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September 21, 2006

The Art of Distribution

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One of the important insights that the Startups 2006 panel hammered home was the importance of distribution for consumer-facing startups. (By the way, an astounding 13,000 people watched this video during the first week.) Many people use the word “distribution” as if it were a tactic when in fact it is a goal. Any bozo can say the word as if it’s a magic bullet; the test is the ability to achieve distribution. Here are my thoughts.

  1. Define it right. To old fogies like me, “distribution” meant Ingram/Micro D physically distributing software. This was in the days when “partner” was still a noun; companies wrote software manuals; and customers paid with money, not clicks. Moderntrepreneurs focus on “virality” and “eyeballs” and have made it necessary to redefine “distribution” to:

    Getting companies with a lot to lose to help companies with a lot to gain.

    The underlying and important assumption in modern day distribution is the asymmetry of the arrangement. For most entrepreneurs distribution involves piggybacking on another organization with much greater momentum. This reality affects many decisions and actions, so come to grips with it.

  2. Separate distribution from virality. Distribution is not the same as virality. Viral means that a product is so compelling that people are involuntary users of it. For example, if someone sent you a PDF, for a time you had no choice but to install Acrobat.

    Distribution, by contrast involves companies making your product available to potential users. It may or may not cause involuntary use. For example, when you upload pictures to PhotoBucket, there is a button to create a FilmLoop out of it.

    A viral product could have no distribution, and a distributed product might not be viral. To use a medical example, a person with hepatitis in the middle of the ocean won’t spread the virus, and someone with a non-contagious disease won’t spread it even if she were in the middle of Mumbai during the morning commute.

  3. Allocate responsibility. The ultimate goal is a viral product that is well-distributed. Understand the roles here: Engineering’s task is to make a viral product. Sales, marketing, or business development’s task is to find the right distribution partner and cut a deal. Then it’s engineering’s task to integrate the products. Then it’s sales, marketing, or business development’s task to ensure that the world knows about the distribution partnership. A clear delineation of responsibilities and fulifillment of those responsibilities by all parties are necessary.

  4. Obey the law of big numbers. The most important characteristic of a good distribution partner is that it has a lot of traffic, eyeballs, page views, whatever. Yes, this traffic might not be the “perfect” customers for you; yes, you’ll only get a tiny fraction of uptakers, but a small percentage of a big number is a big number, so don’t think too much.

    For example, if your target market is mommy bloggers, you might conclude that MySpace wouldn’t be a good distribution partner because its customers are Trixie and Biff, sixteen-year-old kids. There are two things wrong with this reasoning: first, when you’re introducing a product (which is when you need distribution the most), you don’t know who will use your product and what they’ll do with it. As Chairman Mao said, “Let a hundred flowers blossom.”

    Second, there’s the “you never know phenomenon” which goes like this: “You never know: maybe Trixie and Biff will use your mommy-blogger-intended product in their MySpace profile and even end up telling their mommies about it.” You will never know unless you try, so don’t be close-minded.

  5. Look for adjacency. My buddy Bryan Starbuck suggested this. The most logical distribution partners have “adjacent” businesses that truly need each other to function well—for example:
    • eBay and PayPal. Big eBay needed a payment system for sellers who couldn’t take credit cards.

    • LinkedIn and SimplyHired. Is there a better reason to use LinkedIn than to find a job?

    • FeedBurner and TypePad. Once you figure out that many people prefer RSS feeds, TypePad’s FeedBurner widget becomes a no-brainer.

    Nota bene: “Truly need” is different than “same customer base.” For example, a hearing aid manufacturer might like a deal with the AARP, but call it what it is: Advertising, not distribution. The AARP doesn’t need a hearing aid manufacturer to function.
  6. Focus on revenue. Money talks, and bull shiitake walks. No matter what either party says, a good distribution deal always comes down to making money. If you hear or use the words “strategic” plus “brand awareness” more than the word “revenue,” your distribution deal is probably doomed. But if your partner will make money, then the deal will probably happen.

  7. Look out for the other guy. The right perspective for distribution partners is: Let’s both make money. For sure, it’s not: How can I ensure that we make a ton of money and stick it to our partner? I have never seen a case where only partner makes money. Either everyone makes money or no one does.

  8. Always be thinking, “Bigger pie, bigger pie, bigger pie”—not slicing up the same pie differently. The best reason to do a distribution deal is to enlarge size of the market for both of you as quickly as possible. If the pie is going to stay the same size, a distribution deal isn’t as attractive.

  9. Sometimes be thinking, “Skim the cream.” There are cases where the pie isn’t going to get bigger, but you’re leaving money on the table that a partnership can harvest. Monetizing traffic on a popular website, for example. This can work too, but such a deal is seldom in the category of “essential.”

  10. Don’t kid yourself. I’ll bet that you believe these lies of distribution. Stop. You’re hurting your company.

    • The other company has APIs so that integrating will be easy. Integration is always hard. Take whatever your first estimate is and double it to be safe.

    • Not only is integrating easy, co-marketing will be too. Take whatever your doubled estimated time to integrate and double that to get the co-marketing launched.

    • Your challenge will be scaling up fast enough. I’ve never seen scaling up be the gating item on a distribution deal.

    • Your partner’s challenge will be scaling up fast enough too. I’ve never seen this be the gating item either.

    • You understand what your partner wants. If it’s anything besides “additional revenue,” you’re missing the boat.

    • You can cut a deal with MySpace because a board member knows someone there.This is possible. It just won’t happen before you’re fired for missing your sales projections.


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Listed below are links to weblogs that reference The Art of Distribution:

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Clean energy? It is possible as well.
My idea is very difficult for understanding. It is not difficult for engineer - mechanic, who knows very good the Pascal's law and even-arm lever.
Please open GOOgle and find metozor and next :
index of metozor.
Overthere is all about idea of main .
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Your thoughts on distribution are straighter and more fool-proof, but we must accept that the notion of distribution is sinking in new waters.

Ah, the coopetition theme, but in pie format.

Funny how some people work on a "one-plus-one = three" style, whereas others work on a "one-plus-one = more-for-me" basis.

Selecting a partner is left as an exercise for the student

I see Mumbai has left some impression on you ;)
Great article.

Great article. I have a product that combines both a website and a physical product. Distribution of the physical product was a no-brainer as my supplier offered me the possibility of having their distribution partner pack and deliver my products. It means that I have no stock as products are picked directly from my supplier's stockpile, packed individually and distributed to the customer.

Distribution of my website is perhaps a trickier problem. I have a couple of reseller partners, but I had not thought in terms of finding distributors for my website. This will help me in my negotiations with a larger partner who are looking for a concept to add loyalty to their existing products.

Maybe I'm just a novice at business, but I think 'Integration' is one of those ambiguous terms which could mean a ton of different actions two companies take but is often misinterpreted. Could you elaborate for me what 'Integration' means, if not a merger?

Guy - thank you for sharing! This is great insight.

I'm glad you discussed distribution. Much of running a company can follows general patterns. Distribution is a critical topic and hasn't been covered much.

*************

Bryan,

You were the inspiration to do this so thanks!

Guy

This is super helpful. I worked at MSN where many companies approached us for distribution. Now I help run a start-up that is looking for distribution from the likes of my former employer! Fortunately, TripHub.com is a viral service which helps the value proposition to our distribution partners.

One more lie to add to your point #10. You can do lots of distribution deals. Wrong. The management overhead in execution is significant and necessitates surgical focus on a handful of "the best" deals.

Great, great article. It was so appropriate, after I posted an article this morning on mass niches as the true reflection of the long tail. It will help with our thinking as we try to increase our promotion of bloggers. Distribution is systematic and takes a lot of hard work. We often get caught with viral successes because it is easy to see them in hindsight.

Great article and video. Speaking for the technology savvy entrepreneur mommy set-- (in the network software business since 1983) while I don't blog myself, I visit myspace all the time to check up on the doings of my 15 year old daughter and her crowd -since its not the safest place. Thus I could see that there are plenty of collateral marketing opportunities for my generation and beyond. I also think that consumer marketing needs to expand its horizons beyond what the teenage market will adopt as there are plenty of old fogies like myself and my parents using technology to keep up with the world. Sorry for the soapbox.

Great post! Now I have a LOT to think about today :)

Thanks for addressing the distribution question from the comments in the Startup Panel blog entry.

I'm dealing with large non-profit distribution partners and channels. They claim (or want us to think) that revenue is secondary to their goal of helping people. Yet we are insisting that an ROI is defined and measurable. Hopefully we're doing the right thing!

"The right perspective for distribution partners is: Let’s both make money." -- I wish three years ago someone would emphasize this well enough to me. I would have a much better ratio of successful/failed businesses.

Although the majorty of Myspace users may fit a young teen demographic, I'd still advise not too under-estimate just how many "eye-balls" make up a small percentage of 90'000'000+ users. Your niche may be specific, but with a userbase larger than the population of most countries it's going to be quite easy to get "lucky" when marketing using Myspace.

#10 Couldn't be more on point.

My company just landed a few deals with some large ISP's. Even though the CEO is excited, integration is taking months longer than I ever thought. It seems not everyone in the organization shares the same level of enthusiasm for ASAP integrating. We too worried about how we would be able to "scale up" in time. Boy was that ever the wrong worry :)

good post.
me for, distribution strategy should focus on potential synergies between supply partners.....because done right they can influence the demand chain. this also then focuses in the right areas immediately - reveneue projections and the law of big numbers, as you put it.

Great list Guy. I always try to hammer home a variation of #4 to my home-business startup clients.

It's so easy to get hyper-focused on the intended target audience, that you miss opportunities. The MySpace example is pretty accurate based on some surprising things I found out while talking over a new product with a friend. There are actually quite a few mommies who use MySpace as a catch-all for their stuff. Many aren’t aware of the niche-specific alternatives, because MySpace is more widely known. By assuming that your mommy target is not going to be using MySpace, limits your potential.

Wow, excellent timing Guy!

I'm just with a software startup and we've just started looking for distributors two weeks ago. Thanks for the (as always) useful thoughts :)

Dirk

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