Services vs. Products: Why Your Business Needs Both

There are two basic types of businesses. Product and service businesses. Both can be highly profitable.

#11

What up friends!

Today we’re starting with a question.

What company that now turns “tens of millions in profit” started as a small web design agency and before launching their first product?

Read on to find out.

This week’s newsletter is going deep on the differences between the two basic types of businesses.

Product businesses - A product solves a customers problem.

Service businesses - You solve a customers problem.

Lets get into it 👇🏻

Businesses are one of two types.
Your product solves a problem OR your service solves a problem.

That’s about it.

-Nate

Why it matters

There is often a debate on what type of business entrepreneurs should be building.

“Entrepreneurship is about building leverage, you can’t do that selling your time for money.” (Boo services)

“You have to move fast, get to market before you’re ready and figure it out.” (Boo well thought out products)

But, if you pay attention, you’ll see that the best businesses in the world use both products and services. They have different roles in profitability. Apple sells a number of products which scale incredibly well and services which product month over month cashflow.

Chances are, if you run products now, you could benefit from launching a service.

And, vice versa.

To figure that out, lets look at how these foundational building blocks work.

How it works.

Services

With a service, you fix a customers problem using your time. You can generally bucket these into low margin and high margin services.

Low Margin services include things that your customers could do but they would rather spend their time on other things. These services include things like house cleaning, moving furniture, mowing lawns etc.

These services have a low price — and therefore a low margin — because you’re competing not only against other businesses, but against the customer themselves on whether or not to have the service done.

High Margin services include things that your customers either cannot do, or have great difficulty doing. This includes things like law, medicine, or business consulting. These services often require specialized learning, like graduate school and special credentials.

The more specialized you become usually the more you can charge.

Services are excellent for four big reasons.

  1. Easy to start! - Since you’re trading your time for money, it can actually take $0 down to start a service business. If you have either a specialized skill, or are willing to do something well that your customers don’t want to, you can start with 0 dollars.

  2. Lots of time with customers - If you don’t know what your clients need, you have to spend time with them to figure it out. When I launched my consulting business I did data analysis for free to figure out a service. It turned out no one wanted that, which leads to the next point.

  3. Easy to Pivot - You can change direction very quickly with a service. There’s no code to rewrite, or inventory that needs to be moved. You just have to launch a landing page. After I tested data analysis, I got no buyers, so I pivoted to helping entrepreneurs increase profit. Sales went up.

  4. Fast Cashflow - Because of how quickly you can get going and get paid, services are much better for cashflow than products. Especially at the beginning of a business, you have more hours than dollars. That can be a hidden advantage instead of a constraint!

Products

In a product business, you take a discreet problem and solve it for your customer, instead of spending your time to solve it for them.

Products can be split as well into two broad categories.

Physical goods - These are obvious. It’s the stuff we buy from stores and brands we love. Physical goods have lower margin because you have to A.) purchase inventory, B.) store it, and C.) get it to the customer. This could mean either having a storefront or shipping it to them.

Digital goods - This includes software, but also courses, guides, e-books, memberships — basically anything that is composed of computer code, rather than real world atoms. Digital goods have much higher margins because you don’t have any of the costs I listed above for physical goods.

Product businesses are excellent for three reasons.

  1. Leverage - It might take me 10 hours to do a financial analysis for a client. Suppose I can work directly for 4 clients a week. That is 40 labor hours.

    But what if I can make a product that does the financial analysis for the client?

    It may take 1000hrs to create and launch the product, but through distribution, I may be able to reach 10,000 clients. Using the service framework, that would be equal to 100,000hrs of work. The difference there is leverage. With products, you create leverage.

  2. Distribution - You can distribute a product much easier than a service. There are far more logistics involved in setting up the timing of doing the “job-to-be-done” for a service than for a product.

  3. Repeatability - There is little variability for products, which leads to a more uniform customer experience. This is not the case for services.

Taken together these reasons make product businesses much more scalable than service businesses.

Service

Product

Money to launch

💲

💲💲💲

Time with customers

⏰⏰⏰

Potential to scale

🚀

🚀🚀🚀

Ability to pivot

🔄🔄🔄

🔄

Time to cashflow

Short

Long

How to apply it.

But, as with most things, the greatest weakness is often the opposite of the greatest strength.

Service businesses are easier to pivot and launch. But they’re harder to scale.

Product businesses are easier to scale. But they require much more cash-flow negative work to get going. They are hard to start.

Fortunately we can use this to our advantage.

If you are having difficulty with cashflow — consider launching a high margin service. You can probably launch this month.

If you are having difficulty scaling your service — consider taking a piece of your solution and productizing it. This could be either a “hands off” solution, where it’s totally in the hands of your customer, or it could be a productized-service, where you offer the same thing over and over again.

Either way, there are paths available for you to grow a highly profitable business. Adding a high-margin service or digital good is probably a solid bet.

If you need a brainstorm to help you figure it out, try adding in your specifics to this prompt. Just copy and paste this into your fav LLM 👇🏻

Your AI Prompt.

“You are going to respond as a management consultant who has decades of product and service development experience. You will use a zwicky box to help me brainstorm new ideas to quickly add positive cashflow to my business. Your focus is on increasing profitability. My core customers, their primary problems, my main offer and their ability to pay is below.

Core customer -

Main problem -

Main offer -

Ability to pay -

Assume that I am an expert in my business and know my numbers. Ask any clarifying questions you need to get to the best possible answer. Take a deep breath and solve the problem step by step. “

Back to our question:

What company that now turns “tens of millions in profit” started as a small web design agency and before launching their first product?

Answer?

37signals, who is more well known for their flagship product Basecamp. Jason Fried and David Heinemeier Hansson started 37signals as a web-design agency. They did high-margin service work for clients, before building products, on which they grew their company. While private and not required to report their numbers they are very vocal about taking almost no investment and pulling “tens of millions” in profit off the business each year. They bootstrapped it the whole way, using high-margin services to get cash flowing.

It’s cool to be profitable! 😎

Catch you next week!

-Nate

Whenever you’re ready, I help bootstrapped entrepreneurs increase their profit in two ways.

  1. If you are trying to figure out a product or service launch, the 1-hour, 1-on-1 might be right for you. These are best for businesses in the launch stage, usually under $200k in revenue. It’s amazing how much we can get done in an hour.

    Book your call here.

  2. I have 1 spot available for coaching. I got off a call today with a client who, since starting the program, has had a 533% increase in profit on a $1.6M business. The program is a cross between coaching and consulting, it includes 2 major deliverables and 12 weeks of 1-on-1 coaching with me. It’s closed for the summer months, so if you’re on the fence get in touch right now. These are best for more complicated businesses that are scaling, usually between $200k and $1.5M.

    Book a call here. First 45 minutes is free.

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Simple Strategies is written by Nate Pinches.

He did an MBA so you don’t have to, has consulted for over 50 CEOs and has worked on AI projects for 6 years.

He lives with his wife and kids in Okinawa Japan.

definitely not an AI bot

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