Overrated: Product; Underrated: distribution.
Product, market and team are necessary but not sufficient for success.
“Business has only two functions — marketing and innovation.”
Milan Kundera in The Unbearable Lightness of Being
I am fortunate in having the opportunity to meet a number of entrepreneurs who are building interesting businesses. The ability to tell the story of their business (the “why” and the “how”) to both prospective customers and investors is critical to success.
I hear founders talk about the market opportunity (problem and TAM) and their product (the solution). Most entrepreneurs are aware that venture capital investors are seeking out large, growing markets which are being addressed with innovative products (ideally a 10x better solution) led by a team with a compelling backstory as to “why them”.
A widely held but mistaken belief is that a compelling product or service in a large and growing market with a quality team will naturally be successful. Product, market and team are necessary but not sufficient for success.
A clear value proposition to the buyer (return on investment), a thoughtful distribution strategy and attractive unit economics, also critically important to business success, doubly so in these difficult economic times. And these fundamentals often get short shrift in investor pitches.
A word that equity investors love is “scalability.” I define scalability is the combination of:
A clear value proposition with the buyer being able to quantify the benefits. Cost savings are particularly relevant in these times as businesses look to cut costs rapidly while still keeping their lights on;
An efficient strategy for “distributing” your product or service to customers;
Attractive unit economics — a case to investors on how their capital will earn attractive returns;
A process that can be repeated without either (b) or (c) worsening substantially
I have written in the past on the importance of Unit Economics and will dedicate a future piece to how companies can showcase a compelling value proposition to prospective customers.
This blog post focuses on distribution. The reality is that building an efficient go-to-market engine is really hard. Good products with great distribution usually win (in terms of financial success) when competing with great products which only have an average distribution efficiency. Manufacturing businesses selling physical goods have long known the importance of distribution. In an era where marketing is primary digital and buyer attention is hard to get, many start-ups appear to have forgotten the importance of distribution.
In a thread on Twitter from October 2019 comparing two items, Gumroad founder Sahil Lavinga reflected what I believe
Overrated: product.
Underrated: distribution.
Why does the lack of focus on distribution persist in the start-up ecosystem?
In the first months and years after a company is founded, the “new product” is the hook that gets the initial customers to engage and pay. And persistent founders, using their sales and networking skills, are often able to find early adopters for whom the product really provides benefits worth paying for. Not surprisingly many entrepreneurs with early success undervalue distribution (“it’s easier than I expected to find customers”) and overvalue the product (“the reason we’re having success is because the product fills a huge unserved need.”). At a certain scale for all companies, most of the early adopters, who are a tiny minority of the total addressable market, are on board. And at that point, efficient distribution really becomes critical to ongoing business success.
What are the hallmarks of a thoughtful go-to-market strategy that can scale efficiently? These are some of my thoughts.
Product and Distribution are linked. When building the product consider incorporating features that assist with distribution such as designing the product for sharing and virality. While this is not always possible, some of the great success stories that sell to SMBs and Enterprises — Zoom, Slack, Docusign, Dropbox to name a few — have adopted this approach.
Incorporate your product into the customer’s existing workflow. Everyone hopes that they will create a “must have” product that people can’t live without and ideally becomes a system of record. Almost no one achieves that. Customers, especially businesses, will adopt products much faster when they are built into the existing business workflows. Companies that integrate their products via APIs into existing systems are far more likely to generate awareness, trials and eventually revenue.
Remember that paid marketing efforts (media or events) rarely scale efficiently. Most business plans assume efficiencies of scale over time leading to improving margins and profitability. I know this firsthand having built many such plans. The reality is that almost all paid distribution strategies actually get less efficient at scale. The weak recent performance of once successful direct to consumer brands such as Casper and Outdoor Voices, chronicled in this widely circulated Medium article, are proof of risks in marketing strategy dependent on paid marketing.
Give away something of value for free. Not every product lends itself to a freemium or limited free trial offering. However, every business can offer prospective customers something of value such as best practices to solve the core problem, even if they are not buying your product or service to do that. A value exchange given freely builds credibility and trust. At the worst it will help your company’s awareness and brand. At best it will seed the pipeline for future sales — whether in a few quarters or a few years.
Retention matters from the beginning. Shocks to the system as we are currently experiencing remind us how important keeping our customers is. I know full well that customer acquisition is sexy, is a proof of “product-market fit” that venture investors want, and gives all of us in business a dopamine hit. Remember the truism that keeping existing customers costs a lot less than acquiring a new customer. Invest in the entire customer experience early in the life of your company. Happy customers will not only stay but also can use their word of mouth to amplify your offering to their networks.
Avoid premature scaling. As a company starts to build revenue with the founders leading the sales and marketing efforts, the metrics can look very strong. Payback periods are strong and sales cycles appear short leading to initial sales team members beating quota expectations. At this point the business is hyper efficient in distribution terms. And this is often the best time to raise outside capital. New investors want you to use their capital for growth and hence reward plans that invest aggressively in scaling the revenue organization and marketing spend.
Getting the attention of people (whether they’re individual consumers or in a purchasing role for their business) is really hard. And, even once you get attention, prospects often succumb to inertia and stay with their existing solution. So entrepreneurs spent extra time thinking through your go-to-market strategy and unit economics. It will pay dividends in the longer term.