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Naresh Jain's Random Thoughts on Software Development and Adventure Sports
     
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My Take on Services vs. Product Company

Risk and Reward goes hand-in-hand: Overall Services business pays fairly well and its relatively less risky. Product companies have to face all kinds of risk. Starting with what to build, how to market it, how it price it, how to sustain it and so on. But if you can figure out answers to these questions, then Products do pay off really well.

Business Model: Services has a straight forward model. Increase per head revenue and increase head-count. It also has a fairly predictable cash flow. You bill for the time your spent. Product companies have complicated business models. There is very little co-relationship between time spent and revenue. Figuring out the right business model for your product is in fact one of the biggest challenge.

Lifestyle: Services can be extremely stressful or extremely easy going. Depending on the nature of the service, you could have very unpredictable work flow. Causing work to come in unsustainable batches. Usually services involves quite a bit of travel. Generally not good for family life and health. On the other hand, Product developer is usually stressful, but predictable. Lot better on family life and health.

Growth: Services provides you a linear growth path. It depends on the number of customers, number of employees and number of locations you operate in. Product companies usually follow a non-linear growth path. Growth really depends on the value created by your product for the consumer. There is no direct relationship between growth and number of employees or locations you operate in.

Valuation: In services companies, its employees and customer-base are its real assets. If employees are gone, the value of the company is almost zero. For product companies, the product itself is an asset. Good customer-base certainly increases the valuation of the product.

Customer-base: Usually services (at least consulting and training) companies have to deal with dysfunctional organizations (mismanaged expectations and huge communication problems). Working with dysfunctional companies is very depressing and there is not much to learn. And hence not very motivating. Building our own products at least shields us from some of that.

Freedom of choice: In services, you need to work inside the constraints of the client. There isn’t much freedom in-terms of tools, domain, technology, etc. Product companies usually offers a much broader choice. Which usually leads to more experimentation and more accidental innovations.

Bootstrapping: Good skills and reputation is enough to get started in services. It can be gradually scaled out. You can be cash-flow positive from day 1. However for product companies, getting to positive cash-flow takes time and effort. Finding paying customers quickly is hard. In general bootstrapping a product company is a lot harder.

Innovation: Both services and product companies thrive on innovation, but they are different kinds of innovation. Services is driven by innovation in implementation and service quality. While in product companies lot more innovation is required in ideation and in scaling.

Employee’s Attitude: In Product Company you generally Live to Work, whereas in Services Company you could Work to Live. At a Product company you feel your Product is like your own baby, in Services Company you are just Baby Sitting.

  • Raazik

    This article couldn’t be more off the mark.

    OECD numbers show that 60% of economic activity in the US is services based with the top 40 economies having 80% of it services based!!!!!
    Take Apple for instance.If people think that it is the device making the money they couldn’t be more wrong. 
    With the iPod, its the ability for you and me to buy a single and not an entire album. That is the core service that is making money… i.e. iTunes
    With the iPad, it is the appstore that is making the money… i.e. the ability for anyone to come onto that services platform and sell the services they offer.IBM sold their entire product business (something they had for 100 years???) to concentrate on services. It was a big momentous decision which has paid off big time.
    Articles like these should comment with numbers and case studies to justify themselves.


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