Understanding product v. service [ThinkLab Notes 1]

Posted on

One Sunday afternoon, when Avinash and I were in office, he passionately made an argument that we frequently get lost in the everyday execution that doing the big, innovative stuff keeps getting lower priority. He was right and we sat down and thought about how we could come up with a more structured process for focusing on new, innovative ideas. We (including Vishal) finally decided to form an informal group in the company called ThinkLab (I know, the name is pretty unimaginative) whose job would be to meet regularly and think about new product ideas/growth hacks/opportunities in the future. We circulated a mail and asked people to volunteer. With some cajoling and encouragement, 9 people formed a group and now meet almost every second week. Before we could start thinking of the big, new, cool stuff, we all needed a common language (the 9 people had different backgrounds – design, tech, MBAs etc and more importantly, different levels of exposure and reading habits). So in the first few sessions, we wanted to spend some time on the basic concepts so that everyone was on the same page (e.g. everyone uses terms like “scalable” or “product market fit” in the same sense). We circulated some readings before the sessions as well. Here are the links: Notes from Peter Thiel’s Stanford class on Entrepreneurship http://blakemasters.com/post/20400301508/cs183class1 http://blakemasters.com/post/23435743973/peter-thiels-cs183-startup-class-13-notes-essay Internal Memo of Rocket Internet (Jabong et al) – How aggressive startups are http://techcrunch.com/2011/12/22/in-confidential-email-samwer-describes-online-furniture-strategy-as-a-blitzkrieg/

The Four steps to Epiphany – Steve Blank (First 80 pages)

The readings were not related to the topic directly but served to set the general tone for the discussion.

Notes from the ThinkLab Session 1

Since the premise of ThinkLab is to help us think up new “product” ideas, we focused on understanding the differences a product and a service. We asked everyone what they thought was a product or a service – various examples were discussed – is a restaurant a product or a service? is a job portal a product or a service? you know that a bike is a product but you get a one-year free service along with it? why is the distinction important? As we discussed various examples, we realized that a good analogy would be “Gap” v. your local tailor. When Gap sells a shirt, we know intuitively that it is a product. When you local tailor stitches a shirt for you, you know that he is providing a service. As we analyzed this example, we realized that we had subconsciously kept the following things in mind: Customization (to what degree can the customer change the thing being offered – variety of offerings/features does not mean customization) Scalability (can a business be easily made into a large business – more on this later) Brand (the propensity of a thing being sold due to its brand and not because of who made it or provided it i.e. you don’t care who made the shirt till it says “Ralph Lauren”) Margins (the propensity of each additional unit of revenue to come at a low additional unit of cost, leading to high margins on scale) Engagement with the thing being sold (i.e. typically in products, the user would use the “thing” herself; in services, the use is through another person”) Temporality (i.e. enjoyment of the service would extinguish it) Using the above criteria – and assuming that if something was a pure product – it would score 0 and something was a pure service, it would score 10, we decided to assess companies around us and see where they would fall. Gap

Customization 1 They might shorten a sleeve or trouser but not much else etc.
Scalability 2 Yes
Brand 0 Requires capex, but no one care who made the shirt
Margins 2 Depends, but the product allows them higher margins
Engagement with the thing being sold 0 I wear the shirt myself
Temporality 1 Because of the wear and tear of the shirt over time

So we concluded that a Gap shirt is very much a product. Naukri Naukri’s case was a bit difficult to assess since it seemed to be totally a product for its users (i.e. job seekers), but much like a service for its customers (i.e. employers). In the analysis, we only considered whether it is a product or a service from the employer’s perspective. Interestingly, a friend tells me that Naukri guys never cared about whether they were a product or a service, but about solving a pain point and then scaling their revenues up.

Customization 7 From what we’ve experienced, Naukri is happy to customize its packages, and even do executive search work
Scalability 2 Yes (in the way we defined it, it added sales guys who brought in more revenue than they cost, and sales guys are available cheaply in India)
Brand 0 First to market, and a great domain name meant this was taken care of.
Margins 4 Depends, but the product allows them higher margins on services of its enterprises
Engagement with the thing being sold 6 I can tell Naukri to fetch resumes or post a job over the phone. A lot of SMBs don’t go and post the job themselves on the website.
Temporality 10 Job posting etc. extinguishes whenever the period gets over.

Facebook This was hotly debated as people felt Facebook was a service. Again, we analyzed it from a revenue generation perspective (i.e. was it a product or a service for the advertisers). When we analyzed it, it came out that Facebook is a product in most ways but like a service in one way.

Customization 0 Features do not mean customization. If I want to put a banner ad or a popup of my own liking, they won’t do it for me.
Scalability 0 Yes
Brand 0 Yes
Margins 0 Yes (in the way we defined it – the cost of additional servers or engineers is negligible).
Engagement with the thing being sold 0 You just use Facebook yourself without their involvement.
Temporality 10 Job posting etc. extinguishes whenever the period gets over.

SaaS and Internet world While product and service in the offline world still made sense, how would you distinguish between product and service in the online/software world? We discussed the fundamental difference between physical goods and intellectual property (like software) i.e. enjoyment of a physical asset like a chair typically deprives someone else from enjoying it, while in the case of software, the replicated copy of the software does not in any impact this. Considering the above difference, we saw that due to the rise of the internet, and this special nature of software, engineers had invented the “software-as-a-service” model, which essentially meant “product” as a service. For those who have been following the tech space a long time, whether something is a product or a service, is a pretty intuitive process and it also creates a general bias towards creating a product startup. We thought that the above mental framework would be helpful for others to be able to assess whether something was a product or a service. For us, it was useful to come up with an intellectual framework from a discussion within our group. However, we ended the discussion by saying that one can’t make a “value judgment” between product and a service. Ultimately you get paid for solving a problem.

Thanks to Arshleen for doing the first draft of these notes.

Leave a Reply

Your email address will not be published. Required fields are marked *