The Difference Between Product and Service Businesses

October 13, 2020

By: Lee LeFever

I write books and run a company called Common Craft. I recently moved from Seattle to a rural island. Here, I write about online business, book publishing, modern home construction, and occasionally, dumb jokes.
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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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