When it comes to businesses, there are two key types. The first, service-based businesses, sell one or several services to their base of customers. The second, product-based businesses, sell a product or a range of products to theirs.
No single type of business is “best” and both service and product-based businesses offer many unique advantages.
However, each type of business also has its own range of disadvantages that you’ll want to be aware of before you launch.
Below, Business Adviser and Corporate Consultant, Neil Debenham expands on the key differences between service businesses and product businesses, as well as the things you’ll want to consider if you plan to launch a business of your own in the near future.
Service businesses are ideal for professionals
If you’re trying to transition from full-time employment to business, starting a service business is an excellent way to break out on your own.
The reason for this is simple — a service business lets you put your skills and expertise to work immediately, without having to spend time and money designing, developing and manufacturing a product to sell.
For example, if you’ve worked as an in-house web designer for a large company, it should be a relatively straightforward process to transition from this role into a service-based business that offers web design packages.
Likewise, if you’ve worked as an in-house accountant, lawyer or other type of professional, the path from the corporate world to self-employment using a service business often allows you to tap into your professional network.
A product-based business, on the other hand, can require a completely different skillset — one that you may not have acquired at this point in your career says Neil Debenham.
Service businesses are often inexpensive to launch
Compared to product-based businesses, service businesses are often easy to launch, requiring relatively little investment capital to get off the ground and start producing revenue.
For example, if you’re planning to launch a digital marketing business, you may be able to do so with little to no costs other than a laptop, broadband connection and the relatively small costs of launching and marketing a website.
Likewise, if you’re an accountant aiming to start a business around your services, you may have no costs at all other than the expense of creating a legal business entity.
This low cost and simplicity makes a service business a good option if you’d like to start earning income as soon as possible with a relatively small upfront investment. While a product business may require a large investment, a service business can be cheap, fast and easy to launch.
Product businesses tend to scale more effectively
Although product businesses require significantly more upfront investment, both in terms of time and financial capital, they tend to be easier to expand and develop than businesses built around specific services.
For example, imagine two businesses. The first is an advertising agency that works with a range of clients. It’s made up of a team of people in a variety of roles, including copywriters, designers, media buyers, account executives and others.
The second is a product-based business that purchases t-shirts from a manufacturer, packages them in unique boxes and sells them to consumers via an e-commerce store.
If you had to double the turnover of one business, which of the two would you pick? The obvious answer is the t-shirt business, as doubling turnover simply involves ordering and selling twice as many products.
Scaling the agency, on the other hand, involves signing on twice as many clients, expanding the team to match their needs and delivering a larger amount of services every month.
Put simply, the product-based business scales easily through a linear process due to its design, while the service business — despite being able to scale — doesn’t grow as easily and requires a significant investment in more staff as its operations scale upwards.
Which type of business is best?
There’s truly no “best” type of business for every entrepreneur. Service-based businesses and product-based businesses both have significant, unique advantages. Both can produce a vast amount of wealth when managed correctly, and both can be professionally rewarding.
As always, the right answer depends on your strengths as an entrepreneur. If you’re a natural service provider with a valuable skill, a service business is likely to be a good match for you. If you’re a supply chain or marketing expert, a product business may be more rewarding.
Finally, who says you can’t change in the future? Many extremely successful businesses, from agencies turned software companies to professional service businesses that manufacture their own products, start as one type of business before transforming into another over time.
Neil Debenham www.neildebenham.com