Consumers vs business customers
We often hear classification of start-ups into B2C (business to consumers) and B2B (business to business) categories. B2C focuses on selling to and deriving revenues from consumers, whereas B2B focuses instead on business customers. To generalise further, B2B can also include those selling into government, education, and other institutions as well.
Despite many high profile start-ups that seem to target consumers, in reality, most start-ups - since the early days of Silicon Valley till present day - have generated revenues needed to build their companies from business customers, not consumers.
Take Apple. Today Apple is clearly a consumer electronic company. However, back in the early days, the Apple II, its first hit product, derived most of its early revenue from educational institutions and later business segments. Its second hit product, the Macintosh, was sold mostly to businesses that needed its desktop publishing capabilities.
Microsoft, Apple's major rival, targeted business segments from the beginning. First, it sold PC DOS to business customers through IBM. Later, the company offered the compatible MS DOS to IBM's clones, which also targeted businesses. Its successor, Windows, owes its success to these predecessors that served the needs of business consumers.
Start-ups in the dot-com era and the present day have a little more complicated business models. Most of them have models that involve both consumers and businesses. But looking deeply, they still derive most of their revenues from business customers just like what their predecessors did.
Google offers a free search service among a whole host of other online services to consumers, whom we should call "users" rather than "customers" because they only use but do not have to pay. The company derives handsome revenues from businesses that advertise to these users. Facebook likewise offers a free social network service, on the Web and the mobiles, to consumers. Again people who are paying to Facebook are businesses, who advertise to those users who don't have to pay anything.
Start-ups that sell to consumers, in fact, have a variety of difficult challenges. If it is a hardware company, the economy of scale dictates that the company has to manufacture in mass, then spend a fortune in advertising, in order to be profitable. So, it needs a lot of capital. If it is a Web start-up, consumers usually expect a free service and are not willing to pay. Mobile app business is not capital intensive and the consumers are willing to pay for. But because it is relatively easy to copy, the success is usually short-lived.
That is why we don't see too many start-ups that succeed in selling to consumers. It turns out that selling to consumers is much more difficult than selling to businesses.
For this reason, start-up entrepreneurs should never underestimate the importance of business customers and the difficulty of selling to consumers. If your business models call for revenues from consumers, think again and make sure you cover the challenges that lie ahead. If your business models are like Google or Facebook, you need to place as much or more focus on the business customers, your revenue stream, as on consumers, the free users.
Jay Jootar The VC Group & College of Management Mahidol University