The product vs. service distinction wastes your innovation time

Sit through enough innovation workshops in large organizations, and you will eventually watch a room of senior managers spend forty-five minutes debating whether their new offer is a product or a service, as if the answer would change what needs to be built. The product vs. service distinction is one of the most reliable time sinks in corporate innovation. And after twenty years of working on this with industrial groups and startups alike, my take on it never really changed: for innovation purposes, the distinction does not exist. It belongs to your accountants, and they are welcome to keep it.

A rigorous definition?

If you insist on a rigorous definition, here it is:

• A product, in the accounting sense, is an asset or a good whose production cost can be inventoried and whose sale triggers a transfer of ownership. The capital deployed to manufacture it sits on the balance sheet and is amortized over its useful life.
• A service? It is consumed as it is produced, generates no inventory, and is recognized as revenue when delivered, with the associated costs flowing mostly through operating expenses.

Tax authorities care about this because VAT treatment, depreciation schedules, and ownership transfer rules differ; CFOs care because the capex/opex split shapes how investment appears in the books. Yet, nothing here concerns your customer, your market problem, or the value you deliver. It concerns how money is recorded after the fact.

And even on its own terms, the accounting frontier is far blurrier. The textbook story says services are asset-light, yet a SaaS company, the canonical "service" business, runs on data centers, which, on their own, represent some of the most capex-intensive infrastructure in the modern economy. Microsoft and Google are each committing tens of billions of dollars a year to build the physical plant behind their "dematerialized" offers. On the other side, a machine-tool manufacturer selling availability contracts rather than machines has quietly converted a product business into a stream of recognized service revenue without changing a single bolt.

In real life, the categories leak in both directions.

Added value vs. critical market problems is the only variable that matters

Now that we've parked the accounting question, what remains is the only structure worth working on: a critical problem in the market, the added value your offer creates against that problem, and the vehicle (call it product, service, solution, whatever keeps the room calm) that channels this value to the customer. This is the core of the innovation framework we use with every client, and it is deliberately indifferent to format.

The product is only the end feature of the business model, nothing more.

I wrote about this fallacy back in 2018, pointing at carmakers who believed that rebranding themselves around Mobility as a Service would fix a market position that was eroding for entirely different reasons. Product or service as an offer, be sure that companies that struggled to sell cars went on to struggle to sell other mobility gimmicks because, in both cases, the underlying problem (what critical pain were they solving better than alternatives?) had never been answered. Changing the wrapper just wasted time and didn't address the core innovation issues.

To some degree, the obsession is understandable. Debating product vs. service feels like 'strategy.' It produces frameworks, org chart implications, and consulting decks, all without forcing anyone to confront the harder question of whether the offer solves anything a customer would fight to keep.

Dematerialization can be genuinely innovative...

All that being said, some of the most significant innovations of the past three decades did involve moving from a fully physical solution to a dematerialized one; think of what Spotify did to the CD, or what AWS did to the corporate server room. So, doesn't format matter after all?

Yes, it matters. As a consequence. Never as a cause.

Spotify or iTunes did not win because music became "a service"; it won because dematerialization unlocked instant access to a near-total catalog for the price of one album a month, which dissolved the critical problem of choosing what to own. AWS did not win because computing became opex; it won because elasticity removed the problem of provisioning for peak load and paying for idle capacity the rest of the year. In each case, the new format was the output of an innovation strategy fiercely chasing a new layer of added value. And it is this value, communicated as the answer to a problem, that carried the market.

This was followed by plenty of aimless dematerialization plays with no new value attached, like most corporate "digital twins" of existing catalogs, most media paywalls bolted onto unchanged content, which demonstrated the converse just as clearly.

Servicization? Maybe.

So when teams come up proposing to "servicize" an offer, the question we ask is never about the format itself; it is about which previously unsolvable customer problem the new format would now allow them to solve. If there is a sharp answer, the project deserves resources. If the answer is a variation of "recurring revenue" or "that's where the market is going", the project is an accounting reclassification wearing an innovation badge.

Looking forward, I'd suggest a simple thing.

Keep the product vs. service distinction where it belongs, in the finance department, and spend the recovered time on the only question with strategic content: what is the critical problem you want to solve and how much value can you create against it.