Services and the Business Models of Product Firms: An Empirical Analysis of the Software Industry

This article presents one of the first large-sample empirical analyses of the impact of services on the business models (i.e. the financial performance) of product firms. We build upon existing and recent literature in technology management, economics, and service operations in order to propose and test hypotheses regarding the relationship between level of service revenues and operating profitability. We test these hypotheses in a sample of approximately 500 pre-packaged software product firms (a dataset we collected for this purpose) using fixed-effects panel data and dynamic panel data (Arellano-Bond GMM) econometric models methods. We find a non-linear relationship. Services initially are associated with lower profitability but at some point this relationship reverses. We estimate this inflection point to happen when services reach about half of total revenues, and discuss the theoretical reasons behind these results. We also discuss implications for managers in software and other industries as well as avenues for further research.