December 16, 2011

Sell a Service or Goods?

There is a big difference when you have an idea for a business.

You may know how to do something, you do it for others and get payed. Or have something to sell and deliver.

Each will give me some advantages but has it's cons.

Sell Services
The great about selling services is that you can run this kind of business with a minimum budget. No need for big investment. You still may need to pay for some charges like phone, transportation or printing..

Usually you have to start with a minimum experience that your customers will pay you for it. You may have to offer something that others can't do it, or you know how to do it better or in less time. If you can't provide that, than probably this is not the suitable business that you may run.

Another point to focus on, is that providing a service is related to the time spending. If you're the only person in the business, than you cannot serve 10 customers a day, each with tasks of 2 hours!! You may require to hire somebody. And hiring means you need to find the right person to provide a similar quality service than yourself.

Most of service based businesses fail because of this point, they start providing high services, and when growing the quality decrease. The main reason is that expanding the workforce, they are not able to keep the same level of execution. [If you come back to the book I mentioned before, E-Myth, you'll understand better what I mean].

If you could get through all those disadvantages than you can see a great profit. Usually profit is very high on any invoice!! Almost all the money paid by your customer is yours!!

Sell Goods
The classical way to do business, buy something and sell it with a profit.

You'll need first to buy something, manufacture or assemble it. So you'll need to invest money to buy. And not only that, as you're not sure that you'll sell all what you have and when.

You should know that selling something after 6 months and getting $6,000 in profit means that you have only $1,000 a month. and meanwhile if you have a 30% profit of the selling price, you are investing around $2,000 by month, means $12,000 is the money you are getting stuck in your warehouse until the deal is made and the payment received.

Some points will help you run your business faster:

  • Get a product that sells fast and payments
  • Not expensive goods with high profit margin (between $50 and $100) will be the best
  • Goods that are not subject to expiration will help in the case you'll not be able to sell them.
The price of the final product is critical, you should be in the interval where customers are paying enough to get profit for you. And not be so high so the buying decision is not easy. This why a $10 product is not good because you're not able to get profit more than $5 per unit. And a $500 is difficult to sell, people with think twice before making the decision.

Mature businesses are usually combing both. They produce something, sell it. Than offer you to buy a warranty services. And guess what?? Warranty is much profitable as producing even if you'll find the prices are very low comparing to the product itself.

Today, with outsourcing, and virtual tools, you may run a Goods based business in a similar what than you run services! I don't mean the functional way but in the advantage.

You can outsource production, product development, warehousing, customers relationship, orders management. Your role will resume to your capacity of setting all this up and coordinate. And you'll pay your  partner as you go, when there is orders, mean that you're getting profit, than you pay per order all your partners. This model will be valid in someways and you can personalize it depending on your capacities, skills and location.