5 tips for entrepreneurs on how to choose between product or service

As an entrepreneur with multiple startup ideas, an eternal question is whether to pursue a product or service. Factors to consider include identifying the problem, scalability, margins, errors and finances.
Written by Srinivas Kulkarni, Contributor

Technology and business have shaped a lot in today's market and has give many entrepreneurs in India to delve into various kinds of startups and not just limit oneself on building a strong technology product or just create a business that is strongly focused on services. But many times an entrepreneur has to decide what's right for him? This article takes a look at some of the pros and cons of each and how you can decide what's best for you and what are you cut out for.

Addressing a problem

Essentially a product startup generally relies on pinpointing a problem and addressing it. With a product startup, you have a lot more focus and understanding of what you're trying to do, because it's an idea that will go through chunks of evolution and at the end of the day you have one micro direction that you're working towards. With service startups, the focus gets divided between clients, challenges, verticals and domains.

Tarun Davda, vice president of Matrix Partners India, agreed: "At the early stages, it's much easier and also tempting to move to the services side--simply because you are solving a very specific problem for a client and getting paid for it. Building a product company is much harder initially. You need to know which specific problem you want to solve, ensure it is significant that people will pay for it, develop a solution that meaningfully solves the problem and find a way to market it to relevant users with limited resources. However, in the long run, building a services business becomes harder; it doesn't scale well, clients become more demanding and there is always pressure on margins."


Certainly, Davda's right about the scalability factor. While on the product front a lot of the aspects are much easier when you have to scale your product, with less investments required during the building stage and even later in terms of hiring people and talent. Having said that, on the services front money flows in right from day one but a product can ensure huge scale that a service business can't.


In a services startup, the good part with your business is you already have people on board and you have worked on projects in your market, but on the product front, you have to test the waters and explore potentials in different markets, and that is something that takes quite a lot of effort and your time. 

According to Anu Sridharan, co-founder and CEO of Nextdrop, a SaaS startup: "Success is not only creating a brilliant product, but its making sure the distribution channels are there so that the right people can access this service.

"If you make sure that the path to people getting to your product/services are well-defined, you are well on your way," she added.  

Customization and tweaking

A lot of the challenges come when you have to customize your offerings. Services can be easier to customize and provide offerings which clients need. A lot of times, you can talk your way around and involve further cost and provide whatever services your end users need. At the service end, once the software is done with it doesn't really cost much to deliver it to customers. This business model would typically have high gross margins and reproducing the product requires quite a low cost when it's provided as a service.

On the product front, once the cost and the effort is put into building your product to address the pain point you chose to fix, the effort your require in marketing your product, especially without customization is huge. And even though user reviews and client feedback in enterprise is a good mechanism to validate your product, getting actually there is a lot of effort.

Processes and errors 

With a product startup, tackling errors and fixing bugs and evolution is a lot more systematic and entrepreneurs have a lot of flexibility as well as vision to looking at the attributes of their product in a more streamlined manner. It certainly helps when you're working on a product and the client is you because you have a better idea of what can be fixed and what would work when developed.

Of course there is an element of validation and customer feedback that adds to the complication, but most definitely nothing compared to a services startup. When you're working on a service startup you would have to be prepared for loads of errors as most of them are ever-evolving unlike submitting a hot patch when it comes to product startups.

Capitalization and finances

Of course a services startup has lesser risk involved on this front. When you've taken on projects and signed up to provide your services, you know once you ship you will get paid for sure. But at the same time, you are limiting yourself in terms of how far you can scale and what rate in terms of the money involved.

Also once you've finalized your agreement, you would decide on the hours spent or milestones reached. But yes, there is a lot of follow up that is required to procure that money and at the same time there's a lot of clients that require credit, buffer period, and etc. Which means, shipped doesn't always equate to sold. On the other hand, product startup has a lot of risk and is actually tougher when it comes to managing the shipping of the product, but when the marketing is good and sales are easier to acquire, payment is quite up front. 

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