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Should you start a service-based or a product-based business?

Should you start a service-based or a product-based business?

By Amy Beardsley
Aug 29, 2022
7 min read

You've been thinking about starting a business, but you’re torn between two options: A service vs. product business. What you're good at plays an important part in deciding which direction to go, but it's hard to choose. 

If you’re not sure what you should do, take time to understand a few key differences between product and service businesses. Let’s dive in to help you decide what best suits your needs.

Starting a product-based business

What is a product business?

Product businesses sell tangible, physical items. The product solves a problem or a particular customer pain point. 

It could be a one-time-use product, such as flower arrangements or a food item. Or it could be multiple-use item customers reuse, like an organic cotton dishcloth or leather cell phone case.

Product-based business ideas

The first step to getting your business off the ground is deciding what type of item you want to sell. Your interests might play a role in the kind of business you start. 

For example, if you already like woodworking or crafting, you might turn your hobby into a business. Many hobbyists have already started a craft business through e-commerce platforms like Etsy.

Products come in many forms. A handful of ideas to consider include:

  • Electronics
  • Jewelry
  • Beauty and health
  • Home and garden
  • Furniture
  • Food and beverages
  • Clothing
  • Handmade goods
  • Pet supplies
  • Automotive
  • Real estate

No matter which product you choose, focusing on solving the problems of your target market can help you find success. 

Operational focus

Creating a product-based business generally requires an investment upfront. You’ll need to look for manufacturers or suppliers, distributors, find a place to get ingredients and raw materials, design packaging and figure out where and how you’ll sell the item.

You’ll likely need to secure funding for your small business to support your manufacturing, operational, and other startup expenses. 

Marketing message

Without marketing, people won't know your products exist. Your plan to market and promote your product must show how it can meet your customers' needs, enhance their way of life, or solve a particular problem.

Keep in mind that personalizing or creating individualized products is more complex, so your marketing must appeal to a large target market.

Insurance for your product business

Small business insurance for a product-based business is crucial. Product liability insurance can be crucial as it covers property damage, injuries, and legal costs. So, your policy can cover the damage if you sell a candle and the glass jar shatters and spills hot wax all over a customer’s area rug.

You may also benefit from a Business Owners Policy (BOP). A BOP combines general liability and commercial property insurance into one convenient package.

If you have employees, your state may require you to have workers’ compensation insurance. Workers’ comp for small businesses can protect you if your staff gets sick or injured on the job.

Key takeaways about starting a product-based business

Pros

Cons

  • Sell tangible, physical items.
  • Many options across several industries and product categories.
  • Can match the product to your interests.
  • Large upfront investment.
  • Harder to create personalized or individualized items.

Starting a service-based business

What is a service business?

Service-based businesses provide a service to their customers instead of selling physical goods. Typically, you’d focus on using your expertise to provide a solution or meet a customer’s pain point. So, it makes sense that they’re also called "professional services" or "knowledge-based industries."

Services are often intangible, such as legal advice, medical treatment or financial advice, but they can also be tangible, such as lawn mowing or cleaning a house.

Service-based business ideas

Service-based business owners have the advantage of being able to sell their services to a wide range of customers, even for businesses in rural areas. Examples of services include:

  • Medical practices
  • Accounting services
  • Legal services
  • Construction trades (contractor, plumbing, electrician) 
  • Travel agencies
  • Cleaning
  • Auto repair
  • IT or telecom services
  • Fitness and wellness services
  • Beauty (hair stylist, makeup artist)
  • Consulting (Educational, security)
  • Freelance work (writing, graphic design)

Depending on your industry and services, you can work over the phone, online, or in person. For example, a landscaping business would provide services in person, while a financial planning firm could deliver its services face-to-face or online.

Operational focus

When thinking about how to set up your service business, know that you’ll typically have lower upfront startup costs than product businesses. You don't have to worry about production costs and inventory with a service-based business.

However, you may pay more for operations since you’ll need to cover employee compensation and other costs associated with providing the service.

Marketing message

When marketing, ‌position yourself as an expert in the minds of potential clients and focus on increasing value. Services typically require more back-and-forth with customers, giving you more opportunities to demonstrate your expertise and build trust with your client.

Insurance for your service business

Even though you aren’t selling a tangible product, your service business can benefit from insurance. Professional liability, also called errors and omissions insurance, is ideal for service businesses.

Think about this scenario: Say you're an accountant and forgot to file your client's estimated taxes on time, and they had to pay a penalty. Or maybe your financial advice costs your client a sizeable chunk of money. 

Either way, professional liability gives you financial protection if you're accused of making a mistake, being negligent, or not delivering on a business agreement.

Like product businesses, your service business may also need workers’ comp coverage. It depends on your state laws and if you hire employees.

Key takeaways about starting a service-based business

Pros

Cons

  • Built around your area of expertise.
  • Wide range of customers.
  • Lower upfront and overall capital costs.
  • May have higher operations costs.
  • Requires more communication with customers.

How NEXT helps service-based and product-based entrepreneurs

If you’re an entrepreneur at heart, it's not a matter of whether you should start a service vs. product business — it's a matter of picking one and running with it. 

Just remember that you could face uncertainties and struggles, no matter what type of business you operate. That's where business insurance comes in. Whether you need product liability, errors and omissions, or other types of business insurance, NEXT offers affordable, customized coverage to fit your business needs.

Find out more and get a free quote today!

Should you start a service-based or a product-based business?

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About the author
Amy Beardsley is a contributing writer at Next Insurance and a Content Marketing Writer specializing in small business insurance and technology. Her work has contributed to helping independent business owners drive profitable customer action through brand awareness and customer education.
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