Oct 16, 2013
Table of contents:
It is undeniable that online products have become increasingly sophisticated and well designed over the last couple of years. Product focused companies have created some truly outstanding products.
However, despite having an amazing product, a lot of these companies are struggling to get their product recognised and adopted by the mass market.
Distribution is a critical component of building a successful and sustaining company. Without distribution you are nothing, no matter how good your product is.
In this post I’m going to look at the traditional routes of online distribution and why it is so important to build your own distribution channel.
In order for a company to generate revenue, it must have a repeatable method for acquiring customers. Distribution channels are an effective and repeatable way for acquiring customers and therefore generating revenue.
For example, if you are selling a new chocolate bar, you can either sell them from your office, or you could sell them in a supermarket. Clearly selling them in a supermarket is the repeatable way of acquiring customers because it is at the supermarket where the customer will discover a new product.
All companies rely on distribution channels in order to sell their product.
Established distribution channels offer an effective and repeatable method for selling your product to your target customer. For products like chocolate bars, there really isn’t another method for selling your product to the mass market.
However, while distribution channels allow you to effectively reach your target audience using existing relationships, there are many problems with this process.
The problem with relying on one particular distribution channel is, at some point that channel will become exhausted and you will no longer be able to acquire customers at the scale that your business requires.
Exhausting a channel is inevitable for a number of reasons.
Firstly, there is always going to be a limited amount of new potential customers that can be sourced through a given channel. Even channels with a lot of open space eventually become exhausted.
Secondly, if a channel is particularly effective, your competitors will also start using it to acquire customers. This will drive up the cost of acquiring customers through this channel to a point where it is no longer a cost effective method.
Thirdly, unexpected changes in the market will render certain channels ineffective, often over night. For example, a new form of distribution channel might pop up that renders your current method totally obsolete.
An effective distribution channel that can connect companies with consumers is a very healthy business to be in. It is therefore not a surprise that using the best distribution channels will often be expensive.
The problem is compounded because as a distribution increases in effectiveness, the price to reach consumers will also increase.
It’s easy to think of the cost of distribution as a tax rather than an expense, and it often makes complete financial sense to continue using an expensive distribution channel if you can cost effectively acquire customers and amortise that cost over the lifetime value of the customer.
But the cost of distributing your product should be something that you watch closely. You can quickly find yourself out of business by chasing higher and higher sales numbers using non-cost-effective distribution channels.
And finally, using a distribution channel will mean that you won’t have a direct relationship with the customer.
Building a relationship with a customer means that you can effectively increase the lifetime value of that customer by making repeat sales and creating products that meet their needs.
Without a direct relationship you face the serious problem of being beholden to the distribution channel to keep talking to your customers. This means you will have to pay to talk to a customer you have already sold to, or you can’t directly respond to their needs or requests as the product owner.
Culttt is focused on building online businesses and so it makes no sense to look at the antiquated distribution channels of the offline world.
If you are new to thinking about how to distribute an online product, here is a quick run down of the existing established methods and their positives and negatives.
SEM (Search Engine Marketing) Search Engine Marketing remains one of the best ways to get qualified traffic to your website and landing pages. SEM and SEO allow you to build up interest and customer acquisition through the existing established channel of search.
Positives - Essentially free if you can do the work in-house (e.g. creating a good website, writing content, building links, etc)
Negatives - Costly if you can’t do the work in-house. Takes a lot of time so you can’t scale it by investing money. You are beholden to Google’s algorithm.
PPC (Pay Per Click) Pay Per Click advertising allows you to juice your SEM efforts by paying for advertisement placement within natural results. Although these are marked as adverts, it does allow you to scale your efforts.
Positives - Allows you to target qualified customers very quickly.
Negatives - Costly and often not very cost effective after a certain period.
Facebook / Twitter You can pay for your adverts to appear on Facebook or Twitter. This means you can target very specific individuals based on their likes and interests.
Positives - Very granular targeting of who sees your adverts and really good analytics to gauge the effectiveness of your campaigns.
Negatives - Costly and probably not going to be cost effective for long periods of time. Generally user’s don’t like adverts so you are also marketing through interruption.
Email Allows you to speak directly to your customer and engage with them based on what they have previously bought from you. This makes it trivial to set up drip marketing campaigns or segment based on past purchases or interests.
Positives - Effectively free and requires little maintenance. The technology aspect can be outsourced to a number of different low cost providers.
Negatives - It takes a long time to build up a big mailing list of interested potential customers. You will likely have to put in a lot of work to build this list.
Community / guest posting Connecting with an existing community that are focused on the problem or niche you are targeting is a really good way of getting qualified potential customers to notice your product.
Positives - Essentially free. Can drive highly targeted customers to your website and your product.
Negatives - Not scalable. Likely to take a long time before you see any real return on your investment.
So hopefully as you can see, there are many distribution channels that can be used to sell online products. All of these channels have both positives and negatives. Whilst some free channels won’t scale and require a large upfront investment of your time, there are also other channels that offer immediate gratification at a price.
This means you need to choose between scale, cost and ownership of the relationship with the customer.
There is no getting away from the requirement of a distribution channel in order to sell your product. As I’ve illustrated above, there are many distribution channels available, many of which you can run in parallel. However all of these existing channels have downsides.
I think one of the most interesting new online product strategies that has emerged over the last few years is where a company will build it’s own distribution channel.
By this I mean, making significant investments in an additional product that is built to generate inbound interest and cultivate customer relationships. The company can then leverage this platform and these relationships to sell their main products.
This has enormous benefits for three reasons.
Firstly, you own the relationship with the customer. You don’t have to pay a middle man to talk to your customers and you will never lose that relationship because you control the fate of the distribution channel.
Secondly, you can evolve the distribution channel to account for changes in the market, product evolution and revolutions in connecting and engaging with your target audience. For example, the move to mobile caught many established distribution channels completely off guard.
And finally, because you own this distribution channel, none of your competitors can use it to grow their own business. Once you invest in the channel, your investment will continue to compound over time, rather than becoming less effective as competitors drive up the price.
You might be thinking, “How could I justify investing in creating a second product in order to build my own distribution channel?”. You should think of this product as a marketing expense. So instead of plowing all of your marketing budget into Google, Facebook or Twitter adverts, invest in creating your own platform instead.
As you continue to invest and maintain this secondary product, you should start funnelling more of your marketing budget into it. Over time there should be no expectation of profit, but if the product can break even, that is a huge opportunity.
You are basically making the decision to fund the growth of distribution channels, or instead, fund the the growth of a distribution channel that you own and can control.
The two companies who I think have done an amazing job so far in creating their own distribution channels are Thrillist and Birchbox.
Both of these companies are consumer lifestyle brands that a target very specific demographics. Whilst I think these two examples are really breaking new ground, that is not to say that the same theory cannot be applied to other business models or industries.
Thrillist is an online content-first media company that targets young, urban males. Thrillist started out as a newsletter that highlighted things to do, places to go and the latest trends in mens fashion and products.
Thrillist has since expanded to become an online platform and ecommerce company that sells clothes from selected brands as well as their own JackThreads brand.
Thrillist effectively acts as the distribution channel to target and acquire customers for their ecommerce platform. By building the relationship with the customer through targeted content, media and product suggestions, Thrillist becomes a recognised and influential distribution channel for the company. This becomes a distinct competitive advantage over other brands and companies who have to rely on purely social or search as channels for customer acquisition.
Birchbox is a similar company to Thrillist, but has taken a slightly different route. Birchbox began life as a subscription service where customers could receive a regular shipment of new beauty products to try in a box. This monthly package of items was hand selected and included offers for discounts if the customer wanted to buy the full product.
Birchbox effectively created a system that allowed women to discover new products and get expert advice and guidance delivered to their home.
Over the last couple of years, thousands of companies have emulated the “stuff in a box” business model. Whilst some have enjoyed moderate success, I think companies like Birchbox will be the ones who enjoy sustained growth.
This is because Birchbox have transitioned their business to become much more than a “stuff in a box” company. Birchbox is able to use the monthly subscription service as the distribution channel to acquire customers into the Birchbox brand. This also includes a healthy dose of content marketing through their dedicated “magazine” section of their online experience.
What this means is, Birchbox can effectively acquire customers and create an engaged relationship through the low profit “stuff in a box” process. This allows Birchbox to sell much higher profit products through their ecommerce platform once they have a deep understanding of the requirements and interests of that particular customer.
I’ve previously written about both Thrillist and Birchbox in my post The intersection of Content and Commerce so you can probably tell that I’m pretty bullish on the business models of both of these companies.
Whilst I think it is still early days in the lives of both of these companies, I think the competitive advantage that they will enjoy in years to come will be huge. I believe that social and search are two very important components to acquire customers for both companies, but surely there will be a tipping point in the not to distant future.
Building a product dedicated to customer acquisition and keeping new or potential customers engaged with your products and company is genius. You grow your own distribution channel that you completely control and you aren’t taxed for it’s usage whilst also cultivating customer relationships that compound over time. What’s more, your competitors are powerless to tap in to or exploit your new found distribution channel and you are free to evolve it as technology, customer communication or opportunities to engage evolve.
By using this secondary product as a marketing expense or, as even as a lower margin revenue source, you can effectively funnel your marketing budget into investing in your own products rather than lining the pockets of advertising networks.
This allows you to own your relationship with your customer and shield yourself from the unreliable world of building your company off someone else’s platform.
In order to build a sustainable and growing business you need a repeatable way of acquiring customers. Your company will never really become successful and sustaining if it cannot find a repeatable way of acquiring customers.
Relying on other channels is fine, but there are many downsides. No matter what distribution channel you choose, it’s either going to be costly or not scalable. Having a mixture of different distribution channels is extremely important because all customer acquisition methods eventually become exhausted.
Building your own channel is a lot of work, but makes you much more defensible and able to control your future growth. Instead of paying to acquire customers, you can funnel that investment into your own channel. This not only allows you to invest in your own products and brands, but it is also an extremely defensible asset against your competitors.
You can either think of this as a low profit side product, or simply a marketing expense. At the end of the day, you are investing in your own growth, and not building your business on someone else’s platform.
Instead of following the usually customer acquisition path, why not be an outlier instead?