Tristan Kromer, who blogs at Grasshopper Herder, offered some great insights on business models on the Lean Startup Circle mailing list in response to a question about how to select which idea to focus on for your startup
There’s nothing wrong with a services business.
It’s harder to scale, but there’s nothing in the customer development handbook that says only billion dollar scalable software companies are worth doing.
Plenty of people get filthy rich running pool cleaning businesses.
I think a lot of people look to software businesses with some idea that it will somehow be easier because there is no inventory and you can just build one product for a million people.
Personally, I think that’s an illusion. There are just different issues. There is still inventory (people), assets (ideas), a manufacturing process (coding), etc.
Starting out as a service business, or primarily as a services business, does not preclude you from becoming a product oriented company later on. I hear too many entrepreneurs worrying “that approach won’t scale” when they should be more worried “that approach is unlikely to find any customers.”
Also, if there are complex workflows involved, using a service business to prototype and explore what capabilities will actually be required (and used) is much much faster than trying to get it all coded.