Providing a SERVICE versus a PRODUCT ?? client wants to know from designer

I follow your logic in determining product versus service. However, I see this industry as one which provides "professional services" (a term used by accountants, economists, bankers, etc.), as opposed to selling products.

You may product-ize your services by assigning them names, features, and fixed prices, but really, it's still a service.

In a chart of accounts (your "books") your income should be categorized as a service. There could be some situations where you actually sell some products to complement the service (maybe a software package such as components you use for development, or possibly even computer hardware). In those cases, you'd want to categorize the income for those sales as product sales.

Getting back to your original line of thinking, I can see that a person might like to differentiate between packages versus time and materials billings. Typically, people want to pay for packages, but get the quality and flexibility of time and materials. Case in point, there is much criticism to the way that attorneys bill their clients. That being said, a package is a just a package, not a unique creation having the benefit of frequent input along the way via client meetings and a "dev site."

On a funny note, this exchange between web developer and prospective client is quite hilarious. It's by Xtranormal, called "I would like to buy a custom website for $600." The video doesn't answer your question, but it certainly illustrates a number of typical client requests in relation to packages. [warning: bad language in video] YouTube link follows:

http://www.youtube.com/watch?v=dFEidJQiTts

This is technical-semantic question.

Software is a product. You can pack it (copy to a CD or a pen drive), ship it (once packed), you can provide assistence, maintenance, recalls, guarantee... So, yeah, it is a product.

But it can be a service. One can hire your service to make a task (a website for example, or change/implement just a functionality on a existing software).

Labeling as product or service depends exclusively on how and what you sell and tackle it.

EDIT

About design (elements composition and layout, colors and fonts choosing, stock images, illustrations)... It also depends on the POV.

What are you designing? How are you selling it? Implementing it?

The final product usually is a product (a jpg file, a web page layout, a banner, a brand manual...). But what if you stand as a service provider? Retouching images, masterizing a video, conducting usability tests that leads to layout changes on a web page. These are examples on how design can be offered much more as a service than a product.