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Pros & Cons of Service Based and Product Based Businesses

By Oliver Johnson|14th Jan 2020
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As a businessman, there are two roads that you can take, either you can form a service-based product through which you can make money out of your skill or knowledge, or you can create a product-based business where you can sell your product to other consumers. It has been seen that it takes comparatively less money to start a successful service-based business and also has a smaller upside in considerations to scale unless you can increase the service offerings on a repeatable basis. Contrary, a successful product-based business potentially takes more money to initiate but has more upside regarding scalability. You can design a single product and reach out to thousands of customers. 


However, both types of businesses can be very profitable, you can see millions of service-based and product-based businesses all around the world. Anyhow, the amount of money you can make by selling a product outweigh the amount of a service-based business. 


Still, a decision to form a product-based business will demand you to work through a number of things. Such as money management, client relationship, and also work environment. To help you out with weighing out the different aspects of each type of business, in this article we have put together some of the key pros and cons to consider while making a decision. 


Service-Based Business

PROS

  • Minimum Capital to begin with: You just need to cover the cost of your workforce and overheads. Even these costs can lower down if you manage to work out with remote teams through staff time tracker. Though if you are starting out as a single person, at initial stages you can work as a sole owner who works from home and puts in as little as a couple of hundred dollars for the sake of marketing that includes a website, brochures, and 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. While producing new pathways with the product can steer you into unknown territories. 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 bore 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 who 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 to 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 directions, in the end you are working on someone else’s specifications. Even your client’s vision may go against your proficient opinion, the customer is always right.


  •  Time loss in communication: Managing the number of clients, their phone calls, emails, and other ways of communication with customers can cost you a lot of time. These things cause low productivity and taking 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 appraisals: There are a number of factors that go into your work valuation as a service business. That includes earnings before interest, taxes, depreciation, and amortization, or even multiple of profits. These things depend on your market position, yearly growth, and management team. A strong business with a well-maintained market position can see multiple profits as high as 8x profits. 


Product-Based Business 

PROS 

  • Extensibility: Developing products and selling is much easier and cost-effective to scale them or extend them, as in such business growth doesn’t require a large number of employees, bigger office, or other overhead. You can scale business on 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 one you have a good grip on your pipeline, and can maintain cash flow on predicted sales and average regenerating rate. 


  • More 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 $1000 in monthly recurring revenue (MRR) is able to be valued anywhere near $7 thousand to $10 thousand. 


Cons


  • It is a risk: You will have to put time and investment ahead of time during the developing phase in the hope that they will cover-up. However, there is no guarantee that people will purchase your product as predicted, and you might have no idea what they will demand, particularly when you are launching an innovative thing. Researching a market can only help you on minimal phases, and in the end, you are working on a tortured guess. It’s like more of a gamble. 


  • Cash flow is a necessity: Business that is product-based requires continuous investments to launch and grow the business. It is very likely that you will be needed to put your own money maybe even apply for a loan, or look for investors. 


  • 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 phones, emails and etc, though they will be time-consuming and on special even you need to have the capacity to deal with the rush of clients. 


Conclusion

Whichever path you choose to pursue, just remember to keep your primary cost low, find ways to leverage the competence of others, and lower down as many risks as possible. The real success as a business is satisfying your clients better than your competitors.                                                                                                                                                                                                                                                                                                                          

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