Starting a business can be one of the most rewarding and challenging things a person can do. But before you start racking up sales, there’s one critical question to answer – what are you going to sell?
Businesses that sell services deliver something non-physical that solves a problem for customers.
On the other hand, product businesses offer tangible goods that buyers can touch and see.
Which option you choose will determine how your entire operation is structured. So which one is right for you? Let’s take a closer look at what are the characteristics of each of these two business models.
Characteristics of two business models
Which Business is Easier to Start?
Many folks starting a new business may not have a ton of resources at their disposal. They may be short on money, time, manpower, or all of the above. How much startup resources you will need is the first part that you need to figure out before moving forward. Because if you don’t have enough resources, then your business idea won’t be able to take off. On the other hand, if you have more than the minimum amount of resources you can potentially accelerate your growth or give yourself more runway to get everything sorted out.
That’s why it’s crucial to understand what are the costs involved in getting each type of business off the ground.
A. Service Business
Service businesses are typically the simplest to start. All you’ll need is a skill that’s worth selling, a website, and a little marketing.
As for the skills, this can be anything from photography to landscaping to business consulting – anything people would be willing to pay you for in exchange for your expertise.
Startup costs are low, usually a few hundred dollars at most. Because of the relatively scant requirements, a service-based business typically gets going faster than a product businesses.
From a tax perspective, it is also a the most simple configuration. An example of a very easy to start service business is driving for a ride sharing platform or offering freelance services to other companies.
However, just because its simple, doesn’t mean that you won’t need any planning. Having a list of prospective customers, a marketing strategy, and a comprehensive business plan are all necessary to make sure your service business takes off and becomes profitable.
B. Product Business
Product-based businesses are generally much more complicated.
First, you’ll need to determine what your product will be and design it. The product development phase is critical in ironing out all the detail of your product before it goes into production. This stage requires multiple prototypes and is part of the upfront investment you need to be prepared to have.
Then, you’ll either need to make it yourself or find a manufacturer, which can be a long process. This can mean setting up a workspace with all the necessary tools and materials. Or if you look for a manufacturer, you need to make sure that you meet the minimum order requirements.
Finally, you’ll have to take care of any trademarking, patenting, or licensing to ensure you have the rights to your new product.
Of course, you also need to take care of the same steps that service businesses do, like setting up a website and marketing your product.
For these reasons, product businesses are typically slower to take from idea to market. They require a large number of business decisions to be made and a physical location that you can operate out of.
Which One Requires More Capital/Risk?
Capital/risk is another crucial factor in determining the right kind of business for you.
For some, it’s a matter of how much money they’d like to risk on their idea. For others, it’s a matter of necessity due to limited funds or an otherwise tight financial situation.
Here are some crucial things to consider.
A. Service Business
As we discussed above, a service-based business doesn’t take much time to get started. For the same reasons, they’re also less capital-intensive.
Starting up a service business may only cost a few thousand rupees/dollars in many cases, and sometimes less! This will cover your:
Website
Initial marketing
Legalities
Office space Etc.
With relatively little money invested, you’ll have a reasonable limit on the amount you can lose in the worst-case scenario. And depending on the type of service you provide, you can also start seeing profits from your completed projects fairly quickly.
B. Product Business
The additional steps required to bring a physical product from idea to reality are fairly expensive ones.
Investing in equipment or placing large orders with manufacturers can tie up large sums of money in your business with no guarantee you’ll ever get it back.
The many potential pitfalls of designing and building a product can also deplete your cash reserves quickly if you don’t manage costs effectively. Then, you’ll be faced with the decision of whether to invest further or take your losses and move on.
All of this gives a product-based business a significantly higher need for startup capital. Additionally, you need to have a good idea of how long it will take to recover your investment or if you foresee needing additional injections of capital at a later stage.
Which One is Easier to Scale?
Companies that are lucky enough to take off, another challenge awaits – taking them from thriving small businesses to bigger, an even more profitable organization.
It’s vital to know that service and product businesses have major differences when it comes to scaling up.
A. Service Business
Service businesses thrive on the customer experience of an employee solving a customer or client’s problem. However, that personal touch can be difficult to replicate on a large scale. In particular if it is the business owner running the core business operation.
Business owners with specialized skills only have a certain number of hours in a day they can work, and may struggle to find similarly competent employees.
This makes scaling up slower and more complicated for service businesses.
B. Product Business
Product businesses also face some hurdles when growing, particularly in ensuring they have the manufacturing capacity to produce the number of items they need. They can also face logistics challenges.
However, scaling up a successful product is significantly easier and quicker once demand has been proven. Think about something like the iPhone; once it became a massive success, Apple was able to scale up by increasing its manufacturing capacity, making it one of the world’s most valuable companies.
Which One Can Make More Money?
When it comes to making real, significant money in the business world, there’s simply no way to do it without scaling.
As we’ve just discussed, product businesses can scale more easily, thereby opening themselves up to exponential financial growth.
Service businesses can face difficulties shrinking costs as they grow, limiting the ability to grow profits as quickly.
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