A few months ago I read an Above the Crowd newsletter by Bill Gurley of Benchmark Capital in which he introduced the idea of "Demand Side" vs. "Supply Side" Capitalism. Demand side capitalism is where an Internet startup comes up with a product that customers need, while supply side capitalism is where startups dream up a product, and hope that demand will soon follow.
Examples of demand side capitalism might be ebay (EBAY). They satisfied a need already apparent from flea market and garage sale fanatics, and the frustrations people felt when trying to find that perfect something or trying to sell some velvet Elvis portrait mistakenly purchased long ago.
Some people think that Amazon (AMZN) falls into the supply side corner, but most definitely the whole PC industry does. After all, the argument goes, no one knew they needed personal computers until companies like Tandy (now Radio Shack (RSH)), Hewlett-Packard (HWP), Apple (AAPL), and IBM (IBM), not to mention Intel (INTC) and Microsoft (MFST) came up with them.
So, the PC industry supposedly created customer needs, rather than the other way around.
Gurely calls for an end to supply side capitalism that seems rampant in the Internet space, and a return to demand side capitalism.
I think this is important advice for Internet companies. After all, Gurley is considered by many to be an Internet guru, so people should pay heed. But let's be clear that these ideas, like those of many so-called Internet gurus, are quite old. I assure you, one can find them in any Marketing 101 textbook.
In marketing, we just use different names. For example, I have always asked my MBA students: Is marketing about creating needs (Supply Side Capitalism) or filling needs (Demand Side Capitalism)? Throughout history, some firms have more production oriented (Supply Side) or market-oriented (Demand Side).
Those of us who teach marketing have always argued for "finding a need a filling it!"
So be it. As I have often said in this column, there is little about marketing on the Internet that's new. It's just that people think it's new.
THE PC INDUSTRY DIDN'T CREATE NEEDS!
So what about the PC industry. Was it indeed supply side? Absolutely. But the important lesson for Internet companies to remember is that the PC didn't create needs. The fact is that, except for some early adopters, few people had a need for a personal computer until so-called "killer apps" hit the market.
For example, VisiCalc and eventually Lotus 1-2-3 got personal computer sales going because they allowed people to do accounting and "what if" scenarios. Was this the first time in history that people did accounting and what if scenarios? No, this practice began thousands of years before, but computers made it far easier.
The same goes for the other killer apps, including word processing (the need for writing hardly began when word processing programs become available), graphics and presentation software (the need to draw pictures and do business presentations did not start with the advent of the computer), and games.
Now we have email, but email just allows people to communicate more easily. The need to communicate has been around since the dawn of history.
No, the PC industry did not create the need for personal computers. People found an interest in PCs only when software was available that allowed people to more easily or cost effectively do what they already did.
In fact, I doubt any product has created a customer need, and this includes digital pets, handheld computers, or virtually any successful Internet company that exists. If you can think of one – and don't think of the product, but rather the benefits is provide - let me know.
PEOPLE DO KNOW WHAT THEY WANT!
Internet startups, like many people in the technology industry, tend to think the reason why they can create needs is that people can't tell you what they want.
I have written about fallacies that doom Internet startups before (see Fallacies and Failures: Ways of Thinking that Doom Startups), and this is another example of a flawed way of thinking due to a misunderstanding of how to conduct research on customers.
Take the case of Amazon. To some, Amazon is a case of creating needs for buying books over the Internet. Sure, if you asked consumers, say back in 1995, whether they wanted to buy books over the Internet, they would likely looked confused.
You could interpret their response as evidence that people didn't want the Internet as a shopping vehicle. But if instead you asked whether people wanted to search a huge selection of books and get good prices, you would have noticed that many of these people were already going to large bookstores like Super Crown. Throw in the convenience of searching very efficiently and then having the book delivered to your door, and well, I doubt whether people couldn't understand this idea. What is Amazon providing if not this?
There are lots of techniques that companies like P&G (PG) and 3M (MMM) have devised to uncover already existing customer needs. They've had to. Having sold commodities for decades, they've needed to match customer needs better than the competitors just to survive.
I would suggest that Internet startups spend less time dreaming up new ideas they think are neat, and more time watching and listening to real people.
So, I wholeheartedly agree with Bill Gurley. Internet startups should concentrate on finding and filling customer needs, uh, I mean demand side capitalism.
Continue reading "Demand Side Capitalism in the New Market" ... Read the full article
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