Buyers drive markets: the Bag of Snot experiment

Who is more important in a business transaction: the buyer or the seller? It is tempting to believe they are equally important, but I will argue that buyers are a lot more important.

A thought experiment: go to a street corner and try to sell a bag of snot for $1,000. Would you have any takers?

From the same corner, offer $1,000 for a bag of snot. What would happen? You’d have people lining up for half a mile sneezing into bags.

This is a bit misleading because a bag of snot has a market value of almost zero, unless perhaps it’s celebrity snot. If you substituted “bag of snot” with “cure for cancer”, no credible research firm would accept a buyer’s offer of $1,000. The market value for a cancer cure would take a novelty-sized check to print.

The examples illustrate the source of power in business: demand. Buyers drive markets. 

A definition of a market by Merriam-Webster is the extend of demand for a product or service, not how much of it can be supplied. Sellers can influence demand, as the $100 billion TV ad market tries. They can even occasionally create demand, as much of the beauty industry tells you happiness is just a body wash, tummy tuck, or dick pill away. But this is very expensive. Sellers still primarily follow where demand leads them.

This is true even if there is scarcity or monopoly on a low-demand good. If you are the only person on the planet that can create a bag of snot, the demand for it is still limited to its novelty value, which is likely small (but probably above zero; items like Christ-shaped potato chips have a few buyers seeking entertainment, status, or some unique need).

Perhaps sellers had more power in earlier times when the means of production were limited. For our cavemen ancestors, food, water, and shelter were in high demand and low supply. If you could have created a paleolithic bed and breakfast, you’d have been the first billionaire. Today, demand is more varied but our means and productivity are even deeper, fostering multiple competitors in almost every market. Demand is scarcer and more valuable.

The implications of this are critical for entrepreneurs. The most important is to build something people want. The most common entrepreneurial mistake may be creating something just because it can be, not because there’s actual demand beyond the entrepreneur’s market of one. 

There’s also an important implication for creators of marketplaces, which have a chicken-and-egg problem of attracting buyers and sellers simultaneously and balancing their interests. Because buyers drive markets, they are generally the more key element in the long-run.

That doesn’t mean buyers are the best group to target first. One seller can serve many buyers. When Josh Kopelman started Half.com, he convinced dozens of book sellers to upload their inventory for potential leads. Those dozens let him launch Half.com with a million books, giving incoming buyers a lot to browse once they came.

Sellers are also easier to find: there’s literally an alphabetical list of sellers for most items, but unfortunately not the same for buyers. 

eBay reocgnizes the importance of buyers and has favored them with a host of policies, such as light penalties for non-paying bidders and only allowing sellers to leave positive feedback on buyers. It raises seller ire but without the cash of buyers, transaction fees wouldn’t be an issue because sales would be zero. 

It’s become a fashion to attack companies for selling something stupid, unhealthy, or over-priced, but no matter how true those complaints are, it’s worth remembering demand is the real source of business power.

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