Why I Prefer Service-Based Companies
The success of your business or businesses can depend a lot on what your goals are. My goal as an entrepreneur was/is to make an inordinate amount of money, do less nitty gritty work as I scale, and have some level of passive cash flow which will allow me to pursue life on my terms. I’ve already created two companies which are profitable, provide me with a nice monthly income, all while requiring less than 5 hours a week of my time.
I spend 80-90% of my workweek on one specific company, Vicky Virtual, and I’ve learned that putting intense focus on fewer projects will allow me to more effectively build each company. There is a point at which Vicky Virtual will require less and less of my time, and I will 100% begin additional projects in the future. I am already in the planning stages of my next company.
With that said, I think that a service business allows this type of flexibility in more cases than a product business ever would. Of course, you find outliers such as the vitamin supplement company Timothy Ferriss started, or the consistency of a well executed subscription box company, but in my eyes, service businesses (including Software as a Service, or SaaS companies) are the way to go.
Here are a few reasons.
1. Less Need To Innovate
Since the introduction of the original iPhone in 2007, there have been 12 additional models released. That beautiful Tesla you’ve been driving for two years is missing a feature that is being rolled out in the 2017 model. Your $2,500 Macbook pro will literally be obsolete in 5 years. Do you ever think about why clothing retailers, mobile phone companies and Taco Bell keep changing up their product lines multiple times a year?
People Get Bored with Material Things.
With a product company, you always have to come up with innovations or completely new creations to stay ahead of the curve. This will never stop, and a few flops in a row can spell doom for even the largest companies.
With a service business, you can do the exact same thing, over and over again. And the best service businesses actually pride themselves on doing just that. Think about that favorite pizza place of yours you’ve been going to for 20 years. How pissed off did you get when they changed the color of the damn box? Do they have new management now? What is this blasphemy?
While people get bored with material things, they crave familiar experiences. As a business owner, you just need to perfect what you do, and never let that change.
2. Recurring Revenue Is Easier
There is a big push right now for product companies to create recurring revenue streams. The most popular way to do this right now is to create a subscription box company. Now, there are some really cool sub box companies out there (my favorites are Plated and one a friend of mine started, Minechest) but it will be extremely surprising to see a currently operating subscription product company that is still in business in a significant way in 20 years.
When your clients expect the same thing from you over and over again, your job is to provide it. Your clients know what they are getting, you don’t have to explain your new features, and justify a different pricing arrangement. The simplicity of this business relationship breeds loyalty, and a good service business will survive for generations off the loyalty of a core group of clientele. Loyal clients are repeat clients.
3. Less Likely To Be Copied
The real reason clothing retailers and electronics companies are forced to constantly update their products is copycats. Whenever a new $500 pair of Jordan’s are released, there are 1,000 giant factories in China that can reverse engineer the design, build a replica, ramp up production and distribute a copycat pair of sneakers in a few short days. A large company like Nike can stave (most of) these people off, but that amazing t-shirt you created that got popular will be sold at a lower cost, to a larger amount of people, with margins that would put you out of business in just a few short weeks.
If you own a service business, especially a local one, being copied by people across the world is either an impossibility, or it won’t affect you, because you’re clearly serving different markets. Rather than competing against the entire globe, you’re competing against the few competent people in your market. Depending on the size of your community, you may just be the ONLY person doing what you do.
4. Requires Less Upfront Capital
With products, you want to deliver quickly. In order to do that, you generally need to have your inventory purchased ahead of time. It can be difficult to figure out how many units you will sell of your product, and pinpointing the exact amount of units you can order can be a guessing game. Order too few? Miss out on potential clients. Order too many? Cut into profit margins.
Unless you have amazing creation to delivery processes, it is very difficult to sell a lot of product without a lot of upfront capital. This is such a large boundary for so many people, Kickstarter built a multiple billion dollar (service-based) company around closing the gap between wanting to make a product, and having the money to get it made.
With a service company, a lot of times your main costs are on the back end. This means that the majority of our costs occur after revenue is already generated. A lot of maid company owners like myself pay our teams by the job, which means that when a job comes in, we create a work order based on what the client has requested, and our teams get paid after the work is complete. Save a few fixed expenses and a marketing budget, it’s incredibly hard to run out of money if you have a decent margin with a service business.
Again, starting a service business can be a great way to get going with little capital, build a company with little innovation, and create a passive income stream for yourself. Clients and employees alike enjoy consistency, and the nature of a successful service business is just that.