Pros And Cons of Product-Based and Service-Based Business

Entrepreneurs have two roads to choose from, either beginning with a product-based model or with a service-based business. Both types of businesses excel and can be highly profitable. Let us understand what the two models entail and discover the pros and cons of each. 

What are Product-Based Businesses? 

Product-based companies usually introduce or produce a new product in the market. Businesses these days are in a constant race to produce top-rated high-quality products. Besides this, product-based companies keep on adding new features and implementing new technologies to improve the overall quality of the product. 

What are Service-Based Businesses? 

A service-based business aims to provide the end customers or the clients with a solution. They may use their expertise to further help the end users. For instance, service-based businesses include companies such as Tata Consultancy Services, and Wipro, or marketing agencies that aim to help their clients. 

Product-Based Business: Pros 

Choosing a product-based business may require you to deal with critical aspects such as money management, product development, client relationship, and work environment. Let us discuss the pros and cons of forming a product-based business compared to a service-based one. 

Innovation 

A product-based model will give you complete freedom to choose, innovate, and experiment with ideas. You will not be limited to a specific range of categories or features to incorporate. You may decide to go ahead with your creativity and innovate something new that the target audience will like.  

Scalability 

Scalability is one of the factors that gain faster impetus in a product-based model than in a service-based one. You can scale even with a limited number of employees and members in your team. On the other hand, catering to more clients will require employees in a service-based business. This can create obstacles and may limit the growth opportunities for such businesses.   

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Recurring Revenue 

By selling the products, you may be able to generate good revenue. Ensure you focus on marketing and sales strategies to promote the business. 

Ownership  

As a business owner, you will always have complete rights over your business idea and product. You are the original creator and can always claim intellectual property rights. If somebody attempts to steal the idea, make sure you raise a complaint against them. 

High Valuation  

Over time, the capital of the company may increase with increasing sales of the product. Many companies sell their IPO (Initial Public Offering) to allow the public to hold shares of the company. It is one of the effective ways that may help increase the overall worth of the organization and generate extra revenue. 

Product-Based Business: The Cons 

Choosing a product over a service-based business may sound exciting if you want to introduce anything new. However, it can have various cons that you should know before finalizing the model. 

Risky 

You will have to put a lot of time and attention into conceptualizing and developing the phase of the product. It can be extremely risky as it cannot be guaranteed that people will buy your products. There are chances that the target audience may stay loyal to the competitors. To reduce the risks, you must conduct proper market research and analysis to understand the audience. 

Dedicated Customer Service 

Your customers will require support from you. Most companies have implemented 24*7 customer services to provide assistance to customers. Small businesses and startups may find it challenging to spend and provide effective customer service. One should consider this aspect before choosing between a product vs. service-based business. 

Upfront Money is Required 

Businesses require investment, and a product-based business may require more money to operate. You will most likely need investors or a loan to collect the upfront money. 

Service-Based Business: The Pros  

To run a service-based business, you should have some skills, expertise, and amenities. These enterprises do not come into the picture until the client has a problem. Let us discuss the pros of a service-based business to have a better understanding. 

Minimum Capital 

You will not require huge capital to initiate a service business as compared to product-based ones. You can even work alone in the initial stage while building the company. Once you start hiring, you will have to bear the office and employees' costs. You may implement remote working to further reduce costs.  

Something New, Every Day 

In a service-based business, you will have the opportunity to work with various clients. Therefore, you can be assured that you will always have something new to look up to every day. Different clients may have additional requirements and ways of working. Working on other things will keep your brain active and make the work environment more lively. 

Pre-Existing Markets 

The number of businesses that need solutions never ends. For instance, a firm that launched new products in the market may need cyber security solutions or marketing assistance. Therefore, the opportunity always exists for a service-based business. You might have to struggle a bit to get your first client as it may take time to build trust. 

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Service-Based Business: The Cons 

It is a conventional way of working, and you can earn well if you choose the right market. However, there can be specific cons that you must be aware of before deciding on a service-based business. 

Hard to Scale 

Agencies or consultancies may have to hire more people to get the work done. This can make it a little hard to scale. If a company hires more people to deliver the task, it may also have to deal with various other expenses. 

Limited Creativity  

You may have to restrict your creativity and start thinking the way the client wants. In a way, your work and creativity may entirely depend on the client's requirements. 

Client Communication is Time Consuming 

Having just one or two clients may not help you make profits. You will need to have multiple clients to generate a good amount of revenue. However, this may lead to a need to communicate with different clients. Staying in touch with each client can be a time-consuming process. There are chances that you may spend most of your time answering phone calls and emails, which may impact your personal time.  

Little or No Revenue 

The payments are directly related to the number of deliverables and milestones. You may have no source of revenue after the service is delivered in a service-based business. Aim to serve more long-term clients to have better income.  

Both product-based and service-based business models have specific benefits and limitations. Whichever path you choose, focus on catering to your audience and try to find ways to minimize the risks associated with running a business.