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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A Lifestyle Tip From Einstein

A Lifestyle Tip From Einstein

From The Guardian:

A Japanese courier arrived at the Imperial Hotel in Tokyo to deliver Einstein a message. The courier either refused to accept a tip, in line with local practice, or Einstein had no small change available.

Either way, Einstein didn’t want the messenger to leave empty-handed, so he wrote him two notes by hand in German, according to the seller, a relative of the messenger.

The handwritten note from 1922 recently sold at auction for $1.5m. The note described Einstein’s theory for living a happy life. It reads:

“a quiet and modest life brings more joy than a pursuit of success bound with constant unrest”.

Well said. This is Einstein and his second wife Elsa in 1921, a year before he wrote the note and won the Nobel Prize for Physics:

Big Enoughness

Big Enoughness

A recent New York Times article called “Want to Make It Big in Fashion? Think Small, Like Evan Kinori” introduced me to the term “enoughness”.

It was in long-ago 1973 that the economist E.F. Schumacher first published “Small Is Beautiful,” a seminal (and, to the surprise of some, best-selling) collection of essays critiquing Western economics. Mr. Schumacher was among the first to champion sustainability, localization, small-scale industry and “a humane employment of machinery” to yield a more benevolent form of capitalism, one that utilized human effort and ingenuity for the common good.

“Enoughness,” was a Schumacher coinage. Plenty of abuse was heaped on him at the time — mainly he was attacked as an unprogressive Luddite — yet these days his ideas seem prophetic. Maybe it took a worldwide pandemic to remind us that the antidote to too-muchness may be enoughness. Small may be beautiful, indeed.

This, of course, is music to my ears. Big Enough is an ode to “enoughness” and the belief that it’s time for people to think differently about success and how to achieve it according to their values.

Learn more about Schumacher’s Small is Beautiful.

Big Enough: A Balance of Ambition and Happiness

Big Enough: A Balance of Ambition and Happiness

I love this quote by Bill Watterson, creator of Calvin and Hobbes, which I found through James Clear’s newsletter:

“…having an enviable career is one thing, and being a happy person is another. Creating a life that reflects your values and satisfies your soul is a rare achievement. In a culture that relentlessly promotes avarice and excess as the good life, a person happy doing his own work is usually considered an eccentric, if not a subversive. Ambition is only understood if it’s to rise to the top of some imaginary ladder of success. Someone who takes an undemanding job because it affords him the time to pursue other interests and activities is considered a flake. A person who abandons a career in order to stay home and raise children is considered not to be living up to his potential-as if a job title and salary are the sole measure of human worth. You’ll be told in a hundred ways, some subtle and some not, to keep climbing, and never be satisfied with where you are, who you are, and what you’re doing. There are a million ways to sell yourself out, and I guarantee you’ll hear about them. To invent your own life’s meaning is not easy, but it’s still allowed, and I think you’ll be happier for the trouble.”

Source: Some Thoughts on the Real World from One Who Glimpsed it and Fled

In the years leading up to writing Big Enough, this perspective became more real to me. I have always been ambitious and I continue to be. What has changed is the focus or desired outcome of that ambition. I came to see that I could be happy and satisfied by defining my own measures of success and pursuing what made me happy. For me, it meant thinking smaller and more home-based. It meant becoming more satisfiable.