Differences Between Service and Product Based Businesses

With thanks to Susan Varty for suggesting this topic.

Many businesses define themselves as being either a product-based business or a service-based business. While there are certainly those businesses which encompass both categories, and certainly many who will primarily think of themselves as providing both of those, it is the thoughts of the customers that matters in how the business is defined.

For example, my lawyer provides me with documents and contracts, but I think of a law firm as being a service-based business. On the other hand, the company that takes care of my lawn would be a product-based business, since what I care about is that I have a nice lawn, that is, a final product.

As a business owner, it is important that you first identify which of these two categories your business belongs to, and, as a consequence, what that means in terms of the growth and development of your business.

Product-based Business

If your business is based on a product, then your concern should be about making that product be as good as it can be in whatever way it is that you choose to market it. If it’s supposed to be high quality, then that’s your focus, it it’s supposed to be cost-effective, then you need to find ways to reduce its cost to the consumer. However, your interactions with customers are limited to finding out how you can make your product better, and the relationship with the consumer is of secondary importance.

To think about this in more practical terms, think about buying cereal at a store. You, as the consumer, generally don’t consider your relationship with the cereal manufacturer to be important, as long as the cereal itself meets your needs. The manufacturer knows this, and therefore will usually focus on the product, and reach out to consumers in order to find out how to improve those products, or create new products to meet a new demand.

Service-based Business

When your business is based on a service, then your concern is two-fold. On the one hand, you need to offer the best service possible, which may involve improving a product. Additionally, you are working directly with clients to make them happy, and as such, you must spend significant amounts of time on networking. That is, when you meet customers, it’s about more than just improving the deliverable, it’s about finding out how you can better meet the needs of that customer.

If my lawyer merely provided me with well-written contracts, I would be happy with the product, but perhaps not with the service. As such, he spends some time to understand what it is I’m trying to accomplish, so that he can anticipate my future needs. However, if the product he delivered wasn’t up to par, then even good service could not keep me with his business.

The problems a business in this situation faces is that they have to deal with all the issues of the product-based business, as well as those of networking and consumer relations. The rewards are appropriate as well, but a business that fails to take this into account is one that is thinking tactically, not strategically – owner beware.

Asking for a Deal

I’ve been working in software development for a few years, building anything from custom scripting to full-blown enterprise level applications. Along the way, I’ve had the opportunity to work with a variety of people, and have managed to identify what I, at least, would consider my ideal client.

The work I do is not always easy, and rarely fast. Clients will often have a very clear picture of what it is they’re looking for, sometimes in the form of a sketch.

The worst clients are those who ought to know better, and still ask for a deal. They assume that because of the nature of our relationship, whether personal, social, or professional, that I would give them a deal. They get offended when I suggest that the price has been set according to the amount of work I know it will take, based on my prior experience.

The best clients are those who appreciate that I can do my job, and that my skills have value. They don’t mind paying for it, provided I can explain the basis for those fees.

It’s not that I don’t give deals – quite the opposite, I’m frequently undercutting my own time because I believe in the value of the client, whether it be their cause (for example, charities) or their business (knowing that a successful first project will lead to a more profitable second and third). A client who never asks for a deal, in fact, scares me because they may not actually appreciate what it is I do for them.

Especially in the world of small businesses, it is incredibly important to ensure that you do your best to get the biggest bang for your buck. While you need to weigh the value of your time against the potential dollars saved, failing to ask for deals is similar to throwing your money away – sooner or later, you will discover that you’ve been overpaying for services for years.

I’ve had several clients who, during the course of the work I’ve done for them, I’ve suggested that they change their hosting plan to one more in line with what they were doing with their site. In 2 cases, the savings in hosting fees more than covered my own fees in under 2 years. The clients did not realize it, but they were overpaying for a service and hadn’t bothered to find out.

However, when asking for a deal, the basis should not be because you’re somehow special – that’s for the person charging you to initiate. However, you should find out if there’s a way to make the service or product more affordable – maybe you don’t need quite that level of service, or that exact product. Could you get by with last year’s model?

If you start asking these questions, the person making the sale will often work with you – after all, you’ll be happier in the end if you get a product or service that suits your needs, at a price that makes you feel you got your money’s worth. But you need to respect that there is an intrinsic value tied to the various goods and services, and that to get a break on that, it needs to come from good will, not guilt.

After all, the provider needs to make a living too.

When You Feel You’ve Made It

There was a quote from Robert Herjavec, one of the Dragons on Dragons’ Den, when asked if he’s ever looked back on his life and came to the realization that he’s “made it”:

I believe the minute you begin to think that way is the minute you begin to erode.

There’s another saying that I think reflects this thought quite well:

If you’re going to dream, dream big.

If you are aiming high, then your success is a function of your ability to reach those lofty goals. If you find that you’re reaching your goals easily, then perhaps you haven’t set your goals high enough. Goals are made to make you stretch, to push the boundaries of what you can do. If you aren’t stretching, then you may very well be contracting.

If you start to look at your life, and think about how far you’ve come, then that can be motivating to push yourself further ahead. However, if you start thinking along the lines of “I made it!” is an indication that you have not set your goals far enough, as you have time to go further, but don’t have anywhere to stretch.

Reactions to Mistakes

Mistakes is a topic I’ve written about fairly often – after all, to err is human, and businesses are run by people. However, as reactions to mistakes can often be the difference between success and failure, it bears frequent mention.

Around the office where I work, we were discussing the story of an employee, who made a mistake that resulted in losing his employer ten million dollars. He went to his boss, Tom Watson, and expected to be fired for his costly error. However, the response was far from what he was expecting – he was told: “Fired? Hell, I spent $10 million educating you. I just want to be sure you learned the right lessons.

Perhaps the story is somewhat of an extreme example – after all, how many people could justify a loss of that magnitude. Additionally, making such a statement involves a large amount of emotional control, considering what prompted the statement. However, there are still lessons to be learned from this.

Punishment for a mistake is generally a function of an emotional response to the situation. As such, while it may feel good to take such action, it does not really solve any problem. That being said, if the lesson of the mistake was not learned, then it would be prudent to prevent a recurrence by whatever means deemed necessary. But, the consequences are not of making the mistake per se, but rather of failing to learn.

Life is all about learning from mistakes – and in business, people who learn from their mistakes are important to have around. With someone who has not erred, you do not know how they will react to having made a mistake. As such, I would choose to keep people around me who confess to their errors and learn from them over people who I don’t know if they’ve ever made a mistake, let alone been able to learn from them.

Growth and the Panic Response

Having given presentations in the past on time management (for example, my recent talk at Freelance Camp TO), I started to wonder about people’s abilities to manage their time well. What I discovered, though, through watching specific companies and people struggle with time management, is that even people who are good at managing their time can hit a wall, and typically for a single reason.

People who are good at time management have learned how to allocate their time and attention to what they need to work on, and how to delegate the rest to people around them. As the number and the nature of the items demanding their attention changes, so does the nature of what they can delegate, and who the people are to whom they can delegate to.

However, when there is a sudden change in the sheer volume of items to be dealt with, even this system will break down, until a new equilibrium is established. Eventually, of course, the status quo becomes capable of handling a fairly large volume of fluctuation in demands on a person’s attention.

During the sudden increase, though, even people who are good at managing their time will struggle, since they will have more work in front of them than they can manage (there is a limit on the number of hours in the day) and will not yet have the infrastructure around them to handle the excess. Until they can get more people near them to whom they can delegate tasks, the volume of work can become daunting to the point of panic.

The good news is that this breakdown in effectiveness is caused by success – that is, more people want to give you the type of work you want to do.

The good news is that once you figure everything out, you will be positioned to grow your position even further.

The bad news is that you have to figure out how to handle your workload in the interim.

It was suggested to me by a colleague that the approach he has found useful is to first assign some time to panic, perhaps 15 minutes. He goes for a walk, or reads some news items, or does anything other than actually work. At the end of that time, he picks one item from his list of things to do and works on that. He then picks something else. He may not finish the first item, but he forces himself to be productive, and to focus on that item alone. The time for panic has passed.

This process may continue for hours, days, or weeks. But the panic itself has been allocated its own space, and has been given priority over other tasks, because it can hamper you until you deal with it.

So get the panic out of the way, and then just pick something from your list of things to do and finish it. When you’re done, you can move onto the next thing. But the panic has been dealt with.

Who’s to Blame

This article discusses a concept that I only recently learned about in detail. While this issue is one that affects people who sub-contract all the time, it is also one that most people either handle well or poorly, but rarely consciously.

Imagine a client, John Doe, who contacts you to perform some work for him. In turn, you hire Jane Smith to execute a portion of that work. As the project is fairly large, various milestones may be missed or altered, but eventually, John gets his work completed.

If, however, things are not going well, what do you tell John?

You could tell John the truth, or you could avoid the issue, or you could lie.

However, in reality, John doesn’t really care about why things aren’t getting done on time. He cares that his project needs to be completed. As such, anything relating to explanations about the past are not really relevant – all that matters is how the project will get finished.

When I had this told to me by a client, I realized that this applies at all levels of reporting. The why, or who, does not matter. It isn’t important who can get blamed for something or other – what matters is how you’re going to act going forward.

If, of course, the same person or reason continues to cause you problems, you would be prudent to deal with it. But that would be something to be handled quietly and without fuss. It makes absolutely no difference in the scope of working with clients.

Know Your Audience

I recently went to give a demonstration of a product to the owner and the head of operations at a business. The product had been a long time in development, and when I entered the presentation, it was with the knowledge that what I was showing was not complete, though certainly further advanced from the last time I had met with this client.

My strategy for the presentation, though, was to take advantage of knowing what each of the two people in front of me wanted to see in the product, and show that element in use. It was not about showing completion, or showing a slick product. It was about showing a product that filled a need.

I was not about to lie about anything in the product, but I was about to make a demo that fed off expectations.

I showed the head of operations, who was also in charge of sales, how the product could be used to make a great presentation to his clients. I walked him through a theoretical meeting with his prospects, and how the product could produce a “WOW” reaction. I showed him the portions of the product that, in brief, looked impressive.

I showed the owner of the business how the product was good value for his investment in it. It met all the needs of his business, and there were a few extra features in there as well that had not been promised (he had earlier told me that he expected to have to pay for those features in a later release).

In other words, I understood my audience, and what they hoped to hear from me. That’s what I told them, and I didn’t have to lie to do it – just throw perspective into the conversation.

There really isn’t anything like an unbiased presentation. The people involved have opinions, and they will be voiced, whether aloud or silently. But they can also be manipulated to believe in you, if you recognize their needs and expectations, and target the conversation accordingly.

If you don’t understand what your audience needs and wants, it won’t matter how right you might be – they still won’t listen to you!

The Value of an Idea

This past week on Dragons’ Den, there were several entrepreneurs who presented their ideas on the show, only to discover that their valuation was completely off. In some cases, that was precisely the reason they did not get a deal, in others, it was merely a contributing factor.

What is fascinating, though, is the number of people who come on the show and clearly have no idea how to value their company. Watch a single episode and you will hear the question posed to nearly every pitch – what were your sales last year, and what are you anticipating for the current year? The reason this question is important is because it shows whether or not you’ve managed to make the first (and possibly most difficult) sales, and whether your growth is of a significant size. Additionally, sales are often the basis for valuation – that is, the value of a company is a function of the assets it owns, and the income it generates.

Many entrepreneurs, though, make the mistake of putting value on their ideas themselves. Sometimes this is valid, sometimes it is not, but it nearly always is over-priced.

If the idea is not protected by any patent or trademark, then it has next to no value. The fact that it is protected would give it the value of that protection, or about $10-20K.

Additionally, if work has been done which would be necessary to build the company, then the time to duplicate that work would also give the idea some value. For example, if the entrepreneur designs a gadget, and the design and construction of the prototype would take about 1 month to duplicate (that is, if someone were to see the product and try to duplicate it, how much time would it take), then the company would have an asset worth about a month of time.

The short version of all this is that if all you have is an idea and a prototype, you’re going to have a hard time getting a valuation over $50,000. Even that valuation would be considered generous in most cases.

Trying to bank on the potential future value of an idea is just a waste of time. An investment is made on the value it holds today, with the hope that in the future, it will be worth more. To pay the value of the future today would not be an investment – it would be an interest-free loan.