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.

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Tim BerryTim Berry

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