The Difference Between Product and Service Businesses

The Difference Between Product and Service Businesses

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If you’ve ever considered starting a business, you’ve thought about business models and how you’d make money. Most entrepreneurial people start by putting their expertise to work in the form of freelancing or consulting. They have an hourly rate and the more hours they work, the more money they make. Whether it’s lawn care or a global consulting company, the business’s income is connected to hours worked. More hours, more money. This is a service business.

Service businesses, and especially small ones, are often an expression of someone’s passion or expertise. They are good at something and see an opportunity to earn a living doing that thing. For some, the business is simply the vehicle for managing the transactions; a detail. Think of a hairstylist, architect, or graphic designer. Their expertise isn’t necessarily running the business, but doing the work.

Product businesses, on the other hand, break the connection between hours and income. Instead of earning income from an hourly rate, humans work to create a product that earns money for the business. These businesses have the potential to earn income far and above the hours that humans put into it. Because income is not tied directly to hours worked, they can scale.

Product businesses are riskier because they often require an upfront investment. A firm might spend a year designing a product only to discover no one wants it. They also require a skill set that’s different from the domain expertise or passion that goes into a service business. The leaders of product businesses often have to be passionate about the product as well as the overall business, which might include engineering, industrial design, manufacturing, distribution, marketing, support, and more.

I think this distinction is both important and useful because it offers entrepreneurs a choice, or a path to follow. Understanding the fundamental differences between the two models can help you consider what business is right for you.

Here’s how I put it in the book:

A service business ties human labor to income. Humans embody the value. More haircuts, more money. A product business breaks that connection. Human labor is still necessary, but it is not tied directly to income. Instead, people work to create a product that becomes the business’s source of income. The product embodies the value and is often regarded as intellectual property (IP). And unlike consulting hours, a product can scale. It helps, too, that products don’t take vacations.

BIG ENOUGH, Chapter 1: More Money, More Hours

Later in chapter 1, I dive deeper into scalability, the realities of product businesses, why they are attractive to entrepreneurs, and what skills are helpful in making them successful.

Learn more about BIG ENOUGH.

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12 Years of the BIG ENOUGH Perspective

12 Years of the BIG ENOUGH Perspective

In Big Enough, I tell the story of reaching a breaking point in 2008. Sachi and I were burned out and tired of ambiguity about where Common Craft was headed.

It was time to make a decision and start putting a plan into action. The path we chose that day was to focus all our efforts on building Common Craft around our original videos and phase out custom videos. Starting then, we placed a long- term bet that we could make Common Craft a company of our own design. We would be in the product business and earn a living based on our intellectual property.

Big Enough Chapter 6 – Designing for the Future

At the same time, I was writing a series of blog posts called “Being Lightweight” where I explained how we were thinking about Common Craft. In a post called Being Lightweight – Business Design, I shared 13 points related to a business that I would now call Big Enough. Here are a handful of those points:

Two People – We are dedicated to being a two-person company without employees. This is a fundamental constraint that guides nearly every decision. By making our size the priority, we have been forced to think hard about what is possible for two people and be prepared to focus on opportunities that work within this constraint.

Balance – We don’t believe in working 80 hours a week, 51 weeks a year so that you can vacation when you’re old.  We work more hours than most, but we’re not bashful about making sure that we live a fun, interesting, and balanced life. Lightweight businesses make this easier.

Limited Layers – Each person who handles a product on the way to the consumer adds weight and removes reward.  We look for the best ways to get our product from an idea to the customer as directly as possible.  Outside of us, Common Craft doesn’t have salespeople, distributors, marketers, or support reps.  We do it all, A-to-Z.

Supporting Two People – At the end of the day, we remember that we are two people.  Sure, our model may not enable us to dominate markets or become a Fortune 500 company, but that’s not our goal.  We need our business to support us and the life we want to live.  

Common Craft Blog: Being Lightweight – Business Design, July 2008

I provide these points as evidence that Big Enough isn’t a brainstorm, or a trend that we recently noticed. We’ve been at it for over 12 years and have stuck to the same constraints we agreed upon back then. Being lightweight and Big Enough is who we are.

Learn more about Big Enough.