Are Digital Offerings Products or Services?

Companies with any sort of digital offerings often bump up against the same pesky question:  Are these offerings Products or Services?   Said another way,  are these companies choosing a Product-orientation or a Service-orientation? 

In this article, I delve into the differences between products and services, why companies generally lean towards a Product-orientation, and the profound impact it has upon their operational worldview.

Products vs. Services
A haircut is a service.  A banana is a product.  Not much to debate there.   But why, exactly?   What are the defining criteria that separate products from services?

There are certainly exceptions to every rule, but these are generally true:

• Selling a product implies a transfer of ownership.  Selling a service does not.  When I sell you a banana, I transfer its ownership to you.  I do not transfer ownership of a haircut.
• Products have inventory, services do not.  Moreover, Product inventory has storage costs and generally depreciates over time.  I can fill a warehouse full of bananas, but cannot fill a warehouse full of haircuts. 
• Selling a product implies a discrete transaction.  One moment the seller has a banana and no money.  The next moment he has money and no banana.  Services often have a transition period, during which both parties are in limbo:  There is a period in which I am providing a haircut, but have not yet provided the customer's "money's worth."

By these standards, most modern digital offerings are services, not products.  Despite that, indeed despite digital offerings often going by the moniker "SaaS" (Software as a Service), most companies refer to digital offerings as Products.  What gives!?

As it turns out, there are some heady benefits to a Product orientation.

The Benefits of a Product Orientation
The upside is that investors and customers believe that offerings are more standardized and tangible than they really are.  This leads to better sales and negotiations.

• Offerings seem more tangible. Just referring to something as a "product" conveys something tangible, standardized and streamlined.  Such a perception is often vital to gain credibility with both potential customers and investors - neither of whom wants to think that the company is "making it up as they go along."
• Offerings are better-contrasted against "pure" services. Companies with digital offerings also usually want to contrast these offering from their consulting and support engagements, which are far closer to "pure"services.
• Stronger price negotiations. Finally, a Product orientation helps avoid the dreaded "Cost-Plus" negotiation tactic.  This is when a customer will estimate what the services cost the company to provide, and insists upon paying a (modest) markup upon that.   By referring to offerings as Product, it forces customers to assess the value it adds, rather than what it costs to provide.   As a result, Product-oriented companies can charge higher prices.

The Drawbacks of a Product Orientation
The downside is that employees believe that offerings (and consequently your sales) are more standardized and well-understood than they really are.   When left unchecked, this leads to reporting issues.

• Implies that all details of a sale are known up-front.  Product-oriented companies are prone to assume that all relevant details about a deal can be captured at the moment of sale.  After all, for true products, this is generally the case -- you know precisely what you are selling and what it cost.  Service-oriented companies expect that many details will not be known up front, and will manifest themselves as the deal progresses.
• Implies that work ends once a deal is signed.  Product-oriented companies envision that once a sale is made, most of the value-creation process (the "real work") is now over.  Conversely, Service-oriented companies imply that once a sale is made, the "real work" can now begin.  When an offering requires extensive customization, a Product Orientation motivates salespeople to promise the moon, while ignoring the true implementation costs.
• Emphasizes sales over delivery.  Product-oriented companies mostly credit Sales for translating the company's efforts into financial value.  The mindset is something like "The products were just sitting there until Sales sold them."  Service-oriented companies, on the other hand, mostly credit Service Delivery for creating financial value.  The mindset is more like "Making promises is fine, but then we need to roll up our sleeves and get to work."
• Encourages a simplistic view of deal value.  Most digital offerings vary over both volume and time.  For example, one customer might buy a lot of service for a single month, while another might buy a little service for the next two years.   Given this, Product-oriented companies speak about deals as if they were discrete transactions (e.g., a $12M sale) -- and only in the fine print will it mention "well, it's technically $1M per month".   Service-oriented companies envision a deal as a rate:  $1M/per month -- and only in the fine print will it mention "all told, this deal is worth $12M over the next year."

In conclusion, adopting a Product orientation helps companies remain competitive.  However, when designing internal operational reporting (such as how deals are valued, how credit is attributed, etc), adopting more of a Service orientation is often a good idea.