One way to look at a business is what it offers to the world. Any Business offers product or service for a specific price. Most of the money is made by industry leaders in that segment. The problem with product based business is that the business has to sell every time. Service based business on the other hand requires less frequent selling or even no selling but just order taking. Some call it Freeconomics.
Lets compare both business models with examples:
Product based business:
Microsoft selling windows software is a very good example of Product based business. Revenue from each installation of windows software for Microsoft is about $30. Regular user is involved with an average of two windows licences of the software (one for home and other at work). That transalates a $60 revenue for microsoft per user. Microsoft releases new windows version every 4 years.
One way to summarize it as $15/year business for Microsoft. Not bad considering 20% of worlds populaton use computers everyday. Thats More than one billion people.
Service based business :
Google search is a great example of service based business. About 70% of their site space is devoted to search while displaying ads on the rest 30%. This model is free for customers while it costs a business to advertise. As we search everyday on the web, Google attracts more and more advertisers. These advertisements are smartly priced making it more attractive for Google. A Law-firm might pay $10 for a targeted visitor to their site while it costs less than ten cents for a corner store restaurant owner to bring a targeted customer for their site.
On Average google makes 20 cents for every search. A typical user searches 5 times a day. thats $1 per day or $365per year revenue for Google. This is 25 times more than what we saw in the microsoft revenue per user in the above example.
While doing this business, Google builds a use behaviour database which is very valuble asset Google ends up with.