Demand side vs. supply side economics

Something I’ve spent much time thinking about is which types of businesses to run and make money. I did a taco business, and in my job I’m in software, I grew up in a family manufacturing business, and with my wife run an interior design business. I’ve had some other ventures along the way too.

One thing when people are starting a business is, “Will this work?” Most of the time, what that actually means is “Will I be able to get customers?” The level of difficulty in generating at least a single interacting is different depending on which industry you are in. Namely, whether demand is generated naturally, or whether you have to create the demand.

I chose those four specific business experiences to illustrate this point. In order from least effort to get customer interactions to most would be taco business, manufacturing, software, and then interior design. That’s because our bodies create the demand for food. Someone is hungry and you have good smelling tacos cooking, they are likely to stop and try them and as long as you’re good, they’ll be back. Manufacturing is necessary for anyone trying to get something made, they just need to find a supplier. Software starts to get into the “we could do without, but how much more efficient would it be” range of things, though varies a bit by software types. No one needs interior design generally, but they want it due to something aspirational. So they have to be shown things they like.

I would call the taco business and manufacturing demand-side businesses. The demand is generated from the customer themselves seeking to find the good or service they need at a price they find fair. As a result, while it’s easier to engage with customers who are seeking you out, many people like that certain and the industries here become more competitive, meaning profit margins shrink. Restaurants are notoriously low margin businesses.

Another example of demand-side business would be a grocery store. If the only grocery store in a town closed, there would be a new one open pretty quick to fill the demand. The town isn’t going to let itself starve after all.

Software and Interior design are examples of what I call supply-side businesses. Someone with an idea to improve things for others, but can be skipped if needed. These businesses have to sell. They have to make their case on why you need them. These are the businesses that many people are scared to start because it’s impossible to be sure if you’ll be able to get any clients at all. Most likely they aren’t going to just walk in like they do for restaurants. Many times if one of these supply-side businesses closes, unlike the grocery store example, it’s place won’t be filled immediately. It’s impact won’t be felt. However, these businesses are the ones where high profit margins can be charged. They aren’t as competitive since they fill wants not needs.

The reason I’m identifying this to you is because there is a tendency for people to not see this connection. To think their restaurant can charge incredibly high margins and make it. Or to think their service business can scrape by on low margins and make it. Neither is true because of competition for the restaurant and because when times get tight financially the supply side business is going to see a big pullback, meaning you need to have made good money on those jobs you did get to float through the lean times.

It’s worth reflecting on the business you’re in and whether you taking the right economic approach for your business type.