Online Business Models Explained: Products

online business models products

Note. This post is a part of my series where I talk about one of the most important elements of various online business models. This element is, of course, where the money is made.

In the previous part I discussed the online business model of services and consulting.

In this part I’m going to discuss a business model that’s a little more intuitive for online entrepreneurs – products.

By products I don’t necessarily mean the physical/tangible stuff. In my dictionary, a product is simply something that has to be developed before you are able to sell it. Whereas a service is something that you sell first and then do the work later.

Products and their advantages

Let’s do a quick comparison of product centered business models and service centered business models.

Again, I’m no business expert, I’m just talking from my own experience, so don’t sue me, please!

When it comes to selling products, the biggest advantage is that you only have to spend money for research and product development once. Then when the product is finished you can usually replicate it pretty cheaply, or at zero cost if your product is purely digital.

If you’re offering services then you need to put the work in every time when you get a contract from a client. Of course, you can and should develop some systems to speed your work up and make it easier, but you still can’t skip those work hours.

When opting for a product based business model, on the other hand, you can focus almost all of your efforts on marketing and promotion once the product is ready.

Some people choose this approach for another reason. If your product is somewhat evergreen you’re going to be able to sell it for years to come.

More than that, if along the way you create several other products then some day you’ll have a nice product base. This simply creates more income streams, and in the end, the product approach turns out to be much more scalable.

In most cases, one person can successfully sell hundreds of copies of the same product while the same person couldn’t possibly fulfill hundreds of services without any help from other people.

Another advantage is that some people find products easier to market, and easier to find affiliates for. The latter has one more element to it. If you have a digital product you can afford to pay out commissions as high as 70% (or more). If you offer a service then even a commission of 10% might kill your profitability.

The disadvantages

Of course, the world is not perfect. The product approach has some flaws too.

First one up is the cost. Developing a product usually requires some amount of money upfront. Depending on the scale and size of the product this amount can vary.

In various situations you have to take care of lots of different things (take care of = pay for). If you’re developing physical products then you’ll have to buy materials, hire all kinds of people, take care of trademarks and other legal stuff, etc.

On the other hand, there are also situations where just a small initial contribution is required, for example when you’re creating an eBook.

Of course, there’s a “clever” way out, in which you can create a product without spending a dime … you just have to have a lot (and I mean a lot) of free time, and do everything yourself. This isn’t advisable, by the way.

Another disadvantage is that you need to have a good know-how on how to actually create the product. For digital products, you have to be aware of how the Web works and what all the fancy online tools can help you with. You also have to have some general proficiency around computers and be able to use the essential software.

Having a good know-how means that you need to be the manager of your product. You are the one who sits on the highest chair and knows exactly what needs to be done.

A side story. During a project management class I attended at the University we talked about a good project manager’s profile. One of the characteristics of such a person is some lower level experience (hence the computer proficiency requirement). If you don’t know what the phases of creating an eBook are then how are you going to release one?

Continuing … I’m not over with the flaws yet, sorry. Another one worth mentioning is the delayed profitability.

The problem is that you won’t see any money coming in immediately after you create a product. When you’re offering a service you often receive the money before you even start working. This is completely the other way around with a product.

Sometimes it’s not a big problem. For brands having a strong market position turning a profit is just a matter of time. Like Apple, for example, even though they have to spend serious money on developing the new iPhone, this money will quickly come back to them multiplied once the device is launched.

However, for smaller brands the profit may never come. A situation when you spend money on creating a product and then no one decides to buy it is not an uncommon one. In such a case the product centered business model is much more dangerous.

Since we’re talking money, there’s one more disadvantage worth to mention: refunds. Products have usually a higher refund rate than services. This is due to the fact that a product is something a customer can keep. They can go back to it, revise it, and for physical products even touch it. And, unfortunately, if they don’t like it they can return it.

Services have a much smaller refund rate because a service is not that tangible, and it fades into past much quicker, so people are not so keen to request their money back. Furthermore, services are much more difficult to undo.

Types of products

I’ve been talking about some types of products briefly in this post already, so now let’s have a more in-depth look.

The two main types of products are: physical products and digital products.

Even though you’re doing business online you can be selling any physical product you like. For some ideas just go to eBay and see how many different categories there are.

If you’re going for physical products I’m sure you have everything already planned out, so I’m not going to talk about them here. Instead, let’s focus on digital products.

There are hundreds of different types of digital products. Some people choose to go with audio, others with video, and others with traditional text content. On the other hand, there’s software and software resources, graphical content (photos, icons, graphics, animations). The scope is truly enormous.

One of the most common examples of a digital product is an eBook. They are relatively easy to create (I mean the technical aspects of it), and don’t require a lot of money as an investment. That is usually what makes eBooks the starting point for many online entrepreneurs.

The mystical dream

Oftentimes, offering online products brings one thing into mind – passive income – the holy grail of every online entrepreneur.

To be honest, products can get you close to making some passive income, but it won’t ever be truly 100% passive. Don’t fell victim to such a mindset. Reaching success at anything requires a lot of work, passive income included.

Finding clients and customers

This is a very extensive issue, so I’m not going to talk about it now. Instead, I’m going to leave it for some other time when I only focus on different ways of attracting customers. Both for service based businesses and product based businesses, and probably other business models too.

In many cases, though, you can use the same tools in different types of businesses, you just have to utilize them a little differently for each one.

As you can see, there are lots of elements to product based business models. Also, this path has both a number of advantages and a number of disadvantages. This all results in the fact that there’s truly no ultimate business model. You always have to choose one that seems the most attractive to YOU.

That’s it for this post, I hope it helps, and as always feel free to tell me what you think, comment, share, and see you next time.

Next parts of the series are coming soon so don’t forget to come back to get it. Feel free to subscribe to my RSS feed or email updates to get the posts delivered to you the minute they are created.

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