Obviously, a new service is not the same as a new product. Yet, explaining the difference between a product and a service is not always that straightforward. Does McDonald deliver services? Is AmazonWebServices a service organization? Nowadays, the distinction between services and products becomes more and more blurred. However, that does not make that service innovation and product innovation are starting to resemble each other more too. There are fundamental differences between both.
Service innovation vs product innovation
What is the difference in terms of development efforts between a new product and a new service? And do these differences matter?
To explain, let's compare for example a Fitbit and a lifestyle coaching program. Both can help you with living a healthier lifestyle, yet, they are clearly very different solutions.
Let's compare the development process of both.
Lifestyle coaching program
|Who does the development||An experienced team, that has developed similar electronic gadgets before.||The lifestyle coach, who is going to be the (head) coach of the program. He or she unlikely has a lot of experience with developing a new service.|
|What needs to be developed||
|Development costs||High. The "thing" needs to be designed, developed, and manufactured before knowing whether the product will be a market hit.||Low. It mostly requires the time of the lifestyle coach to develop the program. Once developed, the program can be rolled out, tested, and improved upon, while already generating revenue.|
|Scalability||High. Production capacity can be cranked up to keep up with demand.||Low. Limited by the capacity of the program creator and his or her success in training coaches to deliver the same program.|
|Development risks||High. It is difficult to make changes to the product in the later phases of the design and production.||Low. As the offering can easily be adjusted if needed.|
|Appropriability||High. There are many mechanisms to protect intellectual property when it concerns physical "things".||Low. Intellectual property protection options are limited for service concepts.|
|Tangibility||High. Even in the early phases, a mock-up can be used to show what the thing is and does, making it relatively easy to objectively evaluate the new product idea.||Low. Without the ability to experience the program, it will be difficult to describe and capture the benefits, especially when it concerns something novel. This intangibility makes it difficult to objectively evaluate a new service idea.|
Implications for your innovation project
There are a few takeaways from the above comparison between the Fitbit and the Lifestyle coaching program, that could be relevant for your new service development project.
On the positive side, it is easier to develop a new service since you have more flexibility to adjust a new service as you go.
On the negative side, it is difficult to objectively assess the value of a new service idea, simply because it is less tangible than a product. While you certainly can explain what the new service concept is about, you cannot experience it till it exists. Whereas for most products, you can build non-functional prototypes that will help others understand what the new product is supposed to do.
Another negative is the limited scalability. Your market size is limited by the capacity of a service provider. Given there are only 24 hours in a day and 8 hours in a workday, only a limited amount of people can be serviced by one provider. Nowadays, with the help of technology, you certainly can scale new service solutions and reach larger audiences. Nevertheless, as long as the human interaction is the main value driver, it will take effort to scale and you are unlikely to reach the millions of users a product or app solution can.
Reluctant to invest
Taken together, it is thus not surprising that the management of service companies are often reluctant to invest in new service development projects. First, while successful new services are revenue and profit drivers, the chances of generating a significant return are slim. Second, it is difficult to evaluate a priori the potential of an idea - so how do you assess what is going to be a hit. Third, new service ideas are often intertwined with the provider, which brings its own challenges. Such as, who will do the work?
So, service innovation is certainly doable and can be profitable, but it is a very different process than product innovation. It has its own unique challenges.