17 important lessons from this lecture:
00:07:42 When looking for business ideas, and when planning your business’s future, always look for changing technology factors because any market that has a significant change in either the raw underlying materials or the enabling factors is an environment that’s about to change in a very significant way.
00:10:15 Look at your products and services you offer. If you find you are over-serving consumers and under-serving businesses, for example offering a plethora of features or memory space that the average consumer isn’t using or doesn’t need, yet not enough memory space or security for the average business, then you should consider several options:
Make your business consumer-centric:
- Increase the price of your product for consumers and market yourself as a specialist, in which case competitors may try and undercut you by offering a cheaper price
- Offer a lesser quality product to consumers than they currently enjoy, thus identifying yourself as a commodity, in which case competitors may undercut you by offering a better product at a similar price
- With consumer-centric products, competition is fierce; it’s viewed as a commodity product, and you’re constantly struggling with monetizing and making money: How can you get people to actually pay for products?
- The two major business models are either having people pay for your application or offer it for free and advertise on your app/site.
- In 2014, benchmarking figures noted that±$35 billion were spent on mobile apps each year, and ±$135 billion spent on digital advertising per year = consumer-centric businesses are fighting for the ± $170 billion dollars of revenue each year.
Make your business enterprise-centric:
- Focus less on consumers and more on businesses
- In 2014, benchmarking figures noted±$3.7 trillion dollars spent in global IT industry
00:10:14 Consumer-centric startups have the reputation for fun and partying all the time, while enterprise-centric startups are more the unsexy idea of battling large incumbents. Consider the arguments:
For consumer-centric businesses:
- In 2014 (as mentioned above), consumer-centric businesses are fighting for the ± $170 billion dollars of revenue each year.
- The businesses competing in this industry are trying to get as many people as possible to pay a couple of dollars per month for a product where large companies such as Google and Apple will probably eventually offer your product for free over time, or they are trying to get as many page per visits as possible to maximize exposure to the paid advertising on their website.
- A lot of love and care are put into design and user experience to make as many people want to use your product as possible.
For enterprise-centric businesses:
- In 2014, benchmarking figures noted ± $3.7 trillion dollars spent in global IT industry. Enterprise-centric clients are more concerned with increased productivity, efficiency and security, and are willing to pay much more for this.
- Sales in this industry can be extremely slow, with companies taking years to decide which software they want to invest in, and then another few years installing and adapting their business to the software.
- Design and user experience often take a back seat to functionality and universal usage by everyone in the company, no matter their job requirements.
- You must hire sales force intermediaries from all around the country who become the only face for your company and software.
- Breaking into the enterprise industry is impossible if you don’t have some heavy-hitters with enterprise experience backing you, and larger, already established companies are going to stomp on you.
00:18:17 If you’re going to become an enterprise-centric company, you’re going to have to play by a very different set of rules:
- What about the sales process can be changed and quickened?
- What about the design and user experience can be improved?
- How do you bypass an intermediary sales force and approach prospective clients more directly?
1.) “Spot disruptions. Look for new enabling technologies that create a wide gap between how things have been done and how they can be done.”
00:21:11 Prior to the cloud, software and storage had to be manually installed for every client at every client location. This created a lot of redundant work and time lost doing repetitive tasks. With the cloud, companies could now download and install the software directly from your company site and rent storage space from your company’s vast amount of servers as they need, thus drastically reducing the amount of wasted work, and overhead expenses.
00:27:11 Every industry in the world is undergoing a fundamental business model disruption. Gross international transportation shipping companies need to understand Uber and Lyft’s smaller local person transportation business models, and how those technologies and business models will affect their larger, international shipping industry.
- In the retail industry, multi-platform commerce is accelerating. Customers today are going to shop on your site from their laptop, from their phone, at your store, and will expect things to be delivered to them as well.
- In the healthcare industry, hospitals are looking for ways to enable more personalized, predictive, and understandable healthcare and assistance to their patients.
- In the media industry, linear processes where a film is made, goes to the movie theatre for a couple of weeks, and then is eventually going to iTunes, Netflix and other platforms to purchase or rent is changing as people expect more experiences immediately. This is going to have an impact on media creation and distribution.
In all these cases this means that these larger companies will need startups to help them work through this.
[EDITOR’S NOTE: For more information on identifying how business models from other industries can impact yours, read the book Best Practices: Building Your Business with Customer-Focused Solutions by Arthur Andersen, Robert Hiebeler, Thomas B. Kelly and Charles Ketteman.]
2.) “Intentionally start small. Start with something simple and small, then expand over time. If people call it a ‘toy’ you’re definitely into something.”
00:36:36 Larger incumbents will always aim for the “full solution” when they create products. You cannot compete with that. Instead, identify one very tiny sliver of a problem in the full solution, create a solution to that problem with a mind-blowing user experience where customers will want to solve the problem with your discrete product or service, break from the ‘standard’ industry business model, and then work to expand to more solutions and larger clients over time.
[EDITOR’S NOTE: In his lecture The Importance Of Finding Your Idea & Product, Sam Altman of Y Combinator argues that:
- You want an idea that will turn into a monopoly, but you can’t get a monopoly in a big market right away: too much competition for that. Instead, you have to find a small market in which you can get a monopoly, and then quickly expand. This is why some great startup ideas look really bad at the beginning. The first version of your product doesn’t need to sound big, it needs to take over a small niche of your market and expand from there.
- You need to build a business that is difficult to replicate.
- You need towalk the line between right and crazy, and if you do come up with a great idea, most people are going to think it’s bad. This means that they won’t compete with you:
The ideas that often look terrible at the beginning.]
3.) “Find asymmetries. Do things that incumbents can’t or won’t do because it’s economically or technically infeasible.”
00:40:17 Find out where in an incumbent’s business model and financials that they absolutely cannot afford to compete on price (or time, or quality), and then undercut them, or find unusual or unique ways of monetizing customers, and thus not really practial for anyone else to do.
For example, Zenefits gives it’s software for free to startups, and then monetizes the startup’s heath insurance carriers and other benefits providers. Something nobody else had ever thought of, and are not in a position to integrate or compete with.
4.) “Find the almost-crazy outliers. Go after the customers that are working in the future, but that haven’t totally lost their minds.”
[EDITOR’S NOTE: In the documentary Transcendent Man: When Humans Merge With Technology & Transcend Biology, Ray Kurzweil argues that information technology follows relatively predictable trajectories, and you can use this as a planning tool. Meaning you can’t just take projections for just 2, 3, 4, or 6 years, but 10, 20, 50 years from now and invent with the technologies of the future.]
5.) “Listen to customers, but don’t always build exactly what they want. Build what they need.”
00:43:28 Your customers will have tons of requests. Your job is to distill the essence of those request down into the ultimate product.
[EDITOR’S NOTE: Read my interview with Peter Spear, Brand Listener for a list of techniques to effectively listen to customers.]
One response to “119. How To Start A Startup: Choosing Between B2B & B2C Business Models”
[…] NOTE: For more information, watch the Ycombinator lecture Choosing Between B2B vs. B2C Business Models by Aaron Levie for Stanford University, and read my interview with entrepreneur Derek […]