Service Economy: Definition, Characteristics, Pros and Cons

The service economy is a sector of the economy that focuses on providing services instead of producing goods. According to the US Census Bureau, the service sector includes various service industries, including transportation and warehousing, utilities, professional services, educational services, finance and insurance, information services, health care and social assistance, accommodation and food services, waste services, and arts, entertainment, and recreation. Examples of service economy careers include housekeeping, teaching, nursing, acting, and cooking.

The United States and the United Kingdom both place an emphasis on service providers in the private sector, and the service industry contributes to the world economy.

The service economy includes the creator economy, which encompasses the large number of internet entrepreneurs whose main product is themselves and their distinct talents. Through online content creation, people can directly reach out to an audience, making money through their own subscription fees or via revenue-sharing agreements with hosting platforms. Brand deals, as well as partnerships and sponsorships with companies, can also serve as a means of income for those working in the creator economy.

The service economy is an important sector of any economy and includes these characteristics:

1. 1. Countries with a service economy are sometimes members of the Organization for Economic Co-operation and Development (OECD countries). These OECD countries, which includes the United States and the United Kingdom, meet to discuss ways to improve international trade.
2. 2. Service economies are common in advanced economies. First-world countries have a higher growth of the service sector. Two-thirds of the US economy comes from the service economy. As structural changes and economic growth happens in different countries, its services trade will grow.
3. 3. Service economies drive growth. The service economy drives productivity growth in many sectors. The service economy is an important part of any country, and accounts for two-thirds of the gross domestic product in the US economy.

There are many advantages to a service economy including:

1. 1. Less competition locally: In a service economy, small businesses cater to the needs of the community. Individuals who launch a service company won’t have to compete with large retail corporations or huge restaurant franchises. For instance, if a company is the only one to offer a dog daycare, local customers will choose to use it, in part, because of a lack of competition. If a waste management company is the only one in the entire town, community members must use it.
2. 2. Little equipment and low start-up costs: The service economy typically includes lower start-up costs. For example, creators only need their phones or computers to start marketing themselves through social media. Services like dog sitting, dog grooming, house sitting, and house cleaning take little to no equipment and no raw materials. Starting a career in the service economy costs significantly less than opening a brick-and-mortar store.
3. 3. Local marketing to local customers: Since service organizations provide services to individuals in the local area, they have a smaller area to compete in. These service organizations can focus marketing efforts on a small targeted area, and take advantage of targeted marketing that is specific to the needs and wants of local customers.
4. 4. Low barriers to entry: Anyone can get a job in the service economy, so it’s easier to start a career in the service economy. Many companies need individuals to provide a service rather than sell a product, so restaurants, hotels, home improvement companies, and other service businesses are constantly hiring entry-level positions.
5. 5. No inventory needed: People in the service economy sell a service, not a product. This means that they don’t have an inventory. Service economy workers don’t have to worry about buying and selling products, having inventory to stock, storing excess inventory, manufacturing goods, or waiting on a long production process.

Just like anything else, the service economy does come with its disadvantages, including:

1. 1. A lack of human capital: The service economy depends on people to run it. It takes time to perform a service, and the company can only take on as much work as it can handle. So a graphic designer can only take on as many branding projects as they can juggle, unless they decide to hire help.
2. 2. A lot of customer attention: The service economy serves the needs of one individual or company. Each client requires special attention, and you cannot necessarily transfer the time and skills used on each project. For example, a real estate agent in the business sector can’t sell the same house to multiple people. Instead, they have to start the process over when they get a new customer.
3. 3. Less demand for services during hard times: When the economy slows down, the first thing consumers cut back on is unessential services. This means they focus on basic needs, and look for ways to cut back. For example, the retail trade has fewer customers as people choose to forego new clothing. Accountants working in financial services may similarly have fewer customers as people choose to do their taxes themselves.
4. 4. Pricing difficulties: In the manufacturing sector, businesses can look to competitors as they price goods. These relative prices give company owners an idea of how to price the cars, clothing, and other products they make. Business owners in the service economy lack equipment and inventory, which makes establishing prices initially frustrating. Generally speaking, these service economy workers must start with a good reputation, establish a customer base, and become a reliable part of the local economy.

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