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Are you struggling to choose a business to start? This episode goes in-depth with Tom Worcester, founder of Lunchbox to discuss the pros and cons of product and service businesses. This episode is packed full of pearls of wisdom that will surely guide you on the path toward being successful and living the life of your dreams. Full transcript and resources at MentorsCollective.com
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Tom Worcester 0:00
building a business is really, really hard. And you have to ask yourself a lot of question, do I start with a product? Or do I build a service company? Now today we’re going to break down the difference between the two. And more importantly, which is better,
Jay Feldman 0:11
which is better? I’m Jay Feldman. This is Tommy Wester. And we’re both entrepreneurs in very different spaces. Ah, starting off with a little bit of background about me, I actually own multiple service companies. And I’m a huge believer in the service industry. Whereas Tommy over here, tell me about yourself more of a products guy,
Tom Worcester 0:36
I believe products are more scalable, okay,
Jay Feldman 0:38
I like the mer MRR or in other words, monthly recurring revenue. And I also like the idea of not having to really commit to something that might not work upfront, especially if you’re starting a business from scratch. I strongly believe services is the way to go.
Tom Worcester 0:53
So you want to start a business and you want to come up with a product or a service and you’re kind of balanci ng between which one to go after. Now the answer, like almost everything in life is it depends. products, in my opinion are often best started when you have existing capital, and you’re able to find that gap and exploit in the market. Well, services, as Jays previously mentioned, are easier to start from zero, because again, you’re trading your time your service in exchange for monetary value, we’re gonna go into the pros and cons of what works, what doesn’t. When is it better to have a product company when better to have a service company? And some things
Jay Feldman 1:28
we’ve learned along the way? Love it. Let me tell you a little bit about the service industry and some of the things that I’ve done. Maybe services are right for you, and maybe they’re not. So a couple of the services that I’ve offered over the years include writing, tutoring, and my current and biggest business, which is digital marketing, a hugely popular industry right now. So the issue with the service industry and the barrier for most people getting into it is that you have to be very good at something you have to master a skill and you have to face clients. client facing is one of the worst things in business. It’s basically the worst or the most challenging. most challenging, especially depending on who your clients are. Definitely, for example, in my writing company, I had to deal with some of the worst clients ever. Whereas in my Instagram marketing agency, some of my Instagram clients have been some of the best people I’ve ever worked with, as opposed to digital marketing. When you’re doing web development and content creation for people that’s very difficult to please them. Granted, the margins are much higher, but just the amount of communication and customer support that they require. Go go way exponentially up. Now, the service industry is awesome, because if you’re just starting from scratch, you probably don’t have much capital and you don’t have any investors because you don’t have any experience. So my very first company ever was a writing company. And I started off helping people protect their personal statements, research papers, and also did some tutoring on the side. Once I had enough customers, where as I couldn’t keep up with the workload myself, you hire other professionals in the industry to help you. You contract them you hire contractors 1099 contract To help you feel that worthless, and that’s really how you can scale a service industry from zero to a billion dollars, if you’re lucky, probably not yet, but you can build and scale service industry, if you’re willing to put in the hard work upfront. The problem with that is you’ll probably have to do a lot of that work yourself. And you’re starting off with because if you’re paying contractors, your margins go way down, especially when you’re starting off and you have three five clients, you want to make 100% of those margins. Yeah. So that’s what I think the service industry is great for you but be ready to eat shit from your clients that actually eat shit, Jay, because it’s that writing business.
Tom Worcester 3:36
Now, conversely, Jay brings up a really good point in that service businesses are easy to get off the ground early on. But what happens when you scale after a while competition begins to emerge. Imagine we’re in the United States of America, which we are now and you’ve got three main markets. You’ve got New York, you got Los Angeles, and you’ve got Austin, Texas.
Now, let’s say you start a plumbing business and you’re going and working on people’s pipes. unplugging toilet. And by the way, that’s a really, really good margin business. But the problem is the ability to scale that service business is going to be tied to your ability to then replicate that service better than anyone else across the country before anyone else can do it. a plumber in Austin can render the exact same service as a plumber in New York. So the thing that’s often stopping a service company from becoming a billion dollar company is kind of a reason of scale, right? It’s so easy to replicate the service. And if five people can do it, it’s not about the free time anymore. Who can do the job for the right preps. So while you may offer a writing class for $100 if Stephen down the street at the same quality level could give it to me for 80 and he’s one of my business and now we kind of start to unpack why service companies have trouble scaling it because competition as it relates to service products is so fierce. Let’s talk about other products, right for me, I started a company called lunchbox where we have a lot of intellectual property around an anti Thought bag developed for international travel festival goers, the outdoors,
you can’t replace our product you can come up with like substitutes like a Camelback or like another hydration pack, which is a competitor to us. But you can’t copy exactly our product. If your intellectual property is best in class, which can be definitely happens, I hope so. It is best in class, you can copy it. If you can’t copy it, I get to expand into Los Angeles and Austin without any competition because I can’t be copied. So the nature of how a product market fit is determined within new markets is really about how copyable product
Jay Feldman 5:37
or a service. That is an excellent point. And you’re right that is a huge barrier for service industry people is you do have to be the best and you have to market well. Now a reason that I think this is doable. For one of the reasons Everyone needs the service that I’m providing. And if I have a repeat customer because my service is good because I’ve created a good customer experience for them. That customer will come back month and month or a year and weak and weak again, however you want to price it at that recurring revenue recurring revenue. So that one customer who is with you for an entire year is like your 12 customers. Yeah, so that’s one thing. But yes, you have to be excellent at it. And of course, every industry, every business I’ve ever built was not the first of its kind. But I’ve made sure that we are, I’m not even sure we’re the best. But we’re very, very good. And we create an awesome customer experience so that when a customer signs up with us, it’s painful for them to leave, and they feel a connection to my business. It’s like a, your business has a personality. And you have to, you know, show that to your client and make your client connect with you in order to keep them month after month after month, and with the service industry that that I think is the best thing, because they’re going to keep coming back if they have a good time. So that’s where it poses a little challenge for the CEOs and executives and that service businesses, how do we create the best customer experience? How do we make sure that they don’t go with the next guy, or try out that company and of course, we’ve lost customers to other companies, but we have an awesome customer experience and that is I think the key to the service industry. I
Tom Worcester 7:00
think it’s really well said, again, the the we’re talking about the difference between services, the person who comes in who’s on time who brings extra load treat to write a thank you note the things, the little things that stand out actually characterize the reason that one service is distinguished over the other there that unlock service scale. So it’s kind of funny how that kind of came full circle
Jay Feldman 7:20
actually have a question for you. But the products industry, you were saying how, if you have the correct IP, for example, you’ve patented certain things about your hydration pack. Yeah. Do those patents protect you? I mean, if you have a great product, what is stopping businesses out there from saying, oh, wow, that product is doing really well. And it’s the only one out there? Yeah, let’s do a spin off. Let’s create something similar, maybe even trying to improve it. Yeah. And then they’ve got investors, they’ve got marketing money. Yeah. What protects you from them doing that? It depends
Tom Worcester 7:46
on how they approach it. So if, if somebody wants to knock off a lunchbox in the United States, then I have the ability to sue in the court of law and say that you guys are encroaching my patent and any snake sales right? knew that they have generated is going to come back to me, however, and there’s something that kind of underlying your question here, which is a patent is only as powerful as the money, you have to enforce it. If you are unable to pay legal fees against a big company that knocks off patent, you can’t really do anything. So there’s kind of like that fine line of, Okay, how good is a patent and how much money do you have to enforce it? That’s one part of it. The other is actually kind of similar to the like, substitute product. So for example, let’s say you hold a patent on a water bottle. Can you get that what about me right then? So Jay has a patent on the screw top for this water bottle. It’s a really good screw top. He’s got intellectual property they’ve granted him several claims. He is the only person who can come up with a screw top. But the job to be done the service to be provided in a bottle is not the way it opens or closes. It’s the liquid inside and I think a trick
Jay Feldman 8:55
backwash ooh meant
Tom Worcester 9:00
point is that just because you have one mechanism of doing it doesn’t mean that I couldn’t have a flip cap doesn’t mean that I can’t have a zip tie doesn’t mean I can have one of a million other mechanisms. So the interesting thing about products with good IP is you need to actually get ahead of all those embodiments. So if you have a patent on the screw top, and the laptop and a flat top and whatever kind of enclosure you have, then you start to really develop powerful intellectual property. The problem is most people who develop these products are learning as they go and they don’t see those embodiments until it’s too late or until
Jay Feldman 9:32
a spinoff has been developed. I feel a video coming on IP protection. I think that’d be a really good Good idea. Yeah. So I actually have a product business myself, I started a nutritional supplement company, and it’s actually doing pretty well. We’re one of the highest grossing nutritional supplement of its kind on Amazon. So I’ve got some experience there. But the problem with a lot of products and your you did it the right way. If I was ever to go into the product industry, I would develop something really high quality unique and something with your own IP where you can’t get ripped off? Yeah, the product we created was actually a spin off of another product. And we had it created at factory and there’s no IP that can be put on this thing, because it’s just a combination of vitamins. Maybe you could put all they would have to do is what added vitamin and change it. Yeah. So it wasn’t really worth it. In our case. In our case, it was it was branding. But there’s a lot of different ways to go about the product industry, if that’s something you’re interested in. Not everyone wants to fly to China multiple times work with a factory lawyer to try and get the IP work with a design team to actually design the product. Yeah, that’s so many steps. And it’s kind of intimidating for people to think about it that
Tom Worcester 10:33
that barrier to entry is why it’s so hard to replicate. Yeah. And there’s something that you mentioned earlier, which is, you know, when you add your product business, you basically you’ve had a product that was the top of f is kind of Amazon. But when you think about like what really makes a product business powerful is beyond the intellectual property, that customer experience that we’ve seen in the service business, and what we call the brand in the products business, because you have this expectation of excellent Yeah, this expectation How you gonna be treated with that community feels like you know what this company will do for you. And so I would also argue that even in a case where you don’t have intellectual property, if you build that beautiful brand where you build the right communities and you reach out to people in authentic ways and honestly sometimes that means doing things that don’t scale like reading thank you notes or having one on one conversations. But when we talk about products businesses, it’s so easy to get lost in the idea that oh, I can only have a product business if it has IP, I can only have a product business if it’s a knockoff. The truth is you want to wrap it under an umbrella of a brand and deliver a quality customer experience over and over
to people keep coming back to you and that’s the current revenue for me.
Jay Feldman 11:39
Absolutely love that love that you said that. So a lot of people that are looking into getting into the products business and I hope you can touch a little bit on this are going into white labeling, drop shipping, and supplements, which is another major thing we just kind of totally different than what you’re doing right. What are some pros and cons to each of those in a spin offs of product.
Tom Worcester 11:58
Well, I kinda want to harp specifically on Drop Shipping here. The thing about drop shipping is that it’s a marketing game, the best marketer is always going to win the drop shipping market, right? Welcome to the fat of fidgets, spinners of the little fidget cubes. And all these crazy quick products, whoever the best marketer is, is gonna win drop shipping companies rarely build brands behind them, because you can’t build a brand around fads that haven’t yet happened because you don’t know what to expect. On the supplement side, I mean, at the end of the day, you’ve got, what $20 billion supplements industry, most of which is is unknown in terms of how it relates to the human body. So I mean, how is that any different than being really good at marketing? Hey, these omega three acids are gonna help you like have 3d shades, different color, and you’re gonna have skin tone that blows through the clouds, what are we even talking about anymore? So in a lot of those cases, when the product is just something you’re flipping, becomes a marketing game. It’s a marketing game becomes a customer service game, kind of just keeps coming back to that overall idea of the customer experience.
Jay Feldman 12:58
What about white labeling so wildly? labeling is when basically you use a product that’s already been developed, and it’s ready for you to slap your label on it and sell. And this is a very affordable way to get into the products industry and create a brand. But using, you know, a generic product that’s already been created nothing proprietary, and there’s probably already companies out there selling the same product under different brands, different labels, is that something you would recommend to people getting into the product industry?
Tom Worcester 13:23
Listen, I believe in intellectual property and type brands, I can personally recommend that. Do you guys, is there is there the same thing of white labeling within the services industry?
Jay Feldman 13:32
Absolutely. Really? Yeah, I could talk a little bit about that. And that’s a way that our recent probably in the last year we started doing this with our company, if you’re the best at any type of service, or product, you can white label that out to other companies and be the one providing those services and or products that people are slapping their label on and offering to their customers. And it’s basically been a really great way for us to generate hundreds and hundreds of additional customers that are you know, very safe that don’t know that we exist. Just because we’re so good at executing the service that other companies reach out to us to say we’d like to use your service and offer it to our clients. In my case, that’s mostly digital marketing agencies using our specifically Instagram automation services for their clients. And if you’re in the service industry, and you’re awesome at you know, executing writing services or lawn mowing services, or something like that someone might jump on is a really good marketer or already has a similar client base and says, I would love to offer this service to our clients, can you help execute the service and we will sell it to our clients. And I think that’s very true for the product industry as well. But it’s a very handy tool for anyone who’s really excellent at delivering an awesome service.
Tom Worcester 14:40
So I have a question for you. Can you give me an example of a service business that’s been white label that isn’t automated in some fashion,
Jay Feldman 14:48
a service business that isn’t white label that is when I start a service business that
Tom Worcester 14:52
is white labeled? That is an automated, still has people at its core, it’s awesome service being provided? Can you provide an answer sample of a business that doesn’t run on an automated basis, but it’s still white labeled.
Jay Feldman 15:04
What is this a really good digital marketing agency white labeling people go on there when they start the digital marketing industry and they basically Whitely all of their services from the website design, SEO, blogging.
Tom Worcester 15:15
So because they’re so good at what they do in a package, then you just flip the package. Yeah, that’s what I’m getting at is past the automation side of things. Yeah, that’s when you when you have a, like a pure process play, you can hundred percent. But if you have a like a personnel play, it’s not as easy unless you’re best in class. Think about it. If I’m the best designer in the world, and somebody brings a project to me and says, Hey, I had this project already. We’re in this business, but I’m not sure what to do. I’m going to pay you to do it. If you’re paying somebody else a project that you’ve already created your white labeling people rather than an automated product.
Jay Feldman 15:46
So I think it’s kind of like contractors 100%,
Tom Worcester 15:49
which brings you back to the you know, the 1099 writing world, you actually white labeled people for your writing company on a non automated basis. That’s kind of remarkable.
Jay Feldman 15:57
Yeah, so those are essentially contractors, but back to your question of other services that can white label out their services that are not automated, so mine is automated. But there’s still a service that goes that is involved in it. I still have a whole team of people who are setting these these clients up, right? They’re monitoring them. They’re checking them. But I think a great example would be and I totally agree with you, this really only works in the digital space. Yeah, yeah. If it’s someone physical that you need to hire, that’s a contractor. You’re not white label, right. But there’s a really great service out there and I’m not going to do any marketing for them right now. But they basically offer website design, SEO, blogging, pay per click, and they white label their services. This is this is their focus now. They’re white labeling their services to other digital marketing agencies. And these digital marketing agencies who are awesome at marketing are talking to businesses and paying them 10 $15,000 a month, and then this company is turning around and paying this white labeling company, five to $10,000 a month and not having to deal with any of the process not having to deal with any of the hiring, training. You know, execution on the website SEO think they even do the client facing for them in terms of just a sales a sales team basically. Yeah, it’s really fascinating to me.
Tom Worcester 17:09
Interesting. So what is one example of a service business that you really admire today,
and also has also had a level of scale that you find impressive.
Jay Feldman 17:21
So something that I’ve always wanted to get into and still hope to sometime in the future is the SAS business. Just software as a service. This is where you basically created the best software and it’s class for whatever it has to do and other businesses or people or consumers direct to consumer wants to use the software and then they’ll they’ll pay you a monthly or annual fee for the ability to use the software. And it’s, I think the best business model that is L right now if you can get into this space and you are either very tech savvy over in San Fran and in that in that area in this space, and you can team with some of these people software as a service I think is the best thing ever. I use Infusionsoft as an example and I paid them 300 bucks. A month for the use of their software. They don’t have to talk to me. They don’t have to do any upkeep. They don’t have to continue providing services, all they have to do is focus on their software. If I can go back or going forward, I think that’s something that I would really like to get involved in.
Unknown Speaker 18:13
Tom Worcester 18:14
So taking this full circle, it’s almost like that software business model is the white label service model. I mean, that’s what it is. It’s repeatable. It’s automated. It’s infinitely scalable. It has no inventory. And all you have to do is maintain it.
Jay Feldman 18:28
provide the services behind it. Absolutely. Right. It’s some definitely some crossover there.
Tom Worcester 18:32
Cool. All right. Well, this has been a little bit of a chat on understanding the difference between product company and service companies. We’ve got a couple more plan for you. So stay tuned and we will see you later.
Jay Feldman 18:42
Stay tuned products or services. What’s going to be signing up? Jay Feldman Tommy, what’s your Mr.
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