Starting a Business? Differences Between Product and Service Companies

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Starting a Business? Differences Between Product and Service Companies

Laura Galvin - FEB 28, 2019

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Starting a Business? Differences Between Product and Service Companies. Many entrepreneurs in Costa Rica may not consider all the differences between launching a product-based or service-based business. Examples of product-based businesses are clothing boutiques, electronics stores, packaged foods or any business that sells a tangible item. Service-based business examples are mechanics, fitness trainers, consultants or any business where the owner or employees are selling a skill or performing a task. We’re going to compare the two types of business models to help those planning to start their own company decide what is best for them.

First, let’s talk about investment money. Generally, a service-based business will have lower start-up costs than a product-based business. A lot of money goes into purchasing enough products to stock your store or developing your product if you are making something unique. Knowing how much to start with can be a gamble; then if you do start selling, you’ll be constantly reinvesting to keep products in stock. Service-based businesses will have to invest in the tools needed to perform the service, and sometimes education or training, but those are long-term career investments and not just business start-up costs. Standard legal costs and income tax are an expected expense for both, but in Costa Rica only products are charged a 13 percent sales tax to the buyer.

A store or office location is another cost to consider, unless you are only selling wholesale, or can operate digitally with an e-commerce website or popular social media page. The only difference is that while many services can be performed remotely or by appointment, physical products require a reliable way to deliver items. Costa Rica’s Correos service is improving but has some limitations, so shipping should be considered when starting an online store here. It is essential to also consider your target audience and customer experience when deciding between a brick and mortar location or digital presence.

Having a physical location or not can make a significant difference to foreign business owners in Costa Rica. While you can start a business as a non-resident here, you can only work in a managerial role. So if you open a shop or restaurant, you must hire a local resident to be your cashier or waiter.

Marketing strategies will differ slightly; for products, business owners should focus heavily on building a strong brand that speaks to their target audience. Service businesses should focus on providing an excellent experience for their clients, and build their brand and marketing campaign around this. Either way, investing in your company’s branding and marketing will go a long way in the success of any business.

The last important difference between product and service businesses lies with growth and scalability. Selling products is a unit-based billing system while selling a service is a time-based billing system. This can really limit the expansion of service businesses. When product businesses gain popularity, they start stocking more products and selling more units, and can expand into different markets through distribution. Expanding your services, on the other hand, requires finding more employees with the necessary skills and managing them, which can be challenging depending on the complexity of the skills required.

Now you know the pros and cons of each type of business, and can decide which is best for your entrepreneurial venture in Costa Rica. Or, if you already have a service business and are looking to expand, try offering products, or vice versa. There are plenty of businesses that can cross over into both categories, such as a photographer that offers sessions by the hour, but also sells prints of their photography. Diversifying your income streams by offering both a service and products is a smart way to increase profits and capitalize on an audience once you have them engaged.