you can grow organically – as the number of your customers increases, you hire your first employees.
Prompt response to changes. Service businesses can adapt quickly to changing market conditions. For example, if customers in one segment stop buying your service, you can immediately try to sell it in another. By performing services, you also have a closer relationship with customers, so you gather market feedback more quickly. This allows you to move more efficiently between consumer expectations and your offerings, increasing your chances of survival and maximizing profits.
High margins. Specialized services can have higher margins than products. In addition, the services are often performed by the business owner or their closest associates, so they rely on a personal brand. The more recognizable and reputable the personal brand, the more expensive the services.
Product-based company – limitations and opportunities
Limitations
High production costs. Bringing products to market is expensive. Right from the start, you need to have the capital to cover the costs associated with manufacturing, purchasing raw materials, storing and distributing the final product. After all, you can’t make a car or a video game without machines or the right technology.
Surplus goods. Not only is production expensive, but it also requires continuity to optimize production costs, which can lead to a surplus of manufactured goods. As a result, products remaining in warehouses lose value, and the business owner is left with capital tied up in goods they can’t sell. It is a costly problem.
Changing trends. Products can be vulnerable to changes in customer trends and tastes. However, product-based companies, unlike service businesses find it harder to adapt to new customer expectations. That’s because changing a product – even a digital one like software – takes time and money.
Opportunities
Scalability. While service-based companies may struggle to achieve economies of scale, product-based companies have no such problem. First, production processes can be automated – in simple terms, the product is made according to a single scheme. Second, with such a product, it is possible to enter multiple markets simultaneously with a small team.
Business model. A product can be packaged in several different business models. One-time sales are certainly the most popular way for product-based companies to monetize, but not the only way. For example, software can be sold in a subscription model or by charging users on a pay-per-use basis, which is how companies that offer cloud solutions work.
Marketing. It seems easier for product-based companies to build strong brands that attract loyal customers with deep pockets. In this segment, we are more likely to find companies offering luxury goods. Expensive cars, exclusive handbags, and beautiful watches – these are all examples of products that can cost hundreds of thousands of dollars and do not always offer higher quality than their cheaper competitors. The added value is marketing.
Transitioning from service to product
When you enter the market as a service-based company, you don’t have to stay that way forever. You can successfully change your business model and expand your business to sell products. We are seeing more and more of this in the marketplace. Netflix, which used to only offer other companies’ productions, is now producing its own movies and series.
Summary
To summarize the article, here are four questions to help you decide between a service-based company and a company that sells products. It’s a good idea to ask yourself the following questions and jot down the answers on a piece of paper.