Published Jul 17 2021
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Companies can be divided into two big buckets: service companies and product companies.
The difference between the two is incredible.
In the context solopreneurship, which is the kind of company I’m most interested in, service companies are basically freelancers. A freelancer is a hired gun, a person that performs a job. Other companies or people can hire this person to do the thing they are expert into.
Product companies instead sell a product, something that can be easily and cheaply reproduced, and other companies or people buy that product.
Here’s the first difference. With service based companies, since the company performs a service, the service cannot be easily performed at scale. If you are a solopreneur/freelancer, if a job takes 8 hours, you can only do one job per day (assuming you work 8 hours per day). You are limited to 30 jobs per month assuming you want to work every day of your life, and if you want to do more of those jobs, you have to hire someone.
With a product based company, you create the product once, and then you can sell it a countless number of times. You can sell the same product 30 times per day, instead of 30 times per month. Or 10000 times per day.
This gives you the first freedom. When you reach product/market fit with your product, you can benefit from time scaling. Your income is not tied to the time you spend working.
This has also a side effect on pricing. As you only have a limited time available to perform a service, you must charge more for it. This also means less people might decide to buy that service. A product can scale more and it can cost less to the customer, driving economies of scale.
For example if I decide to do a mentoring program, I can have 10 students I mentor 4 hours every week. This is a full time job of 40 hours a week, and if I have to make 6000€ per month, still a low software developer salary for European standards assuming 50% goes in taxes, I have to charge 600€ to each person. If I create a course, that’s a product and I can charge 60€ instead, and sell it to 100 people every month.
Now I am helping 10x more people, increasing my impact 10 fold.
I also create the course once, and then sell it without additional work. This means that instead of working 160 hours a month on mentoring, I can work on creating the next product.
As an employee you have one customer: your boss. With services, you have 10x customers, but each customer is a boss. They pay you more, and expect more from your service. With products, you have 100x more customers, but no one of them thinks they are your boss.
I always prefer having 1000 people paying a little sum to me, rather than 10 paying a high sum. I can easily return the money if they are not satisfied, while returning the money on a service not appreciated is harder because it might mean you don’t get to eat out to the fancy Sushi restaurant that month. So you tend to over-deliver (and over-work).
SaaS (Software as a Service) companies are product companies. You build one product, you do marketing around that product, and if it’s good people sign up to it. It’s not that easy, of course, but I heard so many good stories around SaaS. People going from zero to 5k$ MRR (Monthly Recurring Revenue) in very little time, and scaling to 10k and 20k is just a matter of time, low churn and marketing.
A kind of hybrid approach is productized services: you package your service in a standardized way, and you still perform it manually but now the time you have to dedicate to it is minimal, because it’s always the same service.
I think that in the beginning it’s quicker to get to revenue with services or productized services. I started with services in 2008. I had no network or inbound channels, so I started bidding on freelancer sites, later on when my old blow grew that became an inbound channel and I started receiving requests from clients directly.
I was able to make a living, but it wasn’t my thing. So I gradually tried to move to products, through courses first, then web apps, mobile apps, CMS plugins and more. I never fully made the switch to 100% living out of products, until a couple years ago with my programming courses.
But that was a hill worth dying on, and I do not regret trying for all those years.