1. “Most businesses actually get zero distribution channels to work. Poor distribution—not product—is the number one cause of failure.” (Peter Thiel) Legions of businesses fail every day because the people involved in the company do not know how to market, distribute and sell their goods and services. The right training can help a person understand that while potential customers don’t like salespeople, they do like to buy products and services. Knowing how to present a situation as an opportunity to buy and not an unpleasant experience with a salesperson requires skill. While a lot of this post is about sales, physical distribution systems should not be forgotten. There are companies like McDonalds which owe their success more to their distribution systems than anything else. Great distribution systems can be a substantial part of a company’s moat, as is the case with Starbucks, Amazon and Costco.
2. “Engineers frequently … do not understand distribution. Since they don’t know what works, and haven’t thought about it, they try some sales, BD, advertising, and viral marketing—everything but the kitchen sink…. (Peter Thiel) Engineers have a tendency to believe that people will be lined up outside the door with crisp but non-sequentially numbered stacks of $100 bills waiting desperately to buy what they have designed. They love what they create and think other people will too. Selling and marketing is a much harder problem than most engineers realize. Managers can be equally clueless about how hard it is to market, distribute and sell something. Sending employees who are not trained in sales (engineers and managers) on actual sales calls can be hugely beneficial for a company since they quickly learn that selling is not easy (new respect for salespeople is created) and they often discover new ways to improve the product or service. Similar benefits can be obtained by having these same people sit for a day in a call center hearing customer complaints.
3. “In the old world, you devoted 30% of your time to building a great service and 70% of your time to shouting about it. In the new world, that inverts.” “If I build a great product or service, my customers will tell each other.” (Jeff Bezos) Nothing sells products and services like great word of mouth. Having said that, a so-called “viral” sales and distribution strategy is rarely accidental and is never a complete solution. Clever businesspeople find ways to get customers talking about their product or services that do not require spending huge sums of cash. For an example, see item 4 below. Leveraging a social graph is another way to accomplish the organic avenue of marketing that Jeff Bezos describes.
4. “Rich Barton’s law: The number of cheap brand impressions rises with square of amount of controversial/interesting metadata produced.” This is my formulation of a law based on statements made by Rich. Sometimes you can give something away to the public (often a byproduct of what you do) and turn that into a customer acquisition tool. As an example, Zillow does this as well as any company. The public loves getting updates on real estate prices and every time the press repeats its market data, Zillow gets free brand impressions. There are other laws like Richard Branson’s law (which I just made up) which can also generate cheap brand impressions. Branson’s law is: if you wind surf with a naked model holding tight to your back with photographers present, you will have articles written about you and your company thereby creating cheap brand impressions.
5. “Many entrepreneurs who build great products simply don’t have a good distribution strategy. Even worse is when they insist that they don’t need one, or call no distribution strategy a ‘viral marketing strategy’ … a16z is a sucker for people who have sales and marketing figured out.” (Marc Andreessen). Assuming that a start up with a great technical team or even a promising product or service will be able to creating a winning distribution model is a bad idea. Whether distribution risk can successfully be retired is a core decisions for any investor or entrepreneur. Sales, marketing and distribution systems like the freemium model are easy to talk about but very hard to get right. At an extreme from people who believe that all you need is viral marketing are people (often highly educated marketing professionals) who see no upper limit to what they should spend on sales, distribution and marketing. A number of good blog posts recently describe how a lifetime value (LTV) business model can be abused to justify spending far too much on nonorganic marketing such as television advertising. The right level of spending for a business is a Goldilocks-style “just right” determination. The right level of spending will require not only a keen appreciation of cash levels (and the market’s ability to supply new cash should that become necessary) but also understanding the nature of the business opportunity. Certain markets with network effects that create moats will require that a company grow fast, since in the end there will only be one to three winners. Being one of those companies when a market “tips” can be essential. This is not an excuse for every company to spend on sales and marketing like a drunken sailor. If you run out of cash on the way there, you are dead anyway.
6. “Early in a startup you need to acquire your customers for free. Later on, you can spend on customer acquisition.” (Fred Wilson) Entrepreneurs who know how to acquire customers in a very cost effective way build the most shareholder value. Early in the life of a startup the offerings of the company should be sufficiently valuable that customer acquisition is very cost effective – even free. Paying third parties like television networks for advertising or buying keywords should not be required. If you look at Microsoft, Amazon, Facebook, Starbucks, Costco etc. they all began acquiring customers by delivering great value, not via spending huge sums of money on inorganic customer acquisition approaches like television advertising.
7. “Organic users typically have a higher NPV, a higher conversion rate, a lower churn, and more satisfied than customers acquired through marketing spending.” (Bill Gurley). Customers acquired through sales and distribution channels which do not require spending on television advertising and other inorganic methods are not only less expensive to acquire, they are more valuable because they will spend more and churn less.
8. “On the right side of the distribution spectrum you have larger ticket items where you can have an actual person driving the sale… On the extreme left-hand side of the spectrum you have mass marketing, advertising, and the like. There is quite possibly a large zone in the middle in which there’s actually no good distribution channel to reach customers. This is true for most small businesses. You can’t really advertise. If you can’t solve the distribution problem, your product doesn’t get sold—even if it’s a really great product…. if you can get small businesses to buy your product—you may have a terminal monopoly business.” (Peter Thiel) Being a medium sized business is an increasingly untenable position in the Internet age. As I wrote in my post on Jeff Bezos: A company “stuck in the middle” lacks the scale and scope economies as well as the greater access to capital of a big company, but is too big to effectively pursue a differentiation strategy.
9. “Top salespeople get paid extremely well. But average sales people don’t really. And there are lots of below average salespeople. … Great salespeople are greater than you think. In a sense probably every president of the United States was first and foremost a salesperson in disguise. ” (Peter Thiel) Selling is an incredibly valuable skill and people who do it in a world class way are rare. Top sales people are paid as highly as they are for good reason. Sometimes you may hear people say that one great programmer is worth the same thing as many ordinary programmers. Peter Thiel is saying that the same thing applies to great salespeople.
10. PayPal’s big challenge was to get new customers. They tried advertising. It was too expensive. … Business development didn’t work. They needed organic, viral growth. They needed to give people money. So that’s what they did.” (Peter Thiel) Sometimes loss leaders are the only way to jumpstart a market. One such case involves multisided markets, which have a so-called “chicken and egg” problem to solve. Multisided markets require that the market be seeded with a chicken or an egg before the positive feedback loops kick in. This process is quite tricky to do right and so many companies fail to successfully do so.
11. “In a great company everybody sells – not just the salespeople.” (Larry Ellison) This one is obvious, but no less important. Warren Buffett is a classic example of a person who wastes no opportunity to sell Berkshire products and services. Many products and services require technical support to sell and that means engineers often must be involved in the sales process. Sometimes the seller must help the buyer with their business model, since if your customers die, you will die as well.
12. “What can a sales person say to somebody to get them to buy a product that they already use every day if they don’t like it? Nothing.” (Larry Ellison) Quality matters. Especially in the age of the internet, people don’t have to buy inferior goods and services since information is so easy for consumers to obtain. It’s that simple.