Should you have a B2B model or a B2C model?
February 2nd, 2007 by Robert
A very important question when deciding what route your software startup will take is whether to target corporate customers or individual customers, the B2B or B2C models. Choosing which model has a big impact on several areas of your business, from software delivery to pricing to perceived value.
Business to Business
A recent interview with Ian Landsman of UserScape, a help desk software vendor, says
If possible go B2B instead of B2C. B2B generally will let you charge higher prices and allow you to focus on fewer but more valuable customers.
By ‘valuable customers’ here, he is referring to the price margin per customer for businesses. For a medium to large company, it is fairly common to see software purchases in the 6 to 7 figure range. Most decent size companies think nothing of spending a couple hundred thousand for a piece of software. Their perceived value is much higher than for an individual customer, hence the higher prices.
The downside to this B2B approach is that companies that will pay for this level of software tend to be either picky about the vendors they will deal with and be difficult to approach. By picky I don’t mean the quality of the product, but the recognition of the vendor itself. If a vendor is not well established in their market they will have a hard time making a go of it. It is kind of an ironic fact that for the most part the bigger the vendor and software package the lower the quality of that software, but companies don’t buy quality, they buy a name brand such as IBM, BEA, Microsoft, Oracle, etc.
Ian notes in the interview the struggles in this area:
Now I’m trying to figure out the best ways to reach those old school companies who get all their product information from conferences and trade publications.
Another downside is that companies also look for a laundry list of features, which means far more work for you. It doesn’t matter that they probably don’t need all of the features they are asking for because someone in the company read some article somewhere that said they needed it.
Business To Customer
The other side of the coin is the B2C model. These companies tend to get a lot of visibility because they are, by nature, in the public space. Think YouTube, 37Signals, Flickr, SmugMug, Digg, TheGoodBlogs, etc.
There are two variations of the B2C model. The first is a direct sale to the customer. SmugMug.com follows this approach by charging for their photo sharing/hosting services. Their customers range from the everyday photo taker to full photo professionals and they offer nothing for free, however they are very successful because they have a great product at the right price point to allow the customer to see value in using their service over a competitor offering free services. Of course you could also sell a physical product as well like an Amazon or other online retailers.
The second approach is the advertising model. This is where the Diggs, YouTubes and Flickrs of the world operate. They offer free services that attract a lot of visitors and rely on those visitors for advertising revenue. That advertising can come from a variety of models, such as pay-per-click like Google ads to cost-per-impression to direct sale of a spot. The advertising models tend to be social media sites and the good ones generate large amounts of traffic.
The B2C approach can have a much lower barrier to entry on two fronts. First, individuals are not as overly concerned about company recognition like corporations are and as a result are more likely to check out your product or service. Second is a much lower cost to market. As I mentioned in my previous entry about DropSend, building a web startup can be done relatively inexpensively and much quicker as you can add features as you go.
The downside to the B2C model depends on which route you take. If you choose the advertising path you could end up getting large amounts of revenue, but not large amounts of profit. The operating costs for a site like YouTube or Digg can be quite high with most of the costs going to hardware and bandwidth. That isn’t to say that this approach can’t make money. There are many sites that make good money using advertising. Going down the pay-for-services approach can have its own hurdles. You need to find that niche that people are using but are also willing to pay for and provide a better product that the competition.
The Sweet Spot
An under targeted market is the small to medium B2B market. These companies rarely have an IT staff or at best a very small IT staff so they can’t afford to build software and yet they don’t have the big budgets to buy those 6 and 7 figure software packages. While they are very cost conscience, they still need software to run and expand their business. There are also a lot more companies of this size so you are playing to volume that a B2C model targets, yet higher price that the traditional B2B model enjoys. Finding the right price point and finding customers to buy your product can be tricky, but you may have more success as these companies are more apt to consider a newer, non-established company to do business with.
The Decision
Deciding which path to take can be a tough decision and each has its own rewards and risks. Like any good startup strategy, researching the market can help guide you along with your available resources. Understanding the risks and rewards of each model will go a long way in realizing your success.
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