One of the more important decisions entrepreneurs need to make is about the type of business they’re going to create. More specifically, they should ask themselves if it is going to be a product or service company, as well as whether they plan to focus their business strategy on one-off sales or recurring subscriptions. My background before starting an enterprise web content management software company (which has subsequently spawned a software-as-a-service marketing automation software company) was doing full-service web design and web application development as a solo entrepreneur.
After building websites and doing consulting services for several years in the late 1990s, I knew that I wanted to build a product-based company. Now, of course, choosing between a focus on products or services is a serious decision, with pros and cons for each approach. Let’s take a look at some of the factors that go into the decision making process.
Pros of Product Companies
- Higher margins
- Greater economies of scale
- More appetite from investors
Pros of Service Companies
- Less capital-intensive
- Fewer moving parts
- Potentially profitable from day one
Naturally, many of the cons for products are pros for services and vice versa. I’ve met with two different entrepreneurs in Atlanta over the past few months that have seen the recession seriously impact their services business. As a result, they are now actively working on adding a product component that is delivered over the web for a monthly fee. The goal is to smooth over inconsistent services revenue by adding a subscription revenue aspect to their business. Unfortunately, the grass isn’t always greener on the other side, due to how difficult it is to get a product off the ground and make it commercially successful.
My advice to entrepreneurs is to start with a hybrid approach from day one — do consulting while identifying product opportunities. The benefit of consulting is the ability to pay the bills and to take your time, on your own dime. The benefit of building a product is the long-term growth opportunities and scalability. One major caveat: Consciously prepare yourself and your company for the day that you have to dedicate people to one line of the business or the other. Continuing to have the same people straddle the fence between products and services is a recipe for failure. Good luck!
(Photo: Sarah McD on Flickr)
Ed note: Are railroads in the product or service business?
