How to Start and Run a Service-Based Business
We can basically categorize any business into two broad types: product-based and service-based.
A product-based business, as the name suggests, makes money by selling physical products: clothes, iPhones, and even houses.
Product-based businesses are tangible by nature: there’s the cost of purchasing or manufacturing the sold product (COGS: Cost of Goods Sold), there’s the sale price of this product, and there’s the profit margin, which is essentially the difference between the two.
In a service-based business, however, we are selling intangible services—labor, expertise, experience, education, and so on—that provide value to a buyer. Calculating the cost of providing this service will not be as obvious, and running this type of business is also very different than product-based businesses.
Thus, even if you are an entrepreneur that’s already experienced in running a product-based business, starting a service-based business will require you to develop a different set of skills, such as project management, customer relationship building, and effective communication. Additionally, pricing for service-based businesses can be more challenging as it often involves a delicate balance between ensuring profitability and meeting the needs of the customer. Success in a service-based business requires a deep understanding of the market, the competition, and the unique value that you bring to the table.
In this guide, we will discuss all you need to know about starting and running a successful service-based business, and by the end of this guide, you’d have learned about:
- What is a service-based business?
- Service-based vs. product-based business: pros and cons
- What makes a successful service-based business?
- A step-by-step guide to starting and running a service business
- Actionable tips and best practices for running and growing a service-based business
Let us begin this guide right away from the basics: what is a service business?
What is a service-based business?
A service-based business is, simply put, a business that sells services rather than products or goods:
- Products are tangible: something that we can see, feel, touch, and use physically. Apple company selling Macs and iPhones, is an example of a product business.
- Services are generally intangible: something an individual or a company performs for another person or company. A dentist providing dental care is an example of a service business.
There are, however, businesses that technically provide services that result in tangible deliverables. A restaurant, for example, sells foods and beverages (products) but also provides the service of preparing, cooking, and serving these items.
Similarly, a graphic designer provides design services that can lead to tangible and even physical deliverables like posters, brochures, and so on.
For cases like this, typically, the business is also classified as a service-based business.
Services are traditionally provided by an individual or a service company. However, thanks to the advancements in technology, services can now be provided online on a website or application. PayPal, for example, provides payment processing services completely online.
Key characteristics of a service-based business
While there are thousands of different types of service businesses, the majority of them have the following characteristics:
- Providing intangible value. Despite the fact that we typically can’t interact with services physically, they will provide benefits to their clients/buyers in a non-physical and non-tangible way.
- Inseparable from the service provider. Products can be consumed separately from the manufacturer once they have been purchased, but that’s not the case with services. When we require to be examined by a doctor, for example, it cannot be done without the said doctor providing the service. In the case of online services provided via a website (or app), the service cannot be accessed without using the said app.
- Billable time. Because a service business doesn’t sell anything physical, it doesn’t have inventory. Instead, for a service provider, the hours available for providing service are considered the inventory. This is why many service providers charge their services by the hour (or its variations.)
- Inconsistent by nature. Two different services provided by the same individual won’t be 100% identical and can be hugely different. The quality of services provided, however, can be maintained to be relatively consistent between different services.
Product-based business vs. service-based business: pros and cons
As discussed, the main difference between a product-based business and a service-based business is the tangibility of what the business offers.
Below we will discuss the pros and cons of each type of business in several different categories:
- How quickly can we start the business?
While not always, typically, setting up a service-based business is much faster and easier than it would be with a product business.
For example, a graphic designer can start to provide a graphic design service as a freelancer almost immediately as soon as they can find a client.
On the other hand, it will generally take time before an entrepreneur can start their product business: manufacturing a product or even purchasing a ready-made product from a vendor would take time. Not to mention, since it’s commonly more expensive to start a product-based business (more on this later), securing the required funding would also take time.
- User satisfaction and return policy
Customers can physically interact with a tangible product: see, feel, touch, and sometimes, taste. The customer can then react almost immediately to whether the product meets their needs and preferences and can either file a complaint or return the product when they are not satisfied.
A service, however, is intangible. It may take some time before a client understands how they feel about a service they’ve received. For example, after receiving a root canal treatment from a dentist, it can take a few days before the patient can decide whether they still feel any pain from the procedure and whether the recovery period is appropriate.
Also, in a service business, while contracts can be canceled and clients can sometimes ask for a refund, the service can’t be returned.
- Income generation
One of the key downsides of a service-based business compared to a product-based business is the fact that the service business will only bring in income as long as the service provider actively works.
That is not the case in a product business. As long as there’s a product in the inventory, the business can continue to generate money, even if everyone in the company stops working.
With technology, it’s also possible to sell the product online on an eCommerce store, technically allowing the product business to run 24/7 without requiring any human employee to actively work.
- Capital and funding
Frequently, but not always, starting a product-based business is more expensive since it requires more physical infrastructure and equipment. So, it will typically require more startup capital.
Nowadays, however, there’s no real benefit for either type of business when it comes to securing funding. Both investors and banks are just as likely to provide funding to service businesses as they would to product-based businesses.
Both types of businesses would require a strong and clear business plan to secure funding.
Product-based business vs. service-based business: key focus
Due to the very different natures of both types of businesses, entrepreneurs looking to start a service-based business will need to consider different things to ensure success. Below, we will discuss these differences in focus.
Key considerations for product-based businesses
The main goal of a product-based business is to ensure the product they offer can cater to the needs of as many customers as possible. The better the business can convince its customers that the product is the best possible solution for their pain points, the more sales it will generate.
With that being said, here are the most important focuses to ensure the success of a product-based business:
- The perceived value of the product. As discussed, customers of a product can gauge almost immediately whether their purchase matches their expectations. Ultimately the secret to achieving success for a product business is whether they can create a product that aligns with their target audience’s needs and pain points while also meeting the price point that aligns with this audience’s expectation and buying power.
- Inventory management. Since each product sold has its costs, inventory management is very important to ensure a product business’s cost-efficiency and profitability. If you have too many products in storage, it will increase the product’s overall costs (especially storage costs.) On the other hand, running out of inventory too often can drive off your customers. It’s very important to regularly keep track of your target market’s buying patterns and manage your production rates accordingly.
- Limited personalization. In most cases, it’s more difficult to personalize a product’s offers than a service. Aiming to please everyone can be counterproductive for a product-based business, and instead, it should define and understand its core target market. Product businesses should also be prepared and facilitate returns and exchanges.
Key considerations for service-based businesses
A service-based business often requires lower startup capital and can be set up much more quickly.
However, despite these advantages, there are also some challenges that we’ll need to consider:
- Longer sales cycle: Although setting up a service business is generally much faster, selling a service typically requires more touchpoints with potential clients before they finally make their purchases. A prospective client may need to learn more about your business and be sure about your business’s credibility before they commit to the deal. Expect to receive more questions and prepare yourselves to be ready for the answers.
- Pricing strategy. Figuring out how much we should price a service can be challenging in practice. In general, pricing for service business often reflects the service provider’s credentials, experience, and expertise. That is, the price can increase as the service provider becomes more skilled or experienced. The time needed to provide the service should also be taken into consideration when pricing a service.
- Establishing credibility. While establishing reputation and credibility is important for both service and product-based businesses, in a service-based business, it is even more important due to the fact that you are not selling a tangible item. Quite often, a service provider needs to establish themselves as a thought leader or an expert before they can attract and convince potential clients. Therefore, a service-based business’s marketing strategy should be focused on building credibility.
Starting a service business: a step-by-step guide
Starting a service-based business can be a challenge with all its nuances, but you’ll have a more solid start while ensuring cost efficiency by following these steps:
Step 1: Identifying what type of service business to start
This can be a very simple and short step or a very challenging one depending on your situation.
If, for example, you are someone qualified (in terms of education, experience, or expertise) to provide a service in a specific niche, like an experienced massage therapist or dentist, then this step should be very straightforward.
If, however, you are an entrepreneur looking for viable opportunities to start a new service-based business, then this step will not be as obvious.
If you are in the latter’s case, we’d recommend conducting market research and a feasibility study to assess the feasibility of your business idea.
Consider three basic things:
- Whether there’s enough market size for the service, you’d like to provide in your area
- Whether you have the ability to provide the service at an adequate level of quality
- Whether the competition for the service is manageable according to your available capital and the level of service quality you can provide
Once you’ve identified what type of service business you’d like to start and figured out the basics, you can move on to the next step.
Step 2: Writing a business plan
This step is basically about expanding what you’ve figured out in step 1 into a more detailed form and then putting it into a written business plan.
A business plan is especially useful if you are planning to secure outside funding (i.e., investments, bank loans, etc.). However, even if you plan to fund the business yourself and decide not to get outside funding, the business plan will still be very useful in providing you with a clear roadmap on how to achieve success with the service business.
While there are many different ways to structure and write a business plan, you can use the following structure as an example:
- Cover page. Should include the title of the business plan (and subtitle as needed), your name, and other relevant details. The goal of this section is so that readers can easily understand what this business plan is about.
- Table of content. Pretty self-explanatory will help the reader in navigating the business plan.
- Executive summary. A section summarizing the whole business plan. Should especially communicate your business’s unique value proposition (UVP), competitive advantage, and how much funding the business would need.
- Business description. An overview of what your business is and the service you’ll provide. Also, communicate why you are choosing this type of business and who your target market is.
- Market research. Showing the size of the market and the income potential in your service area.
- Competitive analysis. An analysis of competing businesses in your area. List your strengths and weaknesses against these competitors and what makes your business unique.
- Services list and pricing. Describe which services you’ll offer to your clients and the prices for each of your services based on your market research and competitive analysis results
- Marketing plan. An overview of how you plan to reach and attract your target clients. Describe what marketing channels/tactics you are going to use and their respective costs.
- Organizational planning. List your key management personnel, as well as what roles you’ll be hiring for. Also, communicate how and when you are going to start hiring.
- Budget and financial projections. How much you’ll need in funding to start and run the service business, and a projection on how much you think you’ll make in the first year. If you are going to use this business plan to secure outside funding, you’ll also need to communicate how much you plan to pay yourself and your team.
Writing your business plan shouldn’t be overly complex, and you can start with your handy Microsoft Word, Google Docs, or even a pen and paper.
Especially if you don’t plan to use the business plan to secure a loan or investment, this doesn’t have to be a formal document, and you can always come back to this plan and make adjustments later if needed.
Step 3: Get the necessary certification/permit or hire the right expert
Depending on your location and the type of business you are going to start, you may be legally required to get permits or trade certifications before you can serve your customers. An alternative if you need to get skilled trades certification before you can legally start the business is to hire or partner with a certified expert in the niche.
The licensing and certification requirements in different states can vary a lot. For example, If you are planning to start a handyman business in California, you don’t need a specific license, but you can’t take on projects over $500 (for these projects, you’ll need a contractor’s license.) In Florida, however, there’s no project value cap, but you’ll need certifications if you want to do plumbing or electrical jobs.
There are, however, some types of service businesses that don’t require you to get any certifications or formal training, like lawn care. If you are limited in funding and want to start a business quickly, you may want to explore this option.
Regardless, make sure to check your local regulations before starting your service-based business to avoid legal problems in the future.
Step 4: Establish your pricing strategy
By now, you should’ve figured out the list of services you are going to offer your clients.
In this step, list all these services you are going to provide, along with a basic description of each service. Then, it’s time to price each service accordingly.
There are three basic pricing models you can offer in a service business:
- Charging by the hour. For example, you charge your hourly consultation as a lawyer for $100/hour.
- Per square footage. For certain types of services (i.e., floor installation, home renovation), you can charge per area (square footage or square meters) of job space.
- Flat rate. Pretty self-explanatory; you charge a flat rate per job. For example, as a dentist, you charge $100 per tooth for dental filling service.
When pricing your services, there are two main factors you should consider:
- Account for any resources (equipment, material, labor costs, etc.) you’ll need to perform the service, as well as how long each job will take to complete
- Perform a competitive analysis and check how much your direct competitors are pricing their services in the area.
Remember that you don’t always need to price your services cheaper than your competitors. If you are confident you can provide more value, then, by all means, you can charge a higher premium.
Step 5: Register your business
Having strong branding is important so your business can get noticed amidst all the competition, and your name is one of the most recognizable elements of your brand.
Take your time to pick the best possible name for your service business. Make sure it’s easy to pronounce and remember. Then, design a logo to support this business name.
Then, register your brand name and domain name:
- Check on the U.S. Patent and Trademark Office’s federal database to see whether someone else has registered your chosen business name. If you are not located in the U.S., check with the trademark database in your respective country.
- Check the availability of your desired domain name. You can check domain name availability on GoDaddy and Name.com.
Step 6: Get insured
Some states may legally require you to be insured before you can start operating as a business. However, even if it’s not a legal requirement in your area, it’s always a good idea to protect your business in case of unexpected accidents.
Consult with your local insurance agency for the type of policies you’ll need for the specific type of service you’re going to provide.
Step 7 : Establish a strong online presence
While an online presence is crucial for any business, it’s even more important for service businesses that don’t sell tangible products.
You should focus on establishing a strong presence in four main areas:
- Professional website
It’s crucial to have a well-designed and fully-functional website that:
- Is aligned with current design aesthetic standards and is regularly updated
- Contains all the information relevant to your service business, especially your services and their prices
- Loads fast; check Google’s PageSpeed Insights for your site’s speed performance
- Optimized for SEO, so your website can rank high for relevant keywords
- Has a reliable online booking/appointment functionality (more on this later)
Fortunately, with easy-to-use website builders like Wix, Weebly, Squarespace, or even WordPress, building a well-designed and fully-functional website is now much easier and affordable.
- 24/7 online appointment/booking
For service businesses that rely on client appointments, having a reliable and easy-to-use online booking functionality is critical for success.
Today’s consumers simply expect to be able to book their services anytime 24/7, from anywhere, and with any device.
Fortunately, now integrating online booking functionality on your website is very easy and affordable. With Bookeo’s services scheduling software, for example, you can have a fully-functional online appointment scheduling functionality on your website at just $14.95/month.
- Google Maps ranking
Nowadays, people often rely on Google searches to find service businesses in their respective locations. For example, when looking for a dentist, prospective clients may use queries like ‘dentist near me’ or ‘dentist in (city name).’
The thing is, for these local queries, Google pulls results from Google Maps on top of the organic search results. So, if your business doesn’t rank on top of the Google Maps results in your relevant location/keywords, you may not be able to attract enough clients.
While Google Maps SEO might seem daunting at the surface, in reality, you can perform it in just a few relatively simple steps:
- Claim and verify your Google Business listing here
- Optimize your listing. Focus on providing complete and relevant information for the human audience rather than putting too much focus on keyword optimization
- Get more (positive) reviews on your Google Maps listing, but also on relevant websites and platforms where you can get reviewed (TripAdvisor, etc.)
- Build local citations: online mentions of your business’s Name, Address, and Phone Number (NAP) on the internet. You can build local citations by listing your small business on relevant online directories for your industry/location
- Social media
It’s pretty obvious to market your business on social media with the potential reach; the question is, how?
When building a social media presence and marketing your service business on social media, it’s important to consider three different aspects:
- Organic: building your own followers by regularly posting relevant content. The most affordable and can be totally free, but it will take time before you can see results.
- Paid: leveraging various paid advertising options offered by the social platforms (i.e., Instagram ads, LinkedIn ads, etc.) It will guarantee fast results but can be expensive.
- Influencer marketing: partnering with relevant influencers that will naturally use your service. It can be cost-effective if you can find the right influencer(s) to partner with.
In the end, building a strong social media presence is about effectively leveraging all three and finding the right balance between the three.
Step 8: Establish systems
Establish standard operating procedures and systems that can help make your business run better while reducing and even eliminating human errors.
Automate your business processes whenever possible, with the goal of generating more revenue with less time/effort.
Also, hire employees who can eventually take over your day-to-day operations, so you can focus on improving your service quality and growing the business.
Last but not least, keep learning. You’ll need to continuously develop various skills on top of the ability to provide your services, such as leadership, financial management, time building and management, and more.
Step 9: Market and grow your business
By now, your service business is ready to roll, and all you need is to get some clients.
Don’t underestimate the importance of marketing your business, and don’t underestimate the time and investment needed for you to attract and retain your clients.
Develop a comprehensive marketing plan, and you can leverage the following channels:
- Social media. We have discussed how to build a strong social media presence above, including how to leverage paid advertising on social media
- List your service business. On Google Business/Google Maps, Bing Places, Yelp, and other online directories to improve your business’s visibility
- Network and partner. With other businesses in your area. Explore the possibility of cross-marketing
- Word of mouth. Encourage existing customers to leave reviews on your platforms and start a customer referral program. Start simple, for example, by offering group discounts.
While starting a service-based business may seem overwhelming at first, the steps and actionable tips we’ve shared above can give you a solid foundation on how to properly plan, start, and run your service business so you can achieve success.
It’s important to remember that you don’t have to do this overnight. Take baby steps, focus on one decision at a time, and aim to provide service excellence for each and every client.
Above anything else, ensuring customer satisfaction so they can refer your business to their peers and family remains the best way to achieve growth for your service business.