There have been a number of well-known start-ups that initially started out as B2C and pivoted to B2B, including Plaid, Slack, and somewhat closer to home Xendit amongst others. The lure to consumer can be strong because founders are trying to solve problems that they’ve faced and there’s a perception of a large market of potential users (“Everyone could use this!”). However, the winds of popular perception change swiftly with consumer products. The problems that face businesses are typically immutable and when you consider that businesses exist to generate a profit, if a start-up is able to solve a problem that either increases revenue or reduces costs, then there’s a reasonable likelihood that businesses will want to give you money to solve their problem.

Plaid started out as a financial management tool that connected bank accounts to budgeting and bookkeeping services. However, when they found it difficult to connect to user’s bank accounts, they pivoted to a B2B product helping other companies to solve the problem that they were facing. Slack started as an instant messaging tool and then found a niche in enterprises as a searchable log for all conversations and knowledge. Xendit wanted to make it easy for people to send money across borders but then realized that the financial infrastructure in Indonesia was sorely lacking and worked to create the pipes that allow digital businesses to operate in the region. Why do some companies start with a consumer orientation and pivot to focus on business customers?

Why do founders gravitate towards B2C?

Founders are lured by the prospect of selling to people “like me” which could represent a massive total addressable market. However, the hard part about dealing with crowds is the level of heterogeneity. There’s a large amount of people that have different wants and needs and for consumer products, there is an almost infinite number of substitutes that they can use. This makes it far more difficult to segment and find a niche to capitalize on (remember - there are riches in niches).

Ideally, a B2C product will start with a hypothesis that’s targeted at a relatively large market and will then whittle away the peripheral users and features to become the “go to application” for that group of users. Superhuman did this when they segmented their customer groups until they could find a group that was “very disappointed” if they could no longer use the software and then they doubled down on the features that that group found appealing. They were also able to tailor their marketing to the users that were definitively going to use the product.

There’s also the fear of hearing “No.” Selling to businesses is a tough gig and there’s a lot of rejection that comes with it. The people that do well tend to have an optimistic outlook and can bounce back from rejection quickly. When founders are building B2C products, there’s a tendency to attribute any lack of success to the lack of certain features or alternative external factors. The answer that I’ve heard a number of times is to continue focusing on product or shrugging off the external challenges as they cannot be attributed to active choices. This mindset fails to embrace the challenge head on.

If the founders are willing to get out there and talk to potential customers then they’ll get the feedback that they need to fund success. In B2B sales, it’s difficult to avoid negative feedback because either the sales person (which is typically one of the founders) will be directly in front of the potential buyer giving them a higher probability of understanding the reasons that are preventing a sale. Rather than being perceived as a negative, this gives founders the ability to pivot and change their strategy towards optimal outcomes quickly.

In my travels, I’ve also noticed that it can be difficult to explain the B2B ideas to investors. This could be a geographic issue that’s specific to investors in this part of the world but the difference in measurements that are used for B2B vs B2C business models can cause some confusion. In an attempt to calculate the LTV/CAC, investors will tend to prod for these metrics, which are especially difficult to produce in the early stages of a business.

What goes into calculating the CAC when you’re a B2B business? Do you include the fully loaded salaries of all of the sales people? What about bonuses, multipliers etc? The transport and accommodation at conferences to speak with potential customers? This becomes difficult very quickly because there aren’t any hard numbers that you can point to – like a neat CAC value from a digital marketing campaign. What does the LTV look like? It’s hard to know how long a customer will stick around for when you’ve only got a handful and their spend (net revenue retention) has been increasing as the company is rolling out additional features. It’s hard to play by the rules when you’re playing a different game.

The Benefit of B2B

One of the larger challenges of B2C products is monetization. Natively, the model lends itself to advertising as there is a relatively low propensity to pay and applications can generally (at least historically have been able to) push those advertisements to segmented customer demographics. In this situation, the user (individuals) and the customer (advertisers) are different. As a result, there is a need for different features to be able to satisfy both different parties. This means that the product could end up taking a direction that is in the interests of the consumers (advertisers) but doesn’t benefit the users (individuals), diluting product-market fit.

When you’re producing a product for a business, the user and consumer is the same. This means the product direction can be significantly more focused. All of the features will be relevant and the product will become more valuable, enabling the start-up to charge more and onboard more customers with less effort. The flywheel starts to spin, CAC comes down, and ACV increases. This is more difficult with consumer products as preferences change and the link between customers and users is tenuous at best.

If we assume that the B2C business is able to create a product that isn’t reliant on advertising and they are able to charge, what’s the price point that makes the most sense? As the propensity to pay is lower for individuals, it takes a lot more individuals to adopt the product than it would take customers. An annual $100,000 contract with one B2B client, is equivalent to 8,000 customers paying $1/month or 800 customers paying $10/month. How many customers do you need to sign up before you’re able to pay the founders a living wage? Generally, it’s more difficult to get past the initial stages with B2C businesses. The customers can be stickier once you’ve past this point however, the exercise proves how much scale is required to support a team let alone grow it.

Conclusion

B2C looks like a more promising model initially because of the generally large attainable market and there is a perception that the users are facing more similar than different. However, a business that’s built on a foundation where the users and consumers have materially different preferences can struggle to get the flywheel spinning. If you want to confront difficulties head-on, it’s going to be significantly easier to get the feedback that you need to improve with B2B sales. Founders should think critically about the issue that they’re trying to solve and where it fits in the value chain. Don’t be afraid of “No”, if you actively seek it out, your business will benefit.