Service-Based vs. Product-Based Businesses: What’s the Real Difference?
Most entrepreneurs are building businesses that fall into one of two categories: service-based or product-based. While both business types can be profitable, the way they make money and manage their money looks very different depending on which one they run.
Have you ever wondered why your friend who sells products always have inventory issues? Or why service providers often hit revenue ceilings? No worries, we’ll break it down for you!
Let’s dig into the key differences, the pros, cons, and some accounting must-knows for each.
What Is a Service-Based Business?
A service-based business earns money by providing a skill, talent, or offering its expertise.
Examples: bookkeeping, coaching, hair stylists, graphic designers, virtual assistants, consultants, cleaners, photographers, etc.
How They Generate Revenue:
They charge for their time and expertise.
Their product is them and the work they do.
Their revenue depends heavily on capacity (how many clients they can serve at once).
What Is a Product-Based Business?
A product-based business earns money by selling physical and/or digital items.
Examples: handmade goods, retail shops, beauty products, merchandise, digital templates, e-books, printables, etc.
How They Generate Income:
They charge for items they produce or buy and resell.
Their revenue depends on units sold and pricing.
They can scale without increasing the same amount of time spent.
Pros & Cons: Service-Based Businesses
✔ Pros
1. Higher Profits
Most service businesses have low overhead, which means more revenue stays as profit.
2. Faster to Start
Usually, all they need is their skillset. There is no need for supplies and inventory.
3. Predictable, Recurring Revenue
Monthly retainers and packages bring in consistent cash flow.
✘ Cons
1. Time Limits Income
They can only take on so many clients.
2. Client Dependence
When big clients leave, revenue decreases.
3. Harder to Scale
To grow, they often need to hire contractors, assistants and specialists.
Pros & Cons: Product-Based Businesses
✔ Pros
1. Easier to Scale
If they have demand, they can sell 1 product or 1,000.
2. Multiple Streams Within One Brand
Digital + physical + wholesale + bundles = more ways to earn.
3. Marketability
Products are often easier to advertise because customers love visuals and prefer to see value.
✘ Cons
1. Inventory Costs
Materials, supplies, packaging and storage costs add up pretty quick.
2. Cash Flow Issues
They often spend money before they make money.
3. Lower Profit Margins
COGS, shipping, fees, and overhead eat away at profits.
Accounting Differences: Why They Matter
Service-Based Accounting
For service businesses, accounting is often simpler:
There is no inventory to track
There are less COGS (Cost of Goods Sold)
Profit margins are easier to track
More focus is put into tracking time, billing clients, monthly retainers, and expenses
The profit depends on pricing, capacity, and client retention.
Product-Based Accounting
For product businesses, accounting takes more detail:
COGS must be calculated (materials, supplies, labor, packaging)
The value of inventory must be tracked
Production costs, bulk purchases, and shipping fees need to be managed
Profit is harder to grasp without solid bookkeeping
The profit depends on volume, pricing strategy, production efficiency, and cost control.
Profit Comparison: Which One Makes More?
Service-Based
Usually 50–90% higher profit margins
Revenue depends on them and their time
It is easier to be profitable early on
Product-Based
Lower margins of 20–60% depending on materials and pricing
Scalability is higher (unlimited sales)
Long-term profit potential is huge if costs are managed and maintained
So Which Business Is “Better”?
Both can be highly profitable if they’re priced correctly and tracked properly.
Service-based = high margins, limited time
Product-based = lower margins, unlimited scalability
The key is understanding the numbers so that smart business decisions can be made
That’s where The Craft CFO comes in!
Need Help Understanding Your Numbers?
If you're running a service, product, or hybrid business and you're not 100% confident in your pricing, COGS, profit margins, or books, we can help!
We offer:
Financial Cleanups
COGS & Price Audits
Monthly Bookkeeping
Plus more
