Are Products Really Better Than Services? Maybe It’s Time To Reevaluate 

In the investment community, a consensus has long been that products, especially those with a recurring business model, hold a definitive edge over services. This perspective is often reflected in valuation practices, where product-based revenue typically commands higher multipliers than service-based revenue.

This preference underscores an inclination toward the scalability and predictability that products can offer.

But, at least based on my firsthand observations over the years, this conventional wisdom might need a reassessment. I can’t say I took a quantitative approach, but my observation from hundreds of meetings over the past few years is that companies that integrate services with their products seem to forge deeper connections with their customers, leading to lower churn rates and enhanced customer value.

Both products and services have value, but it’s my belief that the optimal value often lies in the synergy of both.

Enhanced customer understanding and engagement

The integration of services with products brings an invaluable human element to the business-customer relationship.

Services enable businesses to better understand and anticipate customer needs, leading to tailored solutions that resonate more deeply with users.

This bespoke approach fosters a stronger connection and loyalty, which is difficult to achieve with off-the-shelf products alone. Consequently, companies that offer a combination of products and services often see lower churn rates, as their customers feel more understood and valued.

Increased upsell opportunities

The melding of products and services opens up additional avenues for upselling. With services, businesses have more touchpoints with customers, allowing them to identify and act upon opportunities for offering enhanced or additional solutions.

This not only boosts revenue but also enhances customer satisfaction, as clients benefit from a range of solutions that more closely meet their evolving needs.

The ability to seamlessly integrate new offerings into an existing framework makes it easier for customers to adopt additional products or services, reinforcing the business relationship.

Overcoming scalability and cost concerns

A well-executed blend of products and services challenges the traditional assumption that services are inherently nonscalable and costly.

By leveraging products within their service offerings, companies can achieve greater scalability and improve profit margins. This strategic integration allows services to benefit from the replicable and scalable nature of products, while products gain additional value through customization and enhanced service delivery. This symbiosis effectively addresses the scalability challenges associated with services, proving that the right mix can lead to a scalable, profitable business model.

It might, therefore, be prudent for investors and business leaders to reconsider how they value services in conjunction with products. This blended approach not only reflects a more holistic understanding of customer needs, but also positions companies to capitalize on the full spectrum of business opportunities.

As we move forward, the integration of services with products may very well become a key differentiator in the market, redefining what it means to deliver value to customers.

Itay Sagie, a guest contributor to Crunchbase News, is a seasoned lecturer and strategic adviser to startups and investors, specializing in strategy, growth and M&A. You can connect with him on LinkedIn for further insights and discussions.

Illustration: Dom Guzman