Product Business vs Service Business. What is the difference? Which one is better?
I sometimes, when the mood is right, tell people I had two businesses. If questioned further, I will tell them one was a gym and one was a manufacturing company. And at one point I was running both at the same time.
First came the gym. A purely service based business. In order to make money I had to go to my building, open the doors, turn on the lights, and provide the service. That is a 100% service based business. A bad business to be in. Maybe with some tweaks to the business model, revenues and profits could increase, but only to a point. Only so much money can be made in businesses like these.
Two years after I started the gym, I had a flash of brilliance and opened another business. Because of course one small mediocre business wasn’t enough. Why not have two (sarcasm is my coping mechanism)? I didn’t know much back then. Or maybe I did but the confirmation bias was too strong to resist.
I called this second business a manufacturing company. I was stretching polyester mesh over aluminum frames. At the time I considered this “diversifying.” I had a service based business, and now with this manufacturing company, I had a product based business. Technically that was true. It was a slight upgrade from the gym in that respect, but my issue was with the business model. But I’ll save that for another post.
What’s the difference
A service based business is valued less than a product based business. But how do you know the difference? The main difference is that a product based business is not “open to the public.” Meaning they don’t need to be open to accommodate the public. Service businesses have to be open in order to service the customer. Many small businesses fit into this category. Think stores like your local flower shop, grocery story, gas station.
On the contrary, a company who is 100% product based does nothing but collect revenue. Everything is outsourced. The only thing the company does is connect makers to buyers. Ebay comes to mind. So does Uber. And there are various levels in-between. The company I work for does something similar but is more involved in the manufacturing of the product.
My work is product based
My work is a great set up. I manufacture a product and ship it to customers, but I never see the product. I purchase all the raw materials and ship them to a manufacturer. After the product is made it gets shipped to a logistics company. They break it down into smaller packages and process the orders. At the end my customer sends me the check. I don’t do any physical labor and I don’t have any buildings. I work from home and I make my own schedule. I could even automate my tasks further and hire a company to process orders and collect receivables. I might even be able to get it down to less than a four hour work week.
Let’s look at some examples:
Restaurants. I consider restaurants a service based business. Even though restaurants manufacture a product, it requires a huge team of humans to deliver the product. And they have to be open in order to deliver the product and collect the money. Now let’s contrast this with a frozen pizza manufacturer.
Frozen pizza maker. I consider this a product based business. Even though it is still food, the business model is totally different. The main difference is the pizza maker doesn’t need to be open in order to deliver the product or collect the money. They open only to make the product and once the product is made, they ship it to stores for them to deal with distributing the product and collecting the money. Let’s look at another example.
Gyms. Gyms are worse than restaurants. Let me be clear that I am not talking about your 24 hour fitness. I’m talking about Jan’s Yoga Studio. Gyms like 24 hour fitness created a business model around memberships. They get their money if you come to the gym or not. And it takes very little humans to deliver that product and collect the money. And even though 24 hour fitness has a capacity, they never reach it because not all the members use the membership at the same time. And that is a part of their business model. Jan’s Yoga Studio in contrast, can’t operate without Jan. Jan needs to show up, open the doors, turn on the lights, fire up the music and teach the classes and collect the money. And Jan can only teach so many classes with so many people in each class. This contrast is exactly the reason why 24 hour grows and Jan shrinks. Different business models, different results.
If you have customer service, you are a service based company.
You thought you were off the hook because you are a manufacturer of widgets and sold through distributors. Nope. If you have customer service you are a “service based” company. Does that mean you are doomed? Not necessarily. Once you recognize that you are a service based company, double down on that.
Customer SERVICE
Customer service is the most complicated part of the business. And the more it can be reduced, the more the business turns into a product based business. To a degree, the service part of a business can never be 100% removed, because at some point, contact will have to be made to the outside world. But the goal is to streamline this process as best as possible. Streamline the connection points. Whenever the company needs to communicate with someone outside of the company, make this as efficient as possible. Because this is a very dynamic part of any business.
Your customer service department is the connection point between you and the public. It is the most volatile and time consuming portion of your business. It needs to be systematized and optimized. It deserves your full attention. It deserves to have qualified people run that department. The worst thing to do is outsource it to an answering machine.
I feel a lot of companies miss this important point. Running the day to day of the business is one thing. But once you add the variable “C” for customers, so many different versions of a typical day get created. Customer service needs to have dedicated people to run it. It can’t be outsourced. Or can it?
Outsource your customer service
If you have a customer service department, can you dump it off to a company who specializes in customer service? It’s an idea worth considering. I am sure there are ways to pull it off. And once customer service is off your hands, you get the wonderful business that you always dreamed of. A business where you can focus solely on delivering value. But interestingly, customer service only needs to be a person with a computer and a phone. These people can work from home. Cost can be reduced by having these employees work from home.
Now
So here I am, 7 years after I started my gym and 2 years after I sold it and 1 year after I sold the manufacturing business. Now I can say with confidence, I will never start another business that is required to be open to the public to make sales. It needs to make enough money so I can be replaced. Meaning it needs a system that replaces me for the key operating roles (KOR). KOR includes everything that makes the business run. Most of the time these tasks can be handled by employees. That means the business needs to have enough money or make enough money to afford humans to run it. So in all likelihood, it’s a product based company
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