Over the weekend I discovered Software by Rob, where Rob Walling blogs about software from the point of view of the one-person business, which he calls “micro entrepreneur.”

A series of posts there reminds me of one of the fundamental facts about starting a business that relatively few people understand: There’s a huge difference between starting a product business and starting a service business.

It’s relatively easy for an expert to start a service business. Think of the graphic artist, the landscape designer, the market researcher or the social media coach. What you need is mostly what you know. Plus a computer, an office–maybe–and, most important, clients. Even one good client will do.

With a product business, however, there’s almost always so much more involved. Design, packaging, prototypes, channels of distribution . . . it goes on and on.

Rob Walling is talking about software people and not the world in general, with his post “The Software Product Myth”, from last November.

I tried to get at this in Understand the Risks, from my Hurdle: the Book on Business Planning. As you look at the chart here …

Product vs. service

… what I was trying to show (I know, not the world’s most beautiful chart) is that the successful business offering a service, in blue, typically takes less money to start and has a smaller upside. The chart shows cumulative money–a hypothetical, conceptual chart–over time. The successful startup business offering a product, in green, takes a lot more money to start, but has more upside . . . that red line is the downside–a failed product startup business, a reminder that spending the money doesn’t mean you’ll ever get to the upside. That’s what we call risk.

Tim BerryTim Berry

Tim Berry is the founder and chairman of Palo Alto Software and Bplans.com. Follow him on Twitter @Timberry.