Tuesday, April 10, 2018

Product To Distribution

Startups tend to succeed by building a product that is so compelling and differentiated that it causes large number of customers to adopt it over an incumbent. This large customer base becomes a major asset for the company going forward. Products can be cross sold to these customers, and the company's share of time or wallet can expand.

Since focusing on product is what caused initial success, founders of breakout companies often think product development is their primary competency and asset. In reality, the distribution channel and customer base derived from their first product is now one of the biggest go-forward advantages and differentiators the company has.

This pattern of distribution as moat and competitive advantage was used ruthlessly by the prior generation of technology companies. Microsoft bought or built multiple franchises including Office (Word, Powerpoint, Excel were all stand alone companies or market segments), Internet Explorer, and other products and then pushed them down common business and consumer channels. Cisco has purchased dozens of companies that were then repositioned or resold to their enterprise and telecom channels. SAP and Oracle have exhibited similar patterns of success.

Of the most recent crop of technology giants, Facebook and Google realized the power and importance of distribution early in their respective lives. While Google's reputation is that of organic growth, in reality the company bought placement on the Firefox homepage, as well as paid hundreds of millions of dollars per year to have Google search toolbars distributed via download with other applications. Google then used its search customer base to bootstrap other products and distribute Maps (Where2 acquisition), Gmail, Chrome, Docs (Writely and other acquisitions), and other products. Similarly, Facebook invested heavily in growth efforts and acquired multiple companies for email scraping (Octazen), low end feature phone distribution (Snaptu acquisition) and other approaches. It then used this distribution to help accelerate acquisitions like Instagram to the global market.

In all cases, the steps to success have been:
1. Build a product so good that customers will use you over an incumbent. Build a large userbase on the back of this first product.

2. Be aggressive versus complacent about customer growth early. Outsized companies like Google, Facebook, and Uber were aggressive and calculated about growth from their earliest days. In contrast non-metric driven, less aggressive companies failed to reach the next level of success. Too many companies get complacent about distribution if their core product "just works".

3. Realize your customer channels are a primary asset of the company. Build new products or buy companies and push them down your sales channel. Uber has been trying to do this more recently with Uber Eats and its Jump acquisition.

4. Realize that your company will not be able to build everything itself. Buy more companies and push them down the channel. Most companies need to overcome internal resistance to buying companies. A common set of arguments are made about how easy it would be to build something in house instead, or integration challenges will be too hard. In reality, breakout companies never have enough resources to do everything and should buy more startups.

The smartest companies realize they are also in the distribution business, and will buy (or build) and then redistribute a range of products.