woman smiling and thinking while holding a laptop
Service businesses tend to cost less to start and run, but they're more difficult to navigate when it comes to pricing and competition. — Getty Images/PeopleImages

Most businesses you can start fall into two broad categories: product-based businesses and service-based businesses.

A service business provides something intangible — expertise, education, labor, creativity, a tool, etc. — that provide value to a client. Starting and running this type of business is very different from launching a business that creates and/or sells physical products. While product businesses grow by promoting the quality and value of the items they sell, entrepreneurs who provide a service often rely on their personal skills and reputation to increase their sales.

What is a service business?

In general, a service business performs an activity designed to help and support its clients in a specific area of their businesses or personal lives. If a business does not sell a physical or digital item to be purchased and used by the customer, it is most likely a service business.

A few examples of service businesses include:

  • Professional services (accountants, attorneys, marketers, etc.)
  • Health care (doctors, physical therapists, etc.)
  • Personal care (hair stylists, massage therapists, etc.)
  • Home repair and maintenance (landscapers, electricians, etc.)
  • Driving/delivery (rideshare drivers, delivery drivers, couriers, etc.)
  • Financial services (wealth managers, financial advisers, investment bankers, etc.)

[Read: Looking to Launch Quickly? 10 Business Ideas You Can Start Today]

The pros and cons of starting a service business

One of the main benefits of a service business is that it often costs less to start and run. Product businesses often have hefty overhead costs like manufacturing, inventory purchases and shipping. When you provide a service, you simply need your own skill set and any necessary tools to complete the job.

Additionally, because many service-based businesses can now be run virtually with just a computer and internet connection, this type of company often provides more flexibility than opening a restaurant or a retail shop.

Service businesses do come with some unique challenges, though. Because of the low barrier to entry, there's a lot of competition among service providers who have similar offerings. Pricing can also be a challenge, as rates are usually based on your time and experience level, rather than the costs of producing a physical item.

Service-based business owners are essentially selling themselves as their "product," so you'll need a good reputation and a strong value proposition to continue growing.

Tips for getting started

If you think you're ready to start a service business, follow these tips to set yourself up for success:

  • Understand what your service is worth in the marketplace. As mentioned above, service entrepreneurs often struggle to set fair prices. You don't want to come out of the gate charging an exorbitant price, but you also don't want to lowball yourself just to get your first few clients. It's important to research what other successful entrepreneurs with a similar skill set and experience level are charging for their services and set your prices accordingly.
  • Prioritize customer service. As Frances X. Frei wrote in the Harvard Business Review, a crucial element in service business success is properly managing your customers "who are not simply consumers of the service but can also be integral to its production." Therefore, a strong focus on customer relationships will benefit you as a service provider. Make it a priority to listen to your clients and ask them how you can better serve their needs.
  • Don't be afraid to self-promote. Service-based business owners are essentially selling themselves as their "product," so you'll need a good reputation and a strong value proposition to continue growing. However, actively spreading the word about your business is just as important. While it can feel uncomfortable to promote yourself at first, marketing your business and building a strong personal brand are essential to gaining recognition and credibility as a service provider.

[Read: Low Cost Marketing Ideas for Growing Businesses]

No matter what type of service business you choose to start, it's important to first do your research and fully understand the current market demand, your potential startup costs and any applicable permits or licenses you'll need to obtain. When you're ready to get started, read more about the steps you'll need to take to get your business off the ground.

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

Published August 20, 2019