As a follow up to What kind of business do you want to start: Lifestyle Vs Start Up I wanted to go through the other big choice you need to make when deciding what type of business you want to start.
As an entrepreneur there are two routes you can take: either a service based business where you trade your skill for money and do work on their behalf or a product based business where you sell products to people for them to use themselves.
Both types of business can be very profitable, and there are millions of both product based and service based companies around the world. However, the money you can make selling a product far outweighs the amount you can make selling a service. Why? One word: Scale.
All of the economy is based on supply and demand and in a service based business you are limited to how much you can supply that means the amount of money you can make is limited to the amount of hours you can work and there are only 24 hours in a day. Yes you can hire other people to reduce the amount of time a tasks takes therefore you can do more, but this is still limited to the amount of hours your staff can work.
Another important factor in deciding which route to take is in deciding where your strengths lay when it comes to managing and running a team. Both service and product based businesses require managing people to some extent, however hiring and managing people in a service based is far more complex and expensive than managing the process of creating products. This is because once you have a system in place for manufacturing your product a large part of the work is already done, the new challenge is drumming up enough demand through sales and marketing.
For my recent Q&A with Guardian Small Business on how to be a good boss click here
Let’s take the example of a web designer, they can charge an hourly fee of £50 and work an average 30 hours a week (even if charging a retainer you can work out the effective hourly fee) that works out to £15,000 a month, pretty good. Now suppose they switched to a product-based model and spend the next 2 months creating a WordPress theme priced at £50 per license. After 2 months 100 themes are sold and over the rest of the year sales grow 30% a month, that’s 4000 themes or £200,000 not only that but because it’s a product they can keep profiting from the initial 2 months work.
So how do you decide? Once again deciding what type of lifestyle you want and personal goals plays a large roll. Because service businesses are less scalable you can start and fit it around your life goals as they require little to no overhead, while products usually requires startup funding if not a lot of time. Either business model is viable but products tend to be much more profitable in the long run.