Dr. Bylund observes that students, when selecting entrepreneurial projects for his course, lean heavily towards consumer products and services. Does this represent smart entrepreneurial thinking, or not? Is it biased by (lack of) marketplace experience? Is it biased by media reporting and “buzz”? And what can practicing entrepreneurs learn from a reasoned analysis of the profit opportunities in Business-to-Business ventures compared to Business-to-Consumer ventures?
Key Takeaways and Actionable Insights
The economy — measured by Gross Output — is 70% production. That means that 70% of entrepreneurial opportunities arise in the supply chain stages that are prior to the final consumer purchase.
Keynesian economists believe that the economy is defined by consumption. Hence all their policies are justified as supporting or boosting consumption. Austrian economists think differently, and recognize that production is the health of the economy. People produce so that they can then exchange with others — that’s simple way to invoke Say’s Law. Keynesians use the metric of GDP to indicate economic growth or decline, and that metric is 70-75% composed of consumption. Economist Mark Skousen led the charge for an alternative metric, Gross Output or GO to track the size of the economy. GO measures the value of all production at every stage of the supply chain, i.e. every transaction where one entrepreneur or firm sells to another. GO identifies pre-consumption transactions as 75% of the economy. As Dr. Bylund says, it’s where the money is for entrepreneurs.
For the entrepreneur, B2B — producing input for other firms — offers advantages of structure, standardization and scale.
Structure: When an entrepreneur sells inputs for another firm’s production, the customer provides structured guidance on measurements, quality, delivery methods and timing — a blueprint for what they want to receive and how they want to receive it. Demand is codified. If the supplying entrepreneur can meet these codes, and a bid and a supply contract are approved, then a great deal of certainty is created around the business relationship.
This does not mean that there is no room for innovation. That comes in the elements of the business relationship that are not contracted. The creative entrepreneur can innovate in speed, responsiveness, ideation, and spotting new opportunities for efficiency. Innovation occurs at the edges of the structure, while the structure itself provides stability.
Standardization: Once the structured relationship is defined and agreed and the production interchange is established, the supplier-entrepreneur benefits from maintenance of the standard. There is precise knowledge of the ingredients to use, the production process to follow, the production rate and delivery specifications. This adds to certainty, and allows for the negotiation of lower costs.
Scale: Obviously the scale opportunity for the supplier is dependent on the size of the buyer and the size of the contract — it’s in the buyer’s hands. Nevertheless, contract reliability represents scale over time, and future volume assumes some (although not complete) predictability. The supplier can concentrate on efficiency measures to lower costs when there is no need to concern themselves with throughput variability.
These advantages are reversed in B2C businesses, where the trend is towards the opposite of structure, standardization and scale: personalization. Dr. Bylund called the B2C market ephemeral and flimsy. He was referring to the changeability of the consumer. Austrians understand that value is the subjective perception of the consumer. And the consumer is emotional, idiosyncratic and inconsistent in their continual rearrangement of value scales — what they prefer today is often different than what they prefer tomorrow, even if it is not obvious to the entrepreneur what change in conditions has brought this about. Consumers’ moods change and their choices change. Our free pdf points out the techniques required to manage in this context — tight targeting, deep empathy, and micro-segmentation.)
An entrepreneur’s production cycle may be 5 months or 5 weeks, but the consumer can change their mind in 5 minutes. They are on a different cycle. Their demand can not be relied upon. Continuous change is required of the entrepreneur competing for the consumer’s dollar, and continuous change is a tough business model. (Listen to our previous podcast on Austrian Capital Theory for the best tips on how to manage for continuous change.)
There are business channels where both B2B and B2C models are required. Some entrepreneurs find themselves moving their consumer goods to their end-consumer through distribution channels owned and operated by big businesses, such as CPG manufacturers of foods and beverages that sell on the shelves of Whole Foods or Walmart. The Walmart and Whole Foods relationships are B2B, even though the entrepreneur is in the B2C space. It is necessary to focus on producing value for the consumer, and educating the retailer about their benefit in passing on that value, as well as their role in communicating it to the consumer. At the same time, it is necessary to comply with the structure, standardization and scale rules set by the big business. We might call this a B2B2C business. It requires skills for both B2B and B2C.
Competing in B2B remains challenging, of course, but entrepreneurs should consider the size of the opportunity and the reduced uncertainty that are potentially available. In B2B, the entrepreneur is required to compete with other suppliers, to get costs and prices right to meet the customer’s needs, and to work hard to meet supply chain standards and specifications, and to negotiate contracts. Those requirements may be preferable and less uncertain than the ephemerality and flimsiness of consumer markets.