Should I build a B2C or B2B startup? At first glimpse the choice seems quite easy. A startup is based on a great idea, so if I have the idea it will determine whether my startup will follow a B2B or B2C model, right?
But what makes an idea great? If you want to earn money (which is quite essential in case of a startup), your idea must turn into a service or product that satisfies your carefully chosen market, willing and able to pay. In short, you have the product-market fit.
This is quite hard to grasp until we translate it to B2B. The solution springing from your idea should solve a high priority problem of your target segment. You end up with a concept that is easy to validate. In B2C, it is quite a struggle to define “great”, and this is not the only aspect of B2C that is far from simple. We’ve collected the major reasons why you should start with the B2B path if you are a first-time entrepreneur.
Planning and Predicting
The entire life-cycle of a B2B startup is easier to plan and predict compared to B2C. We will check out the differences in ideas, the evolution of services and products, and sales and marketing in B2B and B2C. If you have some extra time for reading, you should also check out Justin Kan’s article, who, even after succeeding in B2C with Twitch, argues for B2B.
If you go for a B2B startup, your primary task is to seek a pain point shared by sufficient number of businesses and create a stable solution. There are methods that can help you chart the problems of your target market with satisfactory accuracy. If you come up with a solution, you can also receive quick feedback on how effective the resulting MVP is in curing the menace of your potential customers and clients. (Watch out for our articles if you want to learn more about the validation of your idea and product.) If you receive a lot of thumbs up, you are on the right track.
In contrast, in B2C solving a common problem is not necessarily the key to success. It’s partly because the to-be-users are more unlikely to have a precise definition of the issues that bother them enough to actually pay for a solution. In addition, B2C customers often grab their credit cards to gain entertainment or something trendy, solving a problem might not be the main motivation of a purchase.
A B2C startup is more at the mercy of trends. Insight and deduction can give you a direction, but chance will still play a major role in the potential success of your product or service. Gamble does not stop at the start line, even if you have ample early adopters, a wind of change can easily blow your users away.
For instance, let’s take a look at social media, one of the most well-known trends. While Facebook, Twitter, and reddit have grown into successful unicorns, many once popular initiatives like YikYak, Friendster, and MySpace have lost their shine over the years. Similarly, the tech-giant Google has failed in the social media business multiple times: Google+ was officially discontinued after a long struggle in 2018, while the also Google owned Orkut was shut down in 2014 even though it had been one of the most visited websites of India at its peak.
Gaining Users and Revenue
B2C is surrounded by myths. It makes sense, as youngsters reaching millions of people while they transform into a billionaire provide a splendid script material for Hollywood. This fame can be misleading though. Contrary to the popular belief, this doesn’t mean that B2C is more profitable than B2B, it rather indicates how different the path is to success.
Compared to businesses, B2C customers are less likely to spend (a bigger sum of) money on a product or a service. As a consequence, your pricing will likely be lower in B2C, so you will need more customers to reach the same revenue as startups who can work with higher price and profit per purchase. In case of the most common B2C apps, you need a bevy of free users to reach a tiny paying elite. That’s why both your product or service and your marketing must be viral to bag primarily impulsive purchases from your B2C customers. This process, if successful, can be striking: everybody will know your brand. In return, it will be less in your control, even with the most talented and experienced team a major component will be trying until “lucking” out.
In contrast, B2B is the realm of rational decisions and usually bigger deals per client. Normally, B2B clients are not impulsive buyers, they look at any purchase as investment. For example, if you solve their problem or you automate a painstaking task for them, they can spend more time with generating revenue. If you help them in legal compliance, you spare them potential fines. Your solution can easily be converted into numbers.
As a consequence, you will end up with a slower, longer sales funnel which is easier to plan and finetune, even if it takes longer to work through. As a side effect of B2B focus, your company might be less-widely-known, but you don’t need the mass appeal. It’s enough to reach your potential clients through a well-built, robust channel.
Growth or Staying Alive
Even after the success of the first product or service, the main difference in B2B and B2C path is if you can grow based solely on reliable information and feedback or if there is a lot of guessing involved. In B2C, every new function, additional service is as much of a gamble as the first idea was. Your users might go crazy (in either direction) about your new chat function, menu items, or layout. With a seemingly dashing yet unsolicited change you may chase your customers to the competition with your own hands.
Snapchat is a prime example. A new design brought the loss of millions of active users, which was reflected in the clearly visible decline in Snapchat’s stock market price. Besides, many giants have their share of entirely failed attempts, you can check out the Google graveyard for proof.
In B2B, your clients can tell you what other problems they want to be solved in the given sector and line of business (such as integrating your app with another corporate system). You gain valuable feedback and potential premium clients with a pricier subscription at the same time.
During the past few years, there is a growing tendency of investors opting for B2B startups over B2C. All in all, this is mainly the result of the previously discussed characteristics.
B2B startups are generally more predictable, more secure investments; they are less exposed to mass trends than B2C businesses. The skillset of the founders of a B2B startup, an exhaustively validated idea and a well-baked solution can be a convincing enough combination for investors to consider your business potentially profitable even in a very early stage.
The bigger risk factor of B2C doesn’t bring compensatory advantages to investors. No matter how big the audience is for a B2C startup if it doesn’t translate to potential extra profit.
This is reflected by the decision of Unicorn India Ventures (UIV), specializing in financing very early phase (even idea-level) startups. Partly based on their own experience they’ve recently chosen to focus solely on B2B startups in the future. The 4-year-old UIV has invested in approximately 18 startup businesses, from which only B2C companies have failed so far.
This, of course, doesn’t mean that a B2C startup cannot succeed or that finding an investor is impossible. The growing interest in B2B, however, can open more stable avenues to a to-be-entrepreneur.
Nothing is Set in Stone: Pivoting
If you are much beyond the planning phase and you’ve already opted for B2C, but it doesn’t seem to bring the expected results, you can still switch to B2B with a clever redefinition of your service or product. (Of course, you can also try this maneuver the other way around). You have plenty of possibilities to pivot from B2C to B2B. For example, you can extend your B2C product or service to be fit for business needs; or you can consider changing to B2B2C.
If you are in the same boat, follow our series of articles, because we’ll devote an entire article for pivoting.
If you are happy with the path you’ve taken and it’s time for a robust MVP, check out our services or contact us.
B2B (Business-to-Business): This is a business model where a business sells its products and/or services to other businesses.
B2B2C (Business-to-Business-to-Customer): this is a business model where you don’t sell your product directly to your end-users, but to another business, which (even as part of another product or service) sells it to its customers.
B2C (Business-to-Customer): This is a business model where a business sells its products and/or services to customers.
MVP (Minimum Viable Product): A first prototype of a software product which has limited functionality, but viable enough for release for the early adopters/users.
Pivoting: When you change one or more major aspects of your startup without altering the rest of your business. For example, one feature of your software product becomes the product itself, or you switch to another market segment.
Product-Market Fit: This is the ideal state when your product reaches its (big enough) market, and it turns out to be a great match. You manage to serve your customers’ needs so well, that they’re not only willing to pay for your product, but they would truly miss it if it wasn’t available any more.
Viral: Your product, service, or marketing is viral when many people share it with and suggest it to others. For instance, a chatting app is inherently viral, because users will recommend it to those whom they want to chat with. The same applies to software used for presentations (such as Prezi), where a user showcases the tool itself to the audience during the speech.