What’s the difference between selling a product-based business and service-based business?
The Six Percent Entrepreneur
What’s the difference between selling a product-based business and service-based business?
September 15, 2021
In this episode, we talk about the real distinction between a product-based business and a service-based business.
One of the more common questions that I get asked pretty often is what is the difference when you are selling a product-based business and a service-based business? And people usually ask this question in terms of when they're applying the vertical method, which is the method that we use in the Vertical Liftoff accelerator program. And if you are making this distinction, here's where you may be making a mistake. 

The thing is where we are right now, today, there is no distinction between a product-based business and a service-based business and I'll tell you why, because we've already talked about how much the world has changed and how everything is a commodity because the time it takes to be able to copy your idea... your product is decreasing, right? 

So as soon as you come up with some kind of product, you're going to see copycats of it on Alibaba the very next day. So what this means is that everything is a commodity and when everything is a commodity, you can only differentiate in two different ways. One is by differentiating on price, which is the race of the bottom, which is not a fun game to play. And the other way you can differentiate is by differentiating on your brand story and that connection with your audience with your users. 

So when you think about it if everything is a commodity, then how do we de-commoditize it? And the way to de commoditize it is to add a service component. If people are going to decide what they're going to buy or how they're going to buy it. If it's already a commodity, then it's going to be a no-brainer that they're going to pick the item that's with the lowest price. But when you start adding a service component to it, then the decision-making changes, right? Because now if I'm looking at product A and product B, but product B offers the service that might be worth thousands to me. And it's only, you know, they're only maybe charging $10 more for this. Well, I'm definitely gonna pick product B. 

So once you start adding this service component, this is how you de-commoditize your product and every single business that's out there right now should be a service-based business. This is how you're going to differentiate yourself, this is how you should be thinking about your business. So when you think about a product-based business... Let's say that we are building a robot that is going to replace the barber, right? So this is probably really far out. We don't have the technology for this. But I think this is a good example because you're going to have a lot of hesitations from the people that you're going to try to sell this to. 

So let's say you made a robot that is going to replace the barber and you as the founder, you want to go out and reach out to different barbershops who have a pretty good presence and see if you can just add one more area, replace one barber with this robot barber that's going to save them so much time and money. And you're super excited about spreading this idea. But what you're going to find is that the people that you're selling to, have all these different hesitations. So a hesitation could be, well, if I'm using this robot barber, how are my customers going to feel about it? They might not trust the haircut that they're getting and they might not want to come and they're not gonna trust my stories. That's hesitation, right? 

Another hesitation that they might have is if they get this robot barber, well, they might have to lay off people that they've hired for such a long time and some of these people are probably their friends. Another hesitation might be where they have to replace all these resources. So not only are they replacing human capital, they have to reeducate their customers, but they have to retool how their barbershop works right now, they might have to install this equipment, replace the equipment, maintain the equipment. 

There are all these different questions that they're going to have and you as the founder, what you will have to do to be able to address all these concerns is you have to add a service component that addresses each of these hesitations. So for example, if the buyer fears that customers aren't going to like it. Well, then you have to have a program in there that helps educate the customer. And this program is so good that it actually convinces the buyer of the robot that this is going to work, right? Then other hesitations, for example, getting rid of employees, then you might want to have some kind of change management guide on how you can let go of employees, how you can support them in their future career, how you can even maybe franchise out and let these other barbers start opening up different locations for you where you install more robots. 

There's a lot of opportunities there. Then if you are doing maintenance contracts and things like that, that's another service component that you're adding, and what you're going to find is someone else that is selling this exact same robot. Well, they're not gonna be able to compete with you because you thought of every other thing that a buyer could possibly think about and you're adding that as your service component and the other person, all they can do is they can only compete on price because they just have a product. They don't have a service business. 

The way the world is right now is if you don't have a service-based business, you are going to lose because you have a commodity. If you have a commodity, your goal is to make it a service-based business by adding some kind of service component to it. I hope this helps. This is Robin Copernicus. Boom bam. I'm out. 

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