Let us begin with a caveat. For a company that manufactures a particular product, service is still an integral part of its business. For a service business, the service itself is its product. There is a need to distinguish between the service aspect and the product aspect of a business. The primary difference lies in the fundamental of service as a product and service as a service. Let us delve into the details to understand the assessment of service business vs. product business.
- There are companies that manufacture products but don’t necessarily offer any service. For instance, companies making roofing materials are responsible for the research and development of various materials, prototyping, testing, manufacturing, sales and distribution. The roofing materials are primarily used by roofing companies or roofers. The installations of materials, repairs, replacements, upgrades and even upkeep are catered to by roofers. Hence, the roofers are a service company. Their expertise is limited to everything associated with roofing but not manufacturing the materials. However, there are roofing companies that manufacture the materials and also attend to installation, repair, replacement and upkeep through a network of certified roofers or franchise. In this scenario, the same company is a service business and a product business.
There are many such simple examples that can be used to understand the basic assessment of service business vs. product business. The local convenience store is a service business but the companies making the goods sold at the convenience store are a product business.
Both service businesses and product businesses have their fair share of advantages and disadvantages, or rewards and challenges. Here are some of the pros and cons of both.
- A service business can be easier to start because making a product often involves a substantial capital investment. It is a high risk business plan but it also has high rewards. Service businesses usually have very little operating margins because most of the costs are overhead expenses. Product businesses can have higher than 50% profit margins while service businesses can have as little as 5%.
• A service business is more demanding because a company has to be perennially available catering to the needs of the customers. A product business can make a sale and may not have to keep attending to anything else, unless there is a problem with the product. Also, many product businesses outsource their services or servicing tasks to third party organizations