On Selling To Consumers

The software industry is a funny thing. For all of our heroic examples (Gates, Jobs, Page, Zuckerberg etc), it is difficult to tell whether we worship them because they are software-y types like us or whether we only do so because they are also famous to everyone else. Pop quiz! Who founded MicroStrategy?

Here’s the thing. Your Gates archetype is famous because of selling into the mass consumer market. Journalists have heard of their product because they too are part of the mass consumer market. So they are famous because they happen, by coincidence, to sell a product that many people buy.

Selling a mass market product is really, really hard to turn a seriously juicy buck on. For two big reasons.

First: it’s hard. Every business is hard. Selling into a mass market is just the same sort of hard multiplied by hundreds of millions of people who have no rational explanation for why they will happily pay $4.30 daily for a coffee but who will refuse to pay $5 monthly for random-app.example.com.

Second: the consumer market’s importance is vastly overstated. This really in-hindsight-blindingly-obvious-fact comes to me courtesy of Hayek in his lecture, The Conditions of Equilibrium between the Production of Consumers’ Goods and the Production of Producers’ Goods, originally published in Prices and Production.

Most of the actual stock of capital in the economy is not in the hands of consumers. It is tied up in the “structure of production”.

Any one product might be seen as the output of a complicated graph which is its “structure of production”. But at any one point of time, most of the value of the structure is not in the consumer product. It’s in the rest of the structure in various stages of digestion.

That is, almost all the money and value and machinery and work in progress and untransformed goods ad infinitum are not on the shelf at Wal-Mart. They are distributed across the economy.

So. Why are you, the software entrepreneur, trying to sell a mass market product, at what will probably be a low-per-unit gross profit, when almost all the easily-available money is flowing between businesses? Especially if you tot up the hit-driven nature of consumer software versus the very high opportunity cost of not doing freelancing or taking employment.

Because of sample bias. You want to be rich, and all the rich software-y people you’ve heard of are involved in the mass market. Try reading a Rich List some time (from any country). Count how many in the top 100 you’ve ever heard of. Notice how few of them made their zillions selling directly to consumers.

That is not a coincidence.

Today’s rant inspired tangentially by this blog post and this story about selling a mass consumer product.

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