When it comes to business models, they differ from business to business, even within the same industry. This is quite evident in software-as-a-service (SaaS) businesses. For small to medium-sized enterprises (SMEs), the distinction in businesses might lie in being either product-based or service-based.
Making this distinction early on in your business planning process will help guide you on the type of funding you need, if you need physical premises and how to acquire your customer base.
In this article, we tell you everything you need to know about product-based versus service-based SMEs, the advantages and disadvantages of each and how they both can shift to become hybrid (Servitisation).
What is a Product- and Service-based SME?
A product-based SME is a company that focuses on developing, manufacturing, or selling tangible or digital goods rather than selling time or services. These businesses, such as manufacturers or e-commerce retailers, offer standardised products and often prioritise scalability and high-volume sales.
In comparison, service-based SMEs are businesses that provide intangible services, expertise, or labour to clients rather than manufacturing or selling physical goods. These firms, which operate below certain personnel and revenue thresholds, often have lower startup costs and focus on client relationships, specialised skills, or professional expertise.
Pros and Cons of Product-based and Service-based Businesses
Choosing which type of business to start depends on your goals, available resources and preferred operations. Here are the pros and cons of both product- and service-based businesses.
Pros of product-based businesses
Scalability: In product-based businesses, scaling is more straightforward. Once a product is created and supply chains are in place, it’s easy to sell to numerous customers with minimal effort. Adding a bigger product option or adding an additional line of products is much easier to do.
Product demonstration: It’s easier for product-based businesses to gain market traction. Customers can see, touch, and in many cases test products before purchasing, making it easier to showcase value and build trust.
Revenue and inventory tracking: Physical products allow for easier forecasting, sales tracking and standardised pricing methods. Calculating that you need to sell X number of products to make Y amount of profit is much clearer.
Cons of product-based businesses
Physical inventory: Physical inventory requires storage, logistics and upfront investment (seed funding). This can make starting costly, especially if items don’t sell or are returned.
Operational costs: Manufacturing, packaging and shipping all add to the costs of goods sold, significantly impacting profitability.
Inventory risks: Unsold products can lead to losses or outdated stock, especially for trend-sensitive/timely products.
Pros of service-based businesses
Low overhead costs: Without the need to manufacture or store physical goods, service businesses have leaner operations and lower startup costs.
Customisation: Services can be tailored according to client preference, offering more flexible and value-added opportunities.
Client relationships: Service-based businesses often build deeper connections, which can lead to repeat business, loyal customers and valuable referrals.
Cons of service-based businesses
Scalability: Service-based offerings require more time and expertise, which can hinder growth potential unless there is staff or the business leverages automation.
Hard to convey value: Since customers can’t ‘see’ the service, it can take longer to establish trust, justify pricing and communicate the value of the service.
Revenue: Work can fluctuate seasonally or project-to-project, making it harder to predict cash flow.
Now, chances are you either have a service-based or product-based SME. This is good to know; however, it doesn’t mean your business model cannot evolve into a more hybrid model. These types of businesses are called servitisation.
What is Servitisation?
Servitisation is a business model where companies don’t just sell products but also provide additional services. This model includes continuous services like maintenance, support, and performance monitoring alongside product sales. The goal is to offer a complete solution, enhancing customer relationships and providing a distinct advantage in the competitive marketplace.
How Does Servitisation Work?
Servitisation combines products with value-added services. Key steps in the process are:
Integration services with products: Servitisation companies pair their core products with complementary services.
Established recurring revenue models: These companies transition to subscription-like models for steady and predictable revenue.
Flexible pricing strategies: Servitisation brings adaptable pricing models to fit various customer needs and market segments.
Expanded market reach: These businesses broaden their customer base by offering comprehensive product-service packages.
Choosing the Right Servitisation Model
With servitisation, there is no one-size-fits-all approach. The right model depends on market segment, asset complexity, digital maturity and customer expectations. Below are three servitisation models, each with a different level of transformation.
1. Product Support Services
This is the most accessible entry point into product servitisation. Manufacturers continue selling products, but add layers of support, such as:
- Spare parts and consumables
- Remote diagnostics and technical support
- Scheduled maintenance contracts
This model adds incremental value and generates new service revenue with relatively low operational change. It’s ideal for businesses starting to explore how to implement servitisation without overhauling their core product offering.
2. Asset Management and Servitisation
This approach involves shared responsibility for asset performance. Instead of just supplying a machine, the manufacturer helps customers manage uptime, efficiency, and lifecycle value. Offerings include:
- Condition monitoring and performance analytics
- Predictive maintenance scheduling
- Uptime guarantees or service-level agreements
This model supports customers who prioritise operational continuity, such as those in industrial equipment, transportation, or utilities.
3. Outcome-Based Services or “Anything-as-a-Service”
The most advanced and transformative model, this approach ties revenue to customer outcomes instead of product delivery. Examples include:
- Charging per hour of machine usage or production output
- Selling compressed air or factory throughput instead of compressors
- Pay-per-use utilities, energy efficiency or smart building services
This servitisation model requires robust digital infrastructure, trust, and long-term collaboration. It is typically supported by IoT, cloud platforms, and AI-driven analytics.
How to Choose the Right Model for Your Business
Here are some tips to help you choose the right model for your business. If you already have a business model, it is never too late to pivot.
- Identify your value proposition: Clearly define the specific problem you solve and why your solution is better than alternatives.
- Target audience and market research: Understand who your customers are, their purchasing behaviours, and the market’s demand.
- Strengths and capabilities: Select a model that matches your skills, resources, and operational capacity.
- Revenue potential and cost structure: Evaluate how the model generates income and ensure it supports sustainable profitability by balancing costs and revenue streams.
- Scalability and flexibility: Evaluate how the model generates income and ensure it can support sustainable profitability by balancing costs and revenue streams
- Test your model: Leverage your network or free trials to validate your approach and make adjustments
