This is a big debate for anyone who wants to start a business. Should I go for a service based business or a product based business? Which business would be more profitable in the long run? Are services easier to sell than products? Would selling products make me richer than selling services?
Let me answer one of those questions now. Both business types will make you a ton of money, a lot more than you can make from an average day job.
I’ve set up and run multiple businesses, where I’ve sold both services and products. So, I’ll try to answer your questions from my years of experience and research.
Both business types have their pros and cons. I’ll cover both in this article. People have different needs and skills. So, you can decide based on what you feel is right for you after you finish this article.
The possibility of automation is very important for the long-term success of a business. Your business should run without you. You can’t take care of it all the time.
What if you get sick? Or you have a family emergency? Or you’re on a vacation? Wouldn’t you want to continuously be making money no matter what?
If you can’t set up a business where that is possible, you’ll probably come back from a vacation to a business which has lost its customers and profits. If you had taken a long enough break, your business might be dead already and you would have to start over from scratch.
I’ve faced that problem before. I ran a content writing business throughout my University years. You know how tough professional courses are. The number of tests, assignments, and projects, not to mention end semester exams students are dumped with is endless.
So, whenever I got too busy with college work, I couldn’t continue my business. I tried to do both in my 4th semester, and my grades suffered. So, I started pausing my business whenever things got busy.
I couldn’t talk to the freelance writers I hired or my clients for months on end. I couldn’t take up projects because I didn’t have the time to manage them. So, when I came back from my breaks, I had to start all over again.
Hire writers again. Contact old clients. Get new ones. But clients value consistency, so my regulars weren’t very happy about my frequent breaks. Some had already moved on to new content providers, which is only right.
So, from my experience, it’s VERY difficult to automate a service based business. When you’re still small, you shouldn’t outsource client management or acquisition, or you run the risk of your employees going Rogue and poaching your clients.
So, you need to be around to manage one of the biggest aspects of the business yourself, with no help. How can you take breaks if that’s the case? Unless you’re a multi-million-dollar service business that can aggressive go after poachers with hefty lawsuits, you can’t safely delegate every part of your business.
But with products, you can automate, right from the get go, with little to no input from you.
Try setting up a sales page and a product delivery system. This could be a course or a software product. You can automate everything from payment to product delivery to future E-mails to your customers with the technology we have at our disposal today.
You make money while you sleep and while you’re on a vacation. That’s true automation. With physical products, the set-up is a bit more difficult. You can still automate payments, but you’ll need to hire people to package and deliver your products. But, the digital world has automated everything for product based businesses.
Even if all you had was a physical store in your neighborhood, you just need to hire a manager and train them well. They should be able to manage your store in your absence. It’s not as easy to poach customers from a product-based business.
Poachers need to set up the store first, then source or create the products, set up the routing channels, etc. Employees won’t get the confidence to do so with respect to products. It’s not as easy as talking to a client and offering them their freelancing services for a cheaper price than you.
But, to be on the safer side, don’t delegate everything to the same person. For instance, hire different people for customer service, product creation and marketing respectively. This way, one person doesn’t know every aspect of your business.
Scaling is just as important as automation. Could you continue to grow your business, year after year? Or, will you reach a saturation point before you reach your goals? Ideally, you need a business that can never stop growing.
Look at Apple and Microsoft. They’ll never run out of new customers or sales, because they continue to release new versions and people with needs for their products are born every day.
With a product, scaling up is just a question of whether you can produce the number of pieces needed to meet the demand. This applies to physical products alone.
If you’re creating digital products, on the other hand, like in the case of Microsoft, you’ll just have to create your products once, and sell it endlessly. In the end, you’ll also retain more in terms of profits than with physical products.
In the case of physical products, your production costs will increase when you scale up, but once you start making money, you can just reinvest that money to create more items. With digital products, naturally, there won’t be any extra production costs while scaling. Though, you might need to continuously update your product to keep with the times and to satisfy user demands.
With services, it’s not as easy to scale up. I’m not saying it’s impossible. There are billion-dollar service companies, of course, but they aren’t as prevalent as the product-based companies. If you’re outsourcing or delegating the service-fulfillment part of your business, as you should if you want to scale up, you’ll need to continuously hire more employees to meet the customer demands.
New employees equal new overheads and the need for more managerial staff. I’m not saying it’s impossible to scale a service-based business. It certainly is possible. But, it’s not as easy to accomplish as in the case of a physical or digital product business.
You’ll need a bigger building and you’ll need to provide benefits to your employees. The overhead is just a lot more in this case, which will eat away at your profits over time. So, as you scale up, your profit % will also reduce.
In terms of scaling, a digital product business trumps over a physical product or a service based business by many times.
3. Starting & production costs
Ah…the setup costs. This factor deters many would-be business people from ever getting started. Not everyone has thousands of dollars in reserve to invest in a business. I didn’t, and I know that more than 70% of aspiring business people don’t.
When I started out, I was barely 17 years old. I had no money. I didn’t even have a tax identification number because I wasn’t old enough. So, I had to create a PayPal account in my father’s name and use that instead. So, do you think I had the startup costs to start a business? Hardly.
But, I did persist, and I found a way. I found that I could start selling services with little to nothing in terms of startup costs. A free way to start out would be getting projects on freelance sites like Upwork and Freelancer. Once you start making money, you can create a self-hosted website and start hiring freelancers to take care of your orders.
I did start out with freelancing. One of my first freelancing gigs was for a guy who paid me pittance to write articles. I wasn’t happy. After he had delayed my payment for the nth time, I took matters into my own hands.
I wanted to know where he was getting his orders from. Naturally, I wasn’t going to steal his clients from him, but I wanted to know the source of his traffic so I can start the business as well. I took his E-mail id, and searched for it online.
It took a bit of digging, but I finally ended up at his “Warrior for hire” thread on the Warrior forum. I learned that the Warrior for hire section was basically a sales platform where service providers setup service based threads (sales pages) and interacted with would-be buyers.
Each thread cost around $20, and another $20 to bump it back to page one once it had dropped. This guy hadn’t paid me yet, so I had no money. I borrowed $20 from my dad, bought a thread on there, and the rest is history.
Within just a month or 2, I started making 4 figures just from my Warrior for hire thread. Once I saw some success, I bought a website, made things official and started outsourcing.
So, I could start a 4 figure a month business with just $20. Is that possible with a brick and mortar business? Nope. If you want to start a physical product business, you’ll have a ton of overhead. Product costs, website development cost, marketing costs, etc.
So, I don’t recommend that you start one if you don’t have at least a $1000 (in case of an E-store) to put into the business. You could start off with a service, make enough money, and then move on to a physical product business.
Things aren’t so cut and right with digital products. Just like I started a $20 warrior for hire thread, you could create a $20 Warrior special offers thread and sell your E-book. You could write an E-book based on your marketing or business experience.
So, your total start-up cost in this case would again come up to only $20. In fact, there are plenty of ways to start out a digital product business for free, or less than $10.
But, if you don’t know how to do something, you might have to outsource the process, and that’d cost you more money. For example, if you want to sell a software, but you’re not a software developer, you’ll need to outsource the development part. Software development can easily cost you thousands of dollars, so I wouldn’t recommend starting a software based business when you’re still a beginner.
So, based on production costs, to start off, I’d say a digital E-book or course based business or a low-cost service based business are the ways to go.
4. Marketing costs
From my experience, it’s much easier to sell a service than it is to sell a product. With a service, you can just go up to someone you think would be interested in your offer and start pitching them.
Or, you could just print out a couple hundred business cards with your website’s details on it and distribute it at a business event.
With a product, on the other hand, you need to put in a bit more effort to get noticed. Your sales pages usually need to be on point.
With a service, you can change your pitch to suit the person you’re pitching to. But that’s not the case with products. You need to test a lot, and finalize a pitch that will resonate with a considerable portion of your target (you’ll still miss quite a few of them though, but that’s business).
Even though you can use generic sales pages and other marketing methods to sell services, just like you would sell a product, you’re not restricted to those methods. Generic sales pages are usually used as a scaling mechanisms once the companies know which pitch works better with their target market.
With a product, especially one that’s not a high ticket product, you’re not so lucky. So naturally, products cost more in terms of sales pages, copywriting, marketing materials and traffic.
If you don’t have a big, or even a decent marketing budget to get started, you might want to start off with a service based business.
Profits have a direct correlation with overhead. If your overhead increases, your profits will decrease. If your overhead decreases, your profits will increase.
Services have historically cost a LOT in terms of overhead than any kind of product-based business. Let me explain. Services make money by charging by the hour, in most cases. There are only so many hours in a day, and there are only so many employees in a company. When they scale up, they hire more employees, to offer more hours to their clients. And so it goes.
So, whenever they get a new client, they’ll have to pay a cut of it in terms of technology costs and employee costs. Usually, if a project is big enough, they’ll assign a team with a manager to said project. Hence, a considerable portion of their resources is usually tied up in a single project. That team can’t take up another project until their current one is done.
Also, if the company made the mistake of quoting a fixed price, they’ll need to make changes to their work. In this case, they might need to spend more hours than their allocated hours, and they won’t be paid extra for those hours either. This again cuts into their profits.
As I specified before, you can’t really automate a service based business. Services sell man power, and that can’t be automated. So naturally, profits are less as well.
With a digital product business, you create the product once and you can sell it as many times as you want. The only cost you’ll incur after your initial product creation costs is your marketing costs, which is standard for any business.
With a physical product business, there is overhead, but it’s not as bad as it is with a service based business. With the latest development in technology, a LOT of development is done with the help of machines, rather than manpower. Machines are faster than humans, hence they can create more products in lesser time. This is ideal for scaling up.
So, in terms of profits, digital products take the crown again, followed by physical products and then services.
Services will need more overhead, hence lesser profit. Products, especially digital products, are easier to create and distribute, hence more profits.
6. Tangible and intangible
Services are intangible. Products are not. Yes, I’m referring to digital products as well. If you pitch a service to a potential client, and they want certain parts of your offer changed, you can immediately do so, without much cost to you, since you/your employees have yet to provide the service, and you can easily change your process.
If a customer wants to change your product though, it’s a much difficult process. It’s close to impossible with a physical product, since it’s already been made, and the only option you can offer your customer now is replacement, not improvement (at least not at that moment).
You have more room with a digital product, but still, not so much. You’ll need to roll out an update/new version of your digital product, and you’ll need to spend more time or money to create the new version.
Software development is not cheap at the best of times, imagine asking for development work at a tighter schedule than before. Your programmers would expect to be compensated accordingly.
Since there is a considerable investment of time and money involved in improving a product, you’ll need to be cautious about which feedback you can accept and which you can’t from your customers.
Chances are, you’ll always disregard the needs/suggestions of a particular group of your customer during every update. You can’t please everyone.
7. Customer needs
People are not the same, and neither are their needs. If your target market is small businesses, chances are, you’ll get customers who operate completely different kinds of businesses, hence have completely different product or service needs.
It’s quite easy to tailor your offer to their needs if you’re offering a service. With a product, you can’t really do that. For example, let’s say you’re selling an accounting software. Your software is generic, designed to cater to multiple business types.
But, you might have clients who have very specific instructions/needs, and they might demand them from you. Depending on what you charge for the software, most often, you might not be able to do custom programming work for each client.
If they pay you for your custom work, that’s a different matter altogether, but then what you’re offering becomes a service and not a product.
With a service though, you can sell it to pretty much anyone, and tailor your offer for EACH customer, if need be.
Take the above example. Instead of selling an accounting software, let’s say you’re offering accounting services. You’ll probably be charging hefty amounts per year per client, and your work will obviously be specifically tailored to every need of your client.
So, in terms of meeting customer needs, services definitely trump over products.
8. Reeling in customers
Though products do need more marketing efforts and marketing materials to get across to the target audience, when it comes to closing a sale, it’s much easy to make people open their wallets for a product than it is for a service.
Once your marketing message gets across to them, all they need is a couple testimonials/reviews and maybe a demo of the product with some pictures, and people will be ready to buy from you.
That’s not the case with services though. With services, there is no tangible proof of what you’re offering. There’s no product to take a picture of. You aren’t selling a software where most often a demo video makes more impact than user reviews.
You’ll need to offer more tangible proof with services. You need considerably more testimonials and verifiable case studies that will make people believe in you. You might even be asked to provide references of your past clients so your claims can be verified.
More often, services charge more than a product (not always) so these efforts are justifiable. But I’ve seen $1000 software get sales based on just a few solid reviews and a demo. So naturally, as I said before, this aspect makes selling products, digital or physical, no matter the price tag, easier than selling a service.
It could also be because people have a guarantee of returns with a product, which is not offered quite as often with a service. I understand why though. When a customer returns a product, you get it back, and it can be sold again. But with a service, you can’t get back your time.
But, since clients commit to paying a service provider, whether they are satisfied or not, they tend to be more cautious before committing.
So, even though marketing or getting eyeballs on a product’s sales page costs more than it does for a service, ultimately, closing the sale is much easier with a product than it is with a service.
9. Do you want to become super rich?
Products and services have their pros and cons, as I’ve detailed above. That said, if you want to become filthy rich, go for products. No contest.
Most of the multi-billion dollar companies out there are product based, not service based, for obvious reasons. The fact that you can make a bigger profit out of product sales and scale them up without many problems should be telling enough.
Like Warren Buffet said, “if you want to become rich, find a way to make money in your sleep”. You can’t make money in your sleep with a service; at least, it’s not easy to.
That doesn’t mean services are no use though. They are. The numerous multi-million dollar and some billion-dollar service companies are proof of that. So you can definitely start a service as well and still become considerably rich.
So, what should you choose? I can’t tell you that.
Ultimately, what do you want? What are you comfortable doing? Some of the points I’ve laid out above could resonate more with you than the others. Choose based on your needs and preferences. I’ve laid out the facts, and I’ll leave the choice up to you.