The product is a physical item that people purchase and take ownership of,to satisfy a specific need. A Service (provision) is an economic activity where the buyer does not generally obtain exclusive ownership of the thing being purchased.
We want to own stuff. It feels good, right? From mans early days we've measured our wealth by how much of anything we owned; a key principle of the materialism philosophy. It does make sense: anything you need, you buy to own it. Until the point when you have too much of it or it's just impractical: most people do not buy planes to fly from A to B, they buy a plane ticket for the trip; we do not buy roads to travel on, we pay road fees [taxes?] instead. We buy cars while we actually need to be transported on demand with specific conditions. Every item you own needs to be maintained, serviced, stored, cleaned, dusted off and so on - it takes some part of your focus. You can buy ingredients for a dinner and make it yourself, or you can go to the restaurant and order something to be prepared for you. The result is the same: lovely meal, satisfaction.
Software is a typical example: it's a digital commodity, yet for years it was treated like a physical product. A big software license deal for hundreds and thousands of users can have a single DVD physical form, just like a single user deal. It's difficult to imagine a single DVD or thumb drive can have so much value. It's also a limiting factor for the case for on-demand use, or any evaluation process. For these reasons, the SaaS model was born: subscription instead of ownership. It took off like wildfire (figure 1).
Which is better?
There is no clear choice between a product or a service, it all depends on the problem you are solving. There are many aspects to that choice:
a product may be easier to scale up, as you can always hire or outsource more resources;
a service can be more demanding, with a risk of quality degradation following the scaling up process;
a product, once shipped, can not be changed in any significant way;
a service can be modified in every way and introduced to a customer overnight;
a product can bear a much higher price point;
a service, being ongoing, means cost in general is more affordable.
Actually, it's both
Each product or service is purchased with the intent to fulfill a specific need. Even art and antiques have an aesthetic purpose to live up to. To meet customer expectations, the right combination of product and service is needed. As customer expectations grow and become more complex, it's getting harder to meet them all with a single product or service. We used to buy just a phone, merely a screen, some buttons and electronics packed inside, a more or less appealing box. The only contract needed was the one with the cellphone operator. Now phones have evolved into multi-purpose communication and management devices, performing many other functions than voice calls. With the mobile app ecosystem blooming, many more services became available on phones, opening up new business models, SaaS especially.
A whole ecosystem of products and services is required to fulfill most of these expectations.