Sometimes, the best way to save money is to spend money.
You invest in education to improve your long-term earning potential. You invest in software to make your employees more efficient.
This is a basic concept that can get lost in the oh-fuck-we're-in-a-real-recession panic that is striking boardrooms and kitchen table conversations around the world.
But companies tend to remember it better than individual consumers. Companies tighten their belts more rationally. Consumers will blindly slash costs across the board. They hibernate and are unable to think about the long term benefits which can accrue from short term investments.
What does this mean to entrepreneurs? I think it's better to start a B2B business than a B2C.
Bottom Line: All else being equal (and this is a huge qualifier), if I were starting a new company in a recession or depression period, I'd prefer to sell to companies over consumers.
I do see your point Ben. B2B does ensure consistent order flows and is to a great extent predictable. But the downsides are –
a) Companies keep a slate of vendors and that slims your margins in a B@B context. Consumers may not drill so deep as they tend to pick what’s available in the neibhorhood store and off the shelf.
b) You need a relatively large scale enterprise to service B2B. Think of commensurate logistics, supply chain, liberal credit terms and organizational bulk. In a way it’s ironic because in a recession, you may not have access to cheap debt since Bankers turn increasingly risk averse and fine comb every loan application before them. Result – your capital will stay locked down and illiquid over the long term and that’s a double whammy. While in B2C, where all business could be for cash and that ensures far better capital turnover ratio [Think restaurants – you can buy stuff on credit while you sell it only on cash basis. You ride on your supplier’s working capital. Isn’t it cool?!!!)
I’m not sure your assumptions are right. Companies “tighten their belts more rationally” – what is your evidence for this? Companies are run by *people* who are trying to keep their jobs, after all. Furthermore, even if they are inclined to invest, my experience is that in downturns companies head for the tried-and-true rather than taking risks on new possibilities, which is what a startup usually offers.
I saw a good analysis of B2B behavior a few years ago that looks at it a different way: basically a quadrant chart, dimension one is necessity/luxury and dimension two is tactical/strategic. In good times, there is room for some businesses to sell strategic solutions that are somewhere in the middle of necessity/luxury, and these tend to be highly profitable for the vendor. In tough times, buyers head for the tactical necessities.
I am not so sure that consumers are any different.
Fair points… My view is that decision irrationality generally goes down
the more people who are involved — ie the more sets of eyes you have on
something the more likely someone is to ring the alarm on an irrational
behavior. An individual consumer has fewer checks and balances and
counterpoints on his purchasing decisions.
So would you then say that the most rational decisions come out of the largest committees?
No, there are diminishing returns. But two people make better decisions than
one. Three better than two. Not sure after that. Wisdom of Crowds theory
would say it¹s a big number but who knows.
So your range of confidence is … roughly the size of a family sitting around a kitchen table. And isn’t the current situation we’re in almost entirely the consequence of the “Wisdom of Crowds”? From the real estate bubble to the relaxed lending standards to the financial panic and market crash and now the consumer spending pullback…
I don’t know that you are wrong about B2B vs. B2C. But you haven’t really supported your claim.
Most of the idiotic financial decisions were not wisdom of crowds they
were made by idiots at the top, alone.
I would qualify – focus on building a B2B startup that has quantifiable financial benefits. Save your customer money or help them to sell more.
In response to Krishna – I see no reason why you can’t consider starting small with a few mom and pop customers for your B2B – this will avoid having to immediately build out costly infrastructure.
Perhaps I shouldn’t be blasting this around on the Internet, but my business is improving in the midst of this recession. Why? Because I’m hustling for business a lot harder than I used to. I’m also putting a lot of energy into improving what I do. It’s paying off.
Nothing succeeds like making an effort.
I’m not so sure it is consumer irrationality as it is aversion to risk. If a company loses all money and goes bankrupt, that’s a shame. But that means equipment goes without use. If a family loses all money, there are still hungry mouths. The end result of “people dying” is actually on the table. I can understand that this chance is limited, and that might be where irrationality plays a part, but the business and individual are playing for and with very different stakes.
Regarding the number of people to make a decision, I think that is an interesting thought experiment. What is the number of people before diminishing returns? Is there a point at which the returns are actually negative (a mob)? I think we’ve all been in meetings large enough that the first idea that comes across is just supported by several head-nodders. Depending on the decisions vs. the quality of people involved, I’d say the number is often somewhere between 3 and 7 or 8. Any more than that, and everyone is assuming someone else is doing that thing that needs to be done.
@Cameron R
Thanks. When you envisage Mom & Pop clientele, it suffers from the same flaw that affects typical B2C inconsistency in terms of order flows (and then recoveries!) because Mom & Pop outfits start up and shut down without notice.
In a B2B context, the clarity of Revenue visibility that sustains business longevity is what seeks to score over the lack of it in a B2C context, though with attendant risks that I had outlined in my earlier comment that you had referred.