Let’s look at the key issues in deciding what kind of business you might want to create.
Time to market. If you are creating a service-based business, you can start almost immediately with little startup costs. If it’s a product based company, you do need to invest in product development but quite a few of these steps can now be outsourced to manufacturers. However, you will need to fund initial prototypes and inventory.
Scalability. In a service-based business, it can initially be hard to scale. It may be just you and a few other people. However, if your business model is to duplicate or franchise the services, then its possible to scale quickly. Obviously, once you build a product and move into manufacturing, then it’s easier to scale selling one product to many customers.
Business risk/entrepreneur risk. If you create a service-based business, you might just be risking your time as hopefully it will not cost much money to start the business. In a product-based company, you might need to spend quite a bit of money for product development, prototypes and initial inventory. You definitely want to identify ways to mitigate risk in either scenario.
Repeatability. With a service-based company, you have to identify processes and training to consistently deliver the same high quality of service. With a product, you need to ensure high quality manufacturing and service support. In either scenario, being able to consistently repeat the service or product is critical.
Profit margin. Initially, in a service-based business, your costs might be fairly low. Imagine if you were a marketer, programmer, accountant or consultant, your costs are mostly just you so your overhead should be low (home office, Starbucks, etc.) so your potential profit might be high but limited in how many hours you could work. In a product company, your initial costs would be high so you should target a 60% gross margin (or more to create cashflow) as a business goal which should yield a 10-15% profit margin. The key here is to sell a high quantity of products so as to create a sustainable business model where you can use incoming cash to fund inventory.
Whichever path you venture down, keep initial costs low, look to leverage the expertise of others, and mitigate as many risks as possible. The real goal is to succeed as a company by satisfying your customers better than the competition.