Product vs. service business: which one should you start?

Hey UpFlipers,

A key question many new entrepreneurs ask when picking a business model:

Do you start a product or service business?

First, we need definitions.

Products are tangible objects you can physically hold or use, like water bottles or fitness supplements.

Services are intangible things you provide or perform for someone else, like car detailing or landscaping.

This core difference causes drastic differences in how you start, grow, scale, and even exit the business. 

Today’s newsletter will highlight these differences to help you pick the best type for your skills and goals.

Let’s get into it…

7 key factors to decide between product or service business

Product businesses don’t directly trade your time for money, but there are several other pieces to master to get a product business right.

Service businesses do sell your time and skills for money. So they’re easier to start, but they have growth challenges product businesses don’t deal with.

That’s the high-level difference. Let’s see what this looks like across several areas:

Both business types generally require a computer and Internet. But product-based businesses can be more expensive up front.

Product-based: You need things like:

• Initial inventory

• Storage

• Equipment (if making products)

• Online storefront

White labeling (selling a generic product with your branding) can make things cheaper, but you still have to purchase and store inventory.

Dropshipping can reduce some of these costs, but there are other mistakes to watch out for.

Service-based: These tend to have lower startup costs. You don’t even need a website, believe it or not. 

For example, this Spruse Clean, a $62,000/month cleaning business, started on just a few hundred dollars for supplies.

And that’s on the high side of service-based startup costs. Plus, from what we’ve seen, cleaning businesses are some of the most profitable service businesses — and this course will show you how to start one today.

(If you don’t make $10,000 within 90 days of starting your cleaning business after taking that course, you get your money back.)

In many cases, you can start a service business for free!

All you really need is your computer. If you already have one, then, well, your startup costs are $0.

As you grow, you might need to spend a few bucks on software. But you’ll have money then.

2. Margins and scalability

Both business types offer paths to scalability and profitability. Those paths are different.

Product-based: Narrower profit margins, thanks to the Cost of Goods Sold (COGS). COGS is the costs that go into making/acquiring the product.

However, scaling physical products is easier. You can grow quite a bit before making your first hire. 

You don’t necessarily have to “undercut” the competitors initially, either. In fact, competing on price can be a race to the bottom.

Service-based: Much larger profit margins up front, but scaling is harder. 

For one, you may have to start at lower pricing since you’re “unproven.” Unlike product businesses, you could charge more than competitors if you get the marketing and audience right.

As you grow, scaling depends more on hiring others to fulfill work while you manage and lead.

3. Marketing, sales, and acquisition

Product-based: Organic networking is on the menu at first. Tell family, friends, and try to get your store name out there. Optimize SEO. Focus on building a brand that people trust.

Sales will be more unpredictable at first.

Once you have the money, though, paid ads (Facebook, Google, X, etc.) become the name of the game. If you can put $1 into an ad campaign and get more than $1 out, you’ve basically unlocked success.

Want more customers? Crank up ad spend on your successful campaigns.

Want fewer for the time being? Cut ad spend.

Service-based: Networking, SEO, social media, and authority-building can start and grow lead flow. Doing great work and referrals help cement it. Clients eventually come to you. Then, you can start raising your rates.

More work up front, but less worry about ad spend.

Remember: These businesses need lots more face-to-face contact during the sale and/or service. You must be comfortable with rejection and excel at interpersonal communications.

As for tactics, provide samples of work at first. Then, turn your initial projects into case studies and a portfolio.

Get involved in groups of fellow service providers and, if possible, in groups with your target customers.

4. Customer retention and relationship-building

Product-based: Building brand loyalty through great products, strong customer service, and retention-focused marketing. Retention-focused marketing strategies can include:

• Email marketing (perhaps the most important)

• SMS marketing

• Retargeting ads for past customers

• Community-building

Check out this interview for an awesome example of a company killing the customer retention game.

Service-based: The focus is on building trust and strong personal relationships while delivering high-quality service. 

Depending on your business, it could also mean expanding into higher-level or more comprehensive services.

An example from my own experience: Helping a client write an email campaign, then setting up a monthly retainer agreement for email strategy.

Service businesses tend to lean on long-term clients more strongly.

Once again, you must be comfortable with frequent face-to-face communications.

5. Operational challenges and solutions

Product-based: Below are a few product-based operational considerations:

• Supply chain logistics: What happens if suppliers run out of stock? Or if the world shuts down again?

• Inventory management: Too little = angry customers. Too much = cash tied up in unused inventory.

• Product innovation: Products can become obsolete. Competitors emerge with better offers (or try to “swipe” your business model from you). How do you set your products apart?

• Regulations: Does your product or niche have regulations regarding manufacturing, consumer safety, claims, etc.? If Facebook/Google takes down your ads, you can lose your revenue overnight. Not to mention legal issues.

• Tech problems: What happens if your site goes down? That’s a ton of potential sales lost. Product-based businesses generally require more tech savviness, whether you or someone you hire.

Service-based: Here are some service-based operational considerations:

• Time management: How do you manage time across clients and projects? What about the non-billable stuff, like bookkeeping, content, networking, etc.? 

• Feast and famine: What happens when you have no clients? How do you prevent yourself from having too many and burning out?

• Service quality: How do you deliver awesome results consistently? Do you have a system? Are you targeting “ideal clients” or anyone that comes your way?

• Client roster: Are you too dependent on one client? Are you spread too thin among too many? 

• Regulations: Do you need licensure? Are there certain rules you must follow?

6. Adaptability and flexibility

Product-based: Inventory (and manufacturing, if applicable) make it harder to adapt to changing circumstances.

You can adapt your marketing and add new product lines, but more time and money investment is involved.

As for location, you can work remotely in many cases. Even if you own a warehouse, you don’t have to be there.

Service-based: Easier to adapt for some services (like freelancing). If you aren’t good at one service or don’t like it, you can drop it for something else earlier with minimal losses.

Even when you’re more well-known, it’s not difficult to adjust current services, pivot to new ones, and find new clientele to adapt to market trends.

These ones may not start location-independent, though… but there are ways to make them remote. Here’s an interview with a cleaning business run entirely remotely.

7. The long-term and exit strategy

Maybe you want to run this business forever. Or perhaps you eventually want to sell for a fat sum.

That process differs for product and service businesses…

Product-based: Generally, the longer-term path for product businesses is easier. Add some back-end products for existing customers, build customer retention, and scale acquisition with those extra retention dollars.

You can get far without a single employee (unless you want your own warehouse and everything). Maybe a virtual assistant and a tech whiz as contractors.

To exit, you can sell the company or merge with another. 

Exiting tends to be easier than with service businesses since product businesses: 

• Have more tangible assets

• Physical products are more easily replicable and scalable

• The biz operates independently of the owner’s skillset

Further: If you can make your ad campaigns profitable, you can often sell for a LOT more. Revenue becomes more predictable.

Service-based: Can diversify services, continue hiring, and offer info products (courses, books) for “passive” revenue. Another option, for certain people, is to take a “stake” in client businesses — you grow their business, you make money.

Exiting a service business is harder since services are intangible and depend more on your work/skills. 

Think about it: Hard to sell a lawnmowing business if it’s just you mowing lawns.

Standardization/systematization are key. You need a predictable process for delivering consistent results to scale and sell the company. The systems must work the same regardless of who’s running the biz.

1 number that beats all else… whether you pick product or service

Would you rather work 40 hours/week to hit $15k/month… or 20 hours a week for $10k/month?

Let’s do the math:

Business 1: 40 hours/week is 160 hours/month. $15k/month divided by 160 hours/month = $93.75/hour.

Business 2: 20 hours/week is 80 hours/month. $10k/month divided by 80 hours/month = $125/hour.

I’d take the second one because I’d earn a higher Effective Hourly Rate (EHR).

I’m earning less… but I can up my monthly hours to 120 to hit $15k/month. I work 10 hours/week less than Business 1 for the same money.

Look: You only have 16-18 waking hours a day. And not all of those are productive work hours.

Whether you sell a product or service, raising your EHR squeezes the most out of those hours.

After all, many of us get into business to escape the long days. You can’t keep trading your time for money forever.

How EHR looks (and differs) in product and service businesses

EHR looks a bit different in product and service businesses. Let’s take a look…

EHR in product businesses

EHR in product businesses is less tied to time spent working. 

Calculating it involves factoring in time spent managing inventory, dealing with suppliers, and handling other product-related matters.

At first, it’ll be really low since you won’t be earning a lot regardless of how many hours you work per day. 

However, it can increase drastically once you nail your core offer, solidify a strong target audience, and set up automated marketing campaigns (ads, emails, etc.)

You can sell many more units in the same amount of time, meaning more revenue and potentially more profits. 

This interview gives a great example of how an eCommerce company was able to grow their EHR over time.

EHR in service businesses

Start with your desired EHR. 

Then, estimate how long it takes for you to complete one job.

Multiply the two numbers.

We know this works because Alan, owner of $75k/month car detailing business GoDetail, started this way.

He wanted to start at $50/hour. An average detail job took him 3-4 hours. He set his price at $150 - $200, depending on the vehicle.

As demand grew, he just raised his rates per job until demand slowed. Rinse and repeat.

Check out our interviews with Alan here (part 1) and here (part 2) for more on his journey from high school to $75k/month.

To wrap it all up…

The verdict is in:

Neither is “better” than the other.

It depends on what you’re looking for.

Want something inexpensive, easy, and flexible up front… and willing to work extra to grow/scale later? A service business might suit you.

Want a more scalable and saleable business… and willing to risk money and deal with more obstacles early? A product business might be up your alley.

The common denominator between these business types:

Hard work and smart choices.

The former can only be done by you. But you can always get help — such as from us — in making smart choices and avoiding mistakes.

Our Ultimate Guide to Starting a Business is a great place to start.

You got this!

Woah, check these out…

📈 7 growth strategies for new and existing businesses alike.

💰 ⅛ of ALL US jobs are sales positions… great place to hone sales skills critical for business!

🔥 Skip the sexy business models and “bore” your way to riches.

🎙️ Catch our latest podcast episode for more business inspiration.

There are three ways to join UpFlip:

 ✔️ Check out our free 7-Figure Cleaning Business Blueprint course.

✔️ A day in the life of Cristobal Mondragon, owner of 7-figure Queen Bee Cleaning Service and our Cleaning Business Masterclass teacher.

✔️ Check out our YouTube community and be the first to catch new interviews with inspiring entrepreneurs.

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