Some Thoughts on Service Business vs Product Business in Software.
1. In a service business, the customer tells you his problem and you provide a solution. In the product business, you discover a set of customers with a problem and come up with a solution. Or you dream up an idea and find customers who can use your product.
2. In a service business, you build a custom solution that the customer pays for. In the product business, you build a generic solution that you or your investors pay for first and hope that many customers will pay for later.
3. In a service business, the customer gives you a spec. You build to that spec. In product business, there is no spec. You make up one. If you are smart, you may build a minimum viable product and see whether you can get some customers to use it and pay for it.
4. In the service business some of the projects may be migrating from existing systems, improvements to existing systems or just maintenance work. You may be constrained in the tools you use. In a product business you have the freedom of space (domain), architecture, technology and tools.
5. In a service business, some of the risks are mismanaged expectations, communication problems with customer and changing specifications. In the product business your risks are finding your ideal customers and keep delivering superior value.
6. In a service business, you may have a cash flow problem but revenues are predictable, since you will be charging for time spent. In a product business, you don’t have guaranteed revenues unless you figure out the right business model.
7. You can bootstrap a service business with just your skills and reputation. In the product business, your bootstrapping strategy would be to build something valuable and find paying customers quickly.
8. In a service business, there are low multiples. You get paid for the work you do. If you are smart, you will build yourself a set of tools that will let you deliver higher quality systems, faster. In product business, there are either no multiples (if your product does not take off) or high multiples. You have a chance of getting exponential revenues disproportionate with your initial investment.
9. To grow a service business you growth is linear and depends on the number of customers, number of employees and number of locations. In a product business your growth can be non-linear and does not depend as much on locations and employees. There is a much higher dependency on the number of products and customers.
10. In product business, you may be the next Microsoft, Google, Facebook, Salesforce.com, Intuit with millions of users. In service business you will be more like Accenture, EDS, Infosys, TCS. The barrier to entry is much higher in service business than product business (example are Google, Twitter, Facebook).
11. Innovation drives product business. Implementation and Service quality drives service business.
One is not necessarily better than the other. But you will notice that product business requires different company culture from a service business.
This is by no means an exhaustive list. I have taken some liberties and made some grossly over simplified statements. But you get the drift. Please add your comments to expand the list.
Update – Sep 2013
A link to my presentation on why service companies can benefit from a product initiative