Chris McCann's Personal Blog

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Distribution’s importance is understood least in startups

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This is a post about secret #3 about startups by Peter Thiel. To see all 4 of the secrets start here.

These views and thoughts are all Peter’s and notes are from Blake Master’s. If you find any of these ideas intriguing I suggest reading through the full notes here.

TLDR: Distribution’s importance is understood least in startups. Tweet this.

Distribution is how you get a product out to consumers. More generally it can refer to how you spread the message about your company.

The distribution secret also has two sides to it. Distribution is much more important than people think. That makes it a business secret. But it’s a human secret too, since the people involved in distribution work very hard to hide what’s going on. Salespeople do best when people do not know they’re dealing with salespeople.

Distribution is the single topic who’s importance people understand least. Even if you have an awesome product you still have to get it out to people.

Distribution isn’t the same for every business
One helpful way to think about distribution is to realize that different kinds of customers have very different acquisition costs. You build and scale your operation based on what kinds of things you’re selling.

On one extreme you have inexpensive products such as steak knives where sales are a couple of dollars each. The other extreme your selling to governments or huge companies and sales are $1M-$50M each. As the unit value of each sale goes up, there is necessarily a shift towards more people-intensive processes. Your approach to these kinds of sales must be to utilize salespeople and business development people, who are basically just fancy salespeople who do three martini lunches and work on complex deals.

The truth is that selling things—whether we’re talking about advertising, mass marketing, cookie-cutter sales, or complex sales—is not a purely rational enterprise. It is not just about perfect information sharing, where you simply provide prospective customers with all the relevant information that they then use to make dispassionate, rational decisions. There is much stranger stuff at work here.

To succeed, every business has to have a powerful, effective way to distribute its product. Great distribution can give you a terminal monopoly, even if your product is undifferentiated. The converse is that product differentiation itself doesn’t get you anywhere.

Understanding the critical importance of distribution is only half the battle; a company’s ideal distribution effort depends on many specific things that are unique to its business. Just like every great tech company has a good, unique product, they’ve all found unique and extremely effective distribution angles too.

Different distribution models

  • Complex Sales – Deal sizes of $1M-$500M+ per deal – Examples are SpaceX and Palantir. At this scale is relationship intensive and its important the CEO is upper management is involved in all of the sales.
  • Large sales – Deal Sizes of $10K-$100K per deal – Examples are Yammer and ZocDoc. Need to have a more cookie cutter sales process that scales and build out a sales team.
  • Missing middle sales – There is a large zone in the middle where there’s no good distribution channel to reach customers. If you get the distribution right in this category you may have a terminal monopoly business. Example is inuit which sells tax software. Now they they are the standard, its probably impossible to displace.
  • Marketing/Advertising – Low cost consumer items – Examples Coke, Downey, Zynga, etc – Find a differentiated way to target your customer demographic online. Examples would be Zynga who built their distribution off of Facebook and Google’s ad networks.
  • Viral Marketing – Create strong network effects that get every 1 customer to pull in more than 1 additional customer. PayPal got their first 100,000’s of customers through referral programs and viral growth.

Note: The hard part of viral marketing is marketing people can’t do viral marketing. You don’t just build a product and then choose viral marketing. There is no viral marketing add-on. But viral marketing requires that the product’s core use case must be inherently viral.

Usually only one distribution model wins
Power law strikes again – you probably won’t have a bunch of equally good distribution strategies. Most businesses actually get zero distribution channels to work. Poor distribution—not product—is the number one cause of failure.

If you can get even a single distribution channel to work, you have great business.

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Written by Chris McCann

May 15, 2012 at 5:35 am

Posted in Uncategorized

8 Responses

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  1. […] The importance of distribution […]

  2. Nice work Chris. Especially the simple list of distribution models. A lot of companies are trying to tackle the middle sales through a combination of Large Sales, Marketing/Advertising, and Viral tactics. If you see any success cases in Middle sales. Do tell me.

    Cheers!

  3. […] Chris McCann’s Personal Blog […]

  4. […] been studying and practicing the art of getting mass initial distribution and I want to help others who are going through the problems of getting mass initial distribution […]

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