“Product” and “service” mean different things in different contexts. My frame of reference is enterprise business to business (B2B) software, where the distinction between products and services can be blurry. When software is packaged and sold via a license or subscription (SaaS) model, its often referred to as a “product.” When human effort is delivered and billed via an input (time & materials) or outcome (milestone) based model, its often referred to as “professional services” or “services”.
Customers buy and use solutions, not products or services. Every product or service addresses a job to be done. In most cases, customers don’t care how the job gets done. How the job gets done only matters insofar as it impacts the experience or outcome. The wizard of Oz approach, in which a product is designed such that the user thinks they are interacting with software, when in fact they are interacting with a human, illustrates this. This approach is common in chatbots and transcription apps.
Imagine a Venn diagram in which all of a single customer’s needs are represented by a circle, their “need set.” When many customer need sets overlap, that’s a potential product opportunity: Good products address a widely held customer need as directly as possible. The best products zoom in to focus on the most narrowly defined need that is shared by many customers. While few customers might use all features of a product, most customers should use each feature. This principle is so widely held that failure to do so has a name - feature creep. If a great product addresses a narrowly defined need, then by definition, it does not address adjacent needs. While a product solves a need for every customer, it almost certainly doesn’t solve every need for any customer. That’s where services can come in: Services can be complementary to the core product(s) such that the total solution addresses a greater portion of a customer’s need set. Customers want a solution that solves as much of their “need set” as possible. Sales professionals know this all too well - enterprise sales processes often devolve into a feature checklist exercise, as Patrick McKenzie covers in Selling To The Fortune 500, Government, And Other Lovecraftian Horrors . Moreover, many enterprises don’t want to string together a bunch of totally independent products (though this is changing). Systems integration is expensive and error prone. Managing relationships with technology providers is time consuming and distracting from their core business. It’s much better to have the proverbial one throat to choke - a single technology provider to hold accountable. All else equal, a more comprehensive solution is an easier sell than a less comprehensive one.
Even post sale, unaddressed adjacent needs pose problems for software companies. An unsolved need might be the difference between the customer using the product or not using it. Similarly, an unsolved need is an opportunity for a competitor to either establish a beachhead with a customer by addressing that need alone, or unseat your product entirely with something more comprehensive. All else equal, a more comprehensive solution makes for a better customer experience. Better customer experiences leads to greater retention.
If offering services enables customers to close that otherwise might not have closed, and customers to be retained that otherwise would not have been retained, it follows that offering services maximizes product revenue. Even if services are offered at cost (without profit), they increase product revenue. The unit economics of products and services are very different. Relative to products, services have low (or no) fixed costs. They may require no up-front investment. However, services have high marginal costs. Relative to services, products have high fixed costs. They require significant up-front investment before even a single unit can be sold. However, products have very low marginal costs. Marginal product revenue is almost entirely profit. Dave Kellogg sums this up pithily in The Role of Professional Services in a SaaS Business:
Professional services exists to maximize ARR while not losing money
This is a great mission statement for a professional services team, but it misses the most important strategic value of offering services in a software business - service delivery is an excellent venue for new product research and experimentation. Service delivery demands a much deeper relationship with a customer than product delivery alone. Through this exposure, a company can learn more about its customers. Through services, a company might even assume the role of its customer. Paul Graham explains how he and his team did this at his startup, Viaweb, in Do Things that Don’t Scale:
When we approached merchants asking if they wanted to use our software to make online stores, some said no, but they’d let us make one for them. Since we would do anything to get users, we did. We felt pretty lame at the time. Instead of organizing big strategic e-commerce partnerships, we were trying to sell luggage and pens and men’s shirts. But in retrospect it was exactly the right thing to do, because it taught us how it would feel to merchants to use our software. Sometimes the feedback loop was near instantaneous: in the middle of building some merchant’s site I’d find I needed a feature we didn’t have, so I’d spend a couple hours implementing it and then resume building the site.
Of course, there is a tradeoff. At some margin, offering services can be a distraction from, or a crutch for, the core product(s), from both a revenue and a customer experience perspective. Companies must be willing to stop offering services that either don’t drive product revenue or don’t present potential for productization. Graham raises this risk in How to Fund a Startup
So you have to be very disciplined if you take the consulting route. You have to work actively to prevent your company growing into a “weed tree,” dependent on this source of easy but low-margin money.
Customers buy solutions to their needs - some, but not all, of which are shared with other customers. While products are the core offerings of successful technology companies, the combination of both products and services yields better, more comprehensive solutions for customers. The combination maximizes product revenue and therefore profitability. Importantly, service delivery enables accelerated product refinement through deeper customer relationships and tighter feedback loops.