How To Analyze A Product Vs Service Business. Hack.
Are you thinking of starting your own business? Your first decision – product vs service.
Is A Product vs Service Business The Right Choice For You?
At the most basic level, a service-based product is one through which you can make money by packaging your skill or knowledge into defined offerings that you sell to one or more target groups of consumers. A product-based business is one where you design, produce and sell one or more products to one or more target groups of consumers.
By comparison, it requires less capital to start a successful service-based business, than it does to start a product-based business. At the same time, serviced-based businesses are notoriously difficult to scale profitably, by comparison to product-based businesses.
Another consideration is raising working or growth capital.
In the following section, you will find a list of Pros and Cons for each category.
Serviced-based Business
Pros
Minimum Capital to begin with: You just need to cover the cost of your workforce and overheads. Even these costs can be minimized if you utilize a 100% virtual (remote teams) model. If you are starting out as a single founder, in the initial stages you can work as a sole owner who works from home. If you have some coding skills or understand technology, all you need is a website/landing page, e-brochures, email, CRM, etc. You can become cash-flow positive as soon as you sign your first customer.
The conventional way of business: Running a service-based business is a traditional way of doing business, it is as old as time. If you find yourself the type of person who isn’t fond of surprises, this is the predictable and safest way to go.
Every day is a new day: While working with different clients every day, you continuously change your routine. In such a way you don’t need to focus on the same thing every day of the year. This nature of work is very suitable for those who tend to get bored easily and like switching things up every once in a while.
Your market is already there: Again, for those who aren’t fond of surprises, maybe you have already done your research and it is very possible that your market exists before launching the business. When you’ll know that your audience is out there it will just be a matter of getting in front of them. If you’re good at what you do, pick the right market, and know how you can promote yourself. It is guaranteed that you will be able to earn your living through this.
Cons
Hard to scale: If you are one of those agencies that charge on an hourly basis for their service or project-based work, then your revenue is directly related to billable hours. This process will require you to hire more and more people to deliver more services and grow your company.
Limited Creativity: Now that you are working for another business, your creativity is somehow limited to the customer’s requirements. Though you can always advise them to take certain directions, you are working on someone else’s vision. Furthermore, even though your client’s vision may go against your expert opinion, the customer is always right.
Time loss in communication: Managing the number of clients, their phone calls, emails, and other ways of communicating with customers can cost you a lot of time. These things cause low productivity and take valuable time away from other important tasks.
Low revenue: All payment is tied to milestones and deliverables, and is embedded in your contract. You will need to make steady contracts to make steady incomes.
Low resale appraisals: There are a number of factors that go into your company valuation as a service business. That includes earnings before interest, taxes, depreciation, amortization, or even multiples of gross profit. These things depend on your market position, yearly growth, and management team. A strong business with a well-maintained market position can see company valuations as high as 8x profits.
Product-based Business
Pros
Scalable: Developing products and selling is much easier and more cost-effective to scale as a business model because, in such a business, growth doesn’t require a large number of employees or other overhead. You can scale your business to a much higher level with a limited number of employees.
Innovation: Your innovation is what guides your production, instead of focusing on your client’s requirements. With creativity, you can align yourself with the company’s vision and can provide yourself the freedom to create a disruptive product.
Continuous revenue: With the aid of the marketing and sales team, you can frequently project sales once you have a good grip on your pipeline, and can maintain cash flow on predicted sales and average regenerating rate.
High resale appraisals: It’s necessary for faster growth i.e 100% year over year to be able to count in the ballpark of 80-100x MRR. That means a company with $100,000 in monthly recurring revenue (MRR) is able to be valued anywhere near $8 million to $10 million.
Cons
It is a risk: You will have to invest resources (time and money) during the developing phase in the hope that they will be recovered in the operational phase. However, there is no guarantee that people will purchase your product as predicted, as you may have misread consumer demand, particularly when you are launching an innovative product that is the first of its kind. Researching a market can only help you so far, and in the end, you are working on an assumption. It’s more like gambling.
Cash flow is a necessity: A business that is product-based requires continuous investments to launch and grow the business. It is very likely that you will need to invest all of your savings, apply for a loan, and get friends, family, and outsiders to invest equity capital as well.
Dedicated customer service: Let’s say you have an established product and regular customers. The nature of customer support is directly dependent on the product, however, it still drastically changes. It is crucial to keep these things in mind as your customers are the ones that are keeping your company running. You can give assistance to your clients through call centers, emails, chatbots, etc, though that will be time-consuming and expensive, and in peak periods, still likely not cover their needs.
Takeaway
If you feel you have more to give and a job is just not rewarding you enough, starting your own business can be a rewarding, if not exhausting, and stressful alternative! It is suggested however to first consider your personal strengths, weaknesses, opportunities, and threats (SWOT analysis), before doing the same for any potential business you consider starting. Gaining clarity as to whether that business will be product vs service-based, is an essential first step.
About The Author
James Spurway is an Angel Investor, Mentor, Advisor, Speaker, former Commercial Pilot, and Author who specialises in raising debt and equity capital. He strives to model diversity, equity, and inclusion in the founders he agrees to invest and work with. He has paused his angel investing activity to focus on raising his first US$ 50M venture capital fund, which will invest in startups that can accelerate the achievement of net zero emissions. James spent the past 33 years living in Hong Kong, Vietnam, Germany, Switzerland, Monaco, the USA, Thailand, the Philippines, Singapore, and Australia, his country of birth. In that time, he started 10 businesses, exited from seven, shut down two, and kept one. He has invested in a total of 50 startups since 2001 and had six successful exits.
