Source: Now that you have decided on the type of business you desire to own, a small business owner must carefully consider which products and/or services it will offer to potential customers. Do you want to have a retail business, or do you want to be a service based provider? Samuel K. Burlum provides an overview of the advantages and disadvantages of both types of business offerings.
Making the decision to become a business owner is a substantial undertaking. After the initial decision to do so, you will need to give consideration to the next steps which include your specific industry interest, and then whether you desire to offer a product or a service, or both. Owning a business that sells products can be a costly investment depending on the type of business you are planning on opening. On the other hand, selling services that are intangible relies on your ability to transfer confidence about your expert skill sets.
Developing a business that sells products can offer several advantages in terms of business growth and financial reward. Products are tangible items (they can be held in one’s hand prior to any financial exchange), allowing an individual to identify with a product quicker since they can use their senses to make a judgement and a decision to purchase the product. You can see what a product looks like, how it tastes (if is a food product), how it smells, how it sounds (if it makes sounds), how it feels (like clothing or a tool that you hold in your hand). Consumers have an opportunity to visually inspect the product they may choose to purchase, which allows for consumers to elevate their risk by taking a chance on the product. Products are simpler to validate by the potential end user. The customer has an out if they are not happy with their purchase; usually they can return the item to the store.
A customer can predict what the expectation might be based on previous purchases of the same or similar product. There is a sense of product continuity, that each time a customer purchases a said product, they feel more comfortable based on their previous buying decision. This leads to a quicker closing rate on the sale of the product. If someone chooses not to purchase the product, then it can be reserved for the next potential customer.
Most national brand products already have large marketing machines in place to drive public awareness and educate potential customers about the product you might offer in your store. So having these products in your store where there is already an existing market demand increases the chances of potential foot traffic to your store. The product business relies on brand recognition.
In today’s market, products can be sold globally, and shipped just about anywhere. Store owners are no longer limited to just their own zip code. With product sales, advertising and marketing can be targeted toward a larger demographic and geographic set of potential clients. The name of the sales game for products is to sell product in either large volume to a small number of clients or take many small orders from a high volume of clients.
The downside of a product based business is initial investment into a store location and the upfront cost of inventory. According to the International Council of Shopping Centers, the average cost per square foot of retail lease space in 2015 was per $41 square foot. Ace Hardware advocates that the optimum store size should be 10,000 square foot, which could be quite costly for many new business owners just beginning. The investment needed to fully stock a new hardware store or family owned pharmacy that is capable of competing against a big box retailer location will cost a small business owner up to millions of dollars in order to be ready to open their doors, and have ample supply of goods available for consumers. In today’s market, consumers demand more product choices in multiple product categories, so stores must offer the customer service model of convenience. This allows the business owner to make available these multiple choices and product mix to potential customers in order to be dubbed the “one stop shop”.
When your business is a product driven model, there are additional risks you must be aware of. Even if you have the proper funding to fill your store and/or warehouse full of inventory, there are still the issues of shrink and loss due to damages. Shrink is internal theft from employees, which does happen. An employee may not think it’s a big deal to remove a product for their own sample use, however, when that employee does not account for the product, it results in shrink. Some employees do intentionally steal products from their employers, as they feel one box or one can will not hurt anyone, but it does when it adds up in the loss column.
Damaged inventory is also a loss to the store owner. Inventory that is either shipped or received damaged, is inventory lost. Most damages happen during the shipping process of inventory to and from the warehouse, as sometimes a forklift operator may have not noticed they misjudged moving a pallet of product around, and it becomes dented and damaged.
Some disadvantages of having a product based business can be overcome, allowing for higher profitability and customer satisfaction. Having an accurate inventory control system in place will allow for you to house just the right amount of inventory in your store, based on historical consumer data, thus limiting the risk of having overstocked an item. By offering a program to your clients that they can order whatever they need, which is not yet stocked in your store, with a two or three day turn around will allow for you to still service the sale, while not having to stock everything that may not sell on a regular basis.
Marketing a product based business has more options for the business owner. A business owner can piggyback on national product recognition and ad campaigns in creating awareness that these popular products are at his or her store. If your store is part of a cooperative group, the cooperative group usually supplies a recipe for investing into local brand awareness in contrast to other competing products and stores. Marketing and advertising options are endless. You must ask yourself, what are you really selling? In many cases products have a brand identity that must accompany the product.
The cost of setting up a product based business varies depending on a number of variables. These costs will be driven partially by the decision you the business owner makes. Do you choose to sell a limited product line from home as an internet based business or are you prepared to open up a full blown retail location, with tens of thousands of product selections? Do you start small with a limited store front or do you take a chance and open a large retail location? How many employees do you think you will need in the beginning to staff your operation or do you start off as the single owner-operator?
Some new business owners opt to offer their expertise as well as their skill sets in the form of services offered. The upside to owning a business that is more service oriented is that you have minimal, if any inventory to stock. Your services offered are not limited to the product’s limitations. For example, if your service business is building decks, you can design and build a deck according to the vision the potential client may have. A service business allows for the business owner to be more personalized and creative when providing services to each individual client. Your service should focus on solving a customer’s need in which they may not have the skills or expertise in providing for themselves. In essence, the business owner and what he or she can do for the client is the product they are selling, along with selling themselves; as in their character, reputation, and expertise.
For instance, if you offer business consulting services, your start-up costs are low, however your upfront investment is the years of experience, education, and understanding of how a business works. These are the tools of the trade. If you decide to begin a property maintenance business, you will have to invest into lawn and building maintenance equipment, a service truck or two, and you may have to hire some help depending on the job at hand.
Your services will be more targeted; as your goal is not to have the highest volume of clients, but the highest rate of quality client demand that results in higher revenue. A service based business will focus on more personalized and customer needs rather than the average cookie cutter mass produced model. This type of model will allow for service based business owners to network with the most desired potential clientele. Service businesses must directly market to specific clients, and usually will prospect for customers inside a radius within the business’s home location. For example, a landscape and property maintenance business would not market to potential customers thousands of miles away, for the obvious logistical reasons that would make the endeavor not profitable for the business owner. Your goal is to provide the highest quality of services to the highest quality of clients, in performing the most work for a smaller list of clients.
A service business can opt not to have a store front. Most service businesses which surround home services (a masonry, carpentry, or landscaping business) many times operate out of their home; saving cost on a rental location. Other service based businesses like a hair salon or dry cleaner, rely on having a retailer location that allows for walk in foot traffic. A service business will focus on the need of the client, where the business is providing a service or skill set the potential client may not possess themselves.
Because a service is intangible, it may be more difficult to connect and close deals with potential customers of your service if they cannot visualize the final result of the service you offer. Potential clients may be hesitant of purchasing a service even if their need of the service is great, because they cannot physically evaluate the outcome of their own buying decision. A service based business will experience a longer sales cycle because there is usually price and service negotiations, client contracts to review, and final review of the services provided, which in some cases will hold up final payment to the business owner.
Potential customers will rely on judgement calls when purchasing a service. Is the service provider trustworthy? Is the service provider of good character? Potential clients have a clear understanding that they cannot return a service once its provided, so they are more cautious in making a decision. For this, most potential customers will desire to get the most dollar value out of the service they are purchasing, since the value proposition is beyond just the service itself. The consumer realizes that part of the value exchange is the experience of the journey through having the service provided to them.
When pitching a service, the business owner must convey the message and the value of the service they are going to provide, clearly. The business owner must be able to be flexible and adjust their service offering to each client situation, for no situations are alike. Granted, if you are in the business of selling dry cleaning services, each individual client will have different needs; attention to the slightest of details will make all the difference whether or not the client returns to that dry cleaner in the future. The service industry relies on personal relationships and reliability. The potential client must have total confidence and belief in your ability to deliver upon your promises and skill sets. Therefore, it is necessary to provide your “why you are passionate about your business” and how that helps you deliver the best services available to your clients.
The start-up cost of service based business is much lower than that of a product based retailer location. Depending on the type of services your business will offer, will determine the type of investment you will need to make in order to fulfill customer demand. The startup cost of a service provider will also depend on the type of industry and service offered. In comparison, someone that wants to start up a landscape business will have far more up-front investment cost in equipment than someone that is providing consulting services to other businesses. A service business usually has to invest more money into marketing and branding their own individual brand identity, because in many cases of the service business, the business owner and their skill sets are the brand.
In either case, both a product and/or service based business boils down to a few basic concepts; you must have what someone else wants, which fills a need and provides an experience desired by the consumer. You can assure yourself of one thing – there is no reward without some level of risk, so regardless of product or service, all levels of business ventures require a cash investment, an investment of time, and an investment into knowledge of the industry by the business owner.