Service vs Product Business

Service and product businesses vastly differ in their culture, business model, unit economics and how they operate and serve their customers. A service business delivers value with the help of a team by providing an intangible experience tailored to its customer's unique needs. The business value increases slowly over time via customer service and reputation. On the other hand, a product business delivers value as a self-serve package, with nearly the exact product sold to all customers with some customisation and personalisation. The business value in a product business increases exponentially after achieving Product/Market Fit.

A service business sells relationships first and foremost, whereas a product business sells value first and foremost.

What is a tech-enabled Service Business?

A tech-enabled B2B (Business-to-Business) service business relies on proprietary technology to enhance and streamline internal processes to serve customers manually. Customers interact with the team providing the service directly. A traditional service business, like a mom-and-pop shop selling goods via Shopify, won’t fall into this category. However, a company like Pro Sky (former client), which provides group ticket booking service for large parties, would classify as they ended up building its technology internally to serve customers as the business thrived.

Why bother transforming into a product business?

Service business owners are eager to transform into product businesses once they hit the growth ceiling. At this point, hiring more staff and updating processes takes the business backwards instead of forward. There are numerous benefits to transitioning from a service to a product business, like scalability, revenue predictability, customer insights, higher customer retention, competitive advantage, intellectual property (IP) ownership and higher business valuation.

Generally speaking, a product is a service delivered at scale with a different mechanism.

In a product business, you can onboard more customers quickly and cheaply, and the customers can serve themselves by using the product. You don’t need to hire or train staff when adding a high-value customer. You can reach customers globally and build unique IP and competitive moat, e.g. by using data, thereby increasing your business valuation.

Should you transform for the pot of gold on the other side?

Your service business is thriving, with steady and predictable growth. Customers are delighted and refer others to you. You may wonder if it’s worth considering a partially or fully self-serve product for customers to help themselves. The answer is either “definitely not”, “not right now”, or “absolutely”, and it highly depends on your circumstances and market opportunity. For example, a service business may not have a market need or demand to offer the same service as a packaged product.

A business generating $20M in revenue annually with a 25% net profit may need more cash to build a full-blown product.

Approaching the transformation

Let’s look at the approach once you have determined it’s the right decision to transition from a service to a product business. First, you need in-house product expertise, ideally a product leader or a product co-founder. You won’t need an entire product team at the start of the transformation journey.

Your success in the service business and understanding of customers and the market won’t necessarily and directly translate to a product business.

The transformation typically takes 9 to 18 months and requires numerous changes categorised broadly into four buckets below, i.e. Culture, Strategy, Product and Process.

1. Culture

The service-to-product business transformation requires unanimous leadership buy-in and unwavering commitment. It requires a fundamental shift in mindset towards customer service, innovation, speed, agility, risk, decision making and product development. It can be challenging for people who have never worked in a product business to simultaneously cater to the needs of a large and diverse customer base rather than individual customers. The changes in other areas like strategy, processes, customer service and sales can cause considerable cultural resistance, with employees fearing for their jobs. You can overcome cultural challenges by communicating effectively, providing a clear vision of the future and supporting employees through thick and thin.

2. Strategy

The strategies (business/market/ops) that served you to thrive in a service business may not work to build or market a product. You likely have to go back to the drawing board to understand customer needs deeply and conduct market research to develop an initial product vision and strategy. You may need to change and measure different KPIs (Key Performance Indicators) and leverage other distribution channels to find customers at scale. You may need to develop a new pricing model and take on additional responsibilities like cyber security, regulatory and compliance. The strategy changes would cause a shift in focus and allocation of resources within the business. Therefore, the strategy implementation must be carefully considered, or else it could derail the existing business.

3. Product

Product development is the most exciting part, as the product will become a key driver of growth in the near future. The transition to product business is certainly more than someone from the service business dictating the product development because they have been doing business for a long time and know customers well.

The product is not a part of the customer experience; it is the experience.

You would need to follow sound product principles, gather and analyse customer feedback, review data and understand the customer problems that the product can solve. You will discover new opportunities for growth and new ways to deliver a superb customer experience compared to a tech-enabled service, e.g. providing personalised reports. You can revisit workflows and make them more efficient and enjoyable both for employees and customers.

4. Process

Moving from a service to a product business often requires substantial changes in customer service and business, sales and delivery processes. It can be a frustrating process to settle into new workflows both for the employees and the customers. Some customers may initially feel the service quality has gone down, and their requests are going unanswered because every request must be considered a product feature for the entire customer base. Your operational processes would be simplified over time as the heavy lifting would be done as part of product lifecycle management.

Common reasons for failures to become a product-centric business

Transitioning to a product business is a complex process and can fail, especially if you don’t know what you are getting into. Some common failure reasons are:

• Cost — When you haven’t considered the overall financial cost of transformation. The upfront cost, e.g. for developing a product, can be substantial and is one of the top reasons for service businesses to abandon their efforts within six months of beginning the transition.

• Ineffective Change Management — When you haven’t managed the significant changes in culture, mindset, strategy and processes effectively.

• Half-baked, Half-scaled — When you have successfully launched a customer-facing product but haven’t sufficiently changed and updated the internal processes and roles, limiting your scalability efforts.

• People and Product not in Sync — When the shift in the role and day-to-day responsibilities is unclear for some or all employees after launching a product successfully. In essence, it’s a product business, but the company doesn’t know how to operate it.

• Missing Customer Discovery — When you have launched a product by simply replicating existing processes from the service business without any product discovery, market research, and customer needs analysis.

Conclusion

The journey of transforming your tech-enabled B2B service into a product-oriented business is risky but filled with opportunities for growth, scalability and enhanced customer value. I’ve advised various companies on this topic and led the transition at Lendis for over a year, as their CPO, by building LendisOS and nearly quadrupling their revenue. Based on that experience, I can say with certainty that the transition isn’t going to be easy, and you may lose some employees/customers/revenue during the transition. However, you can undoubtedly make it smoother with proper planning.