Remember Springpad? How about Facebook Poke? No? Both were good products, created by great companies.
So why did they fail?
Springboard had five million active users before it closed, but it’s ad-support monetization strategy made it impossible to reach enough customers to become economically viable. Facebook Poke lost to Snapchat because it never leveraged it’s colossal user base. Both naively assumed if they simply built it, people would convert to users. But the customer is not going to knock on your door just because you’ve built a killer product.
You’ve got to knock on your customer’s door.
Yet, time and time again, we at Hapibot Studio see this ‘product first’ approach to starting a company or launching a new product. Focusing exclusively in a minimum viable product (MVP) strategy, as any good lean startup should, is simply not enough to sell and grow a business. It's a great product development methodology, but not a framework that helps to understand how your business is going to reach your customers. Customers don’t knock on your door when they don’t know you or your product.
It's this distribution strategy, the process of getting your product to your market, that makes or breaks a business. A distribution strategy has to be thought out, tested and tweaked whilst building a minimum viable product, and, if possible, deeply embedded in the product design and purchasing experience.
This is a summary of Hapibot Studio’s proprietary three-step process, a system we use with our clients to define an overall distribution strategy and discover distribution channel tactics. It’s a synthesis of the best methods practiced by successful entrepreneurs and thought leaders such as Peter Thiel, Ben Horowitz, Seth Godin, Jason Fried, Andrew Chen and Gabriel Weinberg, as well as our own extensive experience.
The Hapibot Studio process allows us to understand our client’s business viability (Step 1), how to go about identifying a distribution strategy (Step 2) and discovering the best traction channels that drive growth (Step 3).
STEP 1 - ASSESS THE BUSINESS ITSELF
We offer a 30 minute free discussion to all potential clients in order to properly review their product or startup. While we may like a potential client's product or service, at the same time it’s vital to assess if the business makes economic sense. Hapibot Studio does not take money to build a product if we don’t believe in it, regardless of how cool it may be.
Hapibot Studio proceeds with a review around four specific areas:
Market Size - Is the product or service serving a narrow or large market? Calculate the potential market cap to determine if there are sufficient customers to reach profitability. The client’s market may be too small with few obvious ways to expand, often the case with niche markets.
Competition - Are there a lot of companies building similar businesses? Is there a low barrier to entry? If this is the situation, the client could be in a hypercompetitive market where it is simply too hard to get customers.
Scalability Costs - The client is going to build a product or service people want, but reaching them may be cost prohibitive. If this is the case, the client may find themselves in a market that is simply hard to reach.
Business Model - A client has a product customers want, but can’t figure out a viable business model. There is just no real market.
If our assessment is positive, we present a proposal to the client. Upon agreement, our next step is to identify an overall distribution strategy.
STEP 2 - IDENTIFY A DISTRIBUTION STRATEGY
“Superior sales and distribution by itself can create a monopoly, even with no product differentiation. The converse is not true. No matter how strong your product - even if it easily fits into already established habits and anybody who tries it likes it immediately - you must still support it with a strong distribution plan.”
- Peter Thiel, Paypal Founder and early Facebook investor.
Once onboard, we study our client’s product or service in terms of three variables to help define a distribution strategy:
Target market - Is the target the consumer market, small businesses, big companies or government contracts?
Sales Complexity - What is the level of personal assistance required to make a sale? Some products and services are relatively simple to sell, and customers feel at ease buying them online. Meanwhile, other products have complex sales cycles, requiring local visits to clients, more than one meeting with multiple decision-makers, and a long lasting proof-of-concept trial of the product.
Customer Value and Acquisition Cost Metrics - There are two fundamental metrics every company should calculate and regularly update:
The first metric, Customer Lifetime Value (CLV), measures the Gross Margin that you would expect to earn over the lifetime relationship with your customer. Gross Margin should take into consideration all servicing, support and installation costs.
The second metric is Customer Acquisition Cost (CAC), which measures the cost to acquire a customer. To calculate CAC, consider the entire cost of sales and marketing over a given period, including salaries and other sales team related expenses, and divide it by the number of customers acquired in that period.
The Gross Margin that you earn on average over the lifespan of your relationship with your customer (Customer Lifetime Value, or CLV) must exceed the amount the customer spends on average to acquire a new customer (Customer Acquisition Cost, or CAC). If your CAC is above your CLV, rethink your distribution strategy or your business.
We encourage our clients to be as quantitative as possible; what’s important is to be able to plot where a business fits within these three variables.
A product or service should fall into one of four distribution strategy categories:
Viral Marketing - Your product has a viral feature at its core that drives users to share and invite. There must be a reason to share it and the means to do so.
Marketing - Your product has a mass appeal and a relatively low price.
Personal Sales - Your product or service is sold by business developers or salespeople. The greatest difficulty isn’t how to make any particular sale, but how to establish a process that can scale with a sales team that needs to grow geographically.
Complex Sales - Your average sale value reaches six figures or above, meaning the business only needs to make a few sales per year to reach profitability. Valuable products or services require developing the right relationships, which entails multiple meetings with the decision-maker and investing in every detail through the sales process. These complex sales cycles may take several months to close.
This simple exercise is often a true eye opener and helps to spur the distribution strategy discussion and planning. Unfortunately, the distribution dilemma companies face is when they find themselves in the Dead Zone, where a product needs a personal sale effort, but where at a certain price point, there are simply insufficient resources to send an actual person to sell to every prospective customer.
A distribution strategy is not a mesh of these four different approaches, where one places a few Adwords, hires a few salespeople, and tries to add some sort of viral functionality. This scattered afterthought will not work. It’s essential to discover one (and only one) distribution method that, as Hubspot’s CEO Brian Halligan said, “matches the way you market your product with the way your prospects learn about and shop your product”.
Let’s analyze Dropbox’s lessons in regards to identifying a Distribution Strategy. Dropbox followed Eric Ries Lean Startup product strategy whilst building their platform, persistently searching for a product market fit. “Sometimes on purpose and sometimes by accident”, as Dropbox’s CEO Drew Houston mentioned at the Startup Lessons Learned 2010 conference. But they never really thought about distribution, and it cost them. As Drew Houston further explains in his Startup Lessons talk, they decided to follow a web 2.0 marketing plan once they launched. They were going to prepare a big launch at Techcrunch50, buy some Adwords and hire a PR firm or VP of Marketing. Sound familiar? They followed conventional wisdom strategies that worked for other companies.
But Dropbox actually started off with a well thought out distribution method. Once Dropbox launched at Techcrunch50, they won their first users by sharing an awesome demo video that was strategically placed on Digg. This video struck a natural chord with Digg users, full of in-jokes and humorous references tailored at the Digg community of early adopters. The video went viral. Dropbox’s prelaunch waiting list went from 5,000 people to 75,000 people quite literally overnight. It was a beautifully executed approach; Dropbox found the right distribution channel to communicate their launch, knew where their target audience lived, and spoke to them in an authentic way.
And, naturally, Dropbox wanted to continue to feed this huge momentum. They decided to invest in Search Engine Marketing (SEM). But that’s when things went wrong. Dropbox was acquiring customers between $233 and $388 (CAC) when their yearly subscription price was $99.
By calculating their cost of acquiring new customers (CAC), Dropbox was able to understand it was time to shift their distribution strategy. They had to come up with a cheaper form of reaching their customers. Dropbox moved to a Viral Marketing strategy and built a referral program (Get Free Space) into their product. The offer was that users would get 500 MB of free space for every friend they invite and got to sign up. This referral program has since been their biggest growth driver.
But, just as Dropbox found a product market fit through testing their product with their customers, they should have also tested how they would reach their customers from the very beginning. We describe this process of testing our distribution strategy assumptions in Step 3.
STEP 3 - FIND THE MOST EFFECTIVE DISTRIBUTION CHANNEL
Steps one and two are relatively straightforward, but important to help identify major market risks your company will face. Our next job is to find the most effective customer acquisition channel. We do this by rapidly carrying out small experiments to test various distribution channel tactics that best support our distribution strategy.
If you are thinking of hiring digital marketing services to help launch your product or business be cautious with proposals that offer closed channel strategies. Defining marketing and distribution channels that drive customer traction are very hard to predict. It must be an ongoing ‘feel out’ process between the channel you are testing and whether it is working or not.
Many digital marketing companies only center their services in three channels, Search Engine Optimization (SEO), Search Engine Marketing (SEM) or Social Media campaigns. Why would you invest your money and time in these three saturated channels if you don’t know yet if it is the most efficient channel to reach your customers?
Finding the most effective distribution channel isn’t only a creative marketing process, but rather a scientific approach to testing various channels that identify visible growth signals until the most efficient channel is found. We use a funnel and sieve approach (yes, we like cooking digital recipes) to help us find the perfect channel.
The Funnel and Sieve Method
1st Funnel (List all of Your Assumptions)
Hapibot Studio conceives of every possible way to reach our client’s customers. We brainstorm for each possible channel, both offline and online, using a ‘traction channel’ tactic based on the distribution path plotted in Step 2.
Reviewing these ideas and assumptions can help to understand how customers buy products in your industry and the marketing strategies used over time to acquire them. For example, if you are launching an innovative product that resolves a problem people don’t yet know about, investing in SEM and SEO channels may not make sense at this stage. Why? Because customers don’t think they have a problem, and therefore don’t look for a solution. Especially through search engines; search engines don’t create demand, they accumulate it. Instead, customers need to learn about your new solution.
You need to knock on their door.
This first funnel serves to highlight not only what channels the market currently uses, but also about what channels are not being used.
When finding a traction channel, most companies end up choosing channels they’ve used in the past or simply following existing market paths. This means companies end up with very similar channels and ignore more novel and promising ways to garner traction. More often than not, underutilized channels in certain industries are the most promising ones. Hapibot Studio’s approach is to forget conventional wisdom tactics. Initial customer traction is unpredictable.
Once our team has gone through this first thought process, we use this first funnel to sieve the distribution channel assumptions that seem most promising through into the second funnel.
2nd Funnel (Test, Track and Validate Promising Channels)
Hapibot Studio builds an inexpensive test for each of the most encouraging distribution channels to determine if the idea shows any signs of traction or real customer engagement. Keep in mind that, at this stage, we are not trying to grow a lot of traction with a channel. The objective is to simply try to determine if one of these channels drives more sign-ups or conversions than any other, as well as how much each is costing you. Our main consideration at this point is to quickly capture data that proves or disproves our assumptions by developing small tests that don’t require significant upfront costs.
Hapibot develops these channel tests to answer the following questions:
- How much does it cost to acquire customers (CAC) through each channel?
- What type of customers are coming through each channel? Are these customers the type of customer you predicted or want at this stage?
- How many customers can you reach in each of these channels?
For example, if SEM is an encouraging channel and we develop a landing page, we’ll only set up two or three Adword campaigns rather than eight or ten for that particular landing page. These adwords should be sufficient to indicate if this is a channel that works for our client’s business. Remember, at this stage, with limited resources we only want to test and be able to compare the success between each channel. We’ll keep track of the numbers that answer questions 1 - 3 coming through your tests.
Once we’ve completed all the channel tests, we will have identified a particular channel that has the best answer to the three questions above. We will now sieve this core channel through the third funnel.
3rd Funnel (Optimize Your Core Channel)
The third funnel’s goal is to extract as much traction out of this core channel as possible. Investments should be made around three key areas:
Track and measure channel information
We start by setting up tracking and reporting tools to help us measure the channel’s market reach, conversion and customer acquisition costs. There are great analytics tools that do cohort analysis such as Google’s own Analytics, Mixpanel or Chartbeat and apps such as Heat or Hotjar that really help improve with Conversion Rate Optimization (CRO). Tracking our channel data helps us rank, prioritize and align our client’s channel tactics.
Optimize the channel tactics as most effectively possible
We’ve tested our client’s core channel before, but the idea now is to optimize our client’s tactic as much as possible. If Search Engine Marketing was our core channel, and we had already tested one landing page with two or three adword campaigns, we will now be testing two or more landing pages with five to ten adword campaigns. We’ll use A/B testing to help optimize and fine tune the channel even further. A/B testing will help us find the most efficient landing page coupled with the right set of adword titles and keywords.
Continually set out to discover better traction tactics within this channel
The goal here is to see if there is a better channel tactic combination we should be using within our core channel. This still means focusing and continually experimenting the key channel. But, as we naturally become an expert in our client’s core channel, this process alone will help us uncover new tactics. We will also understand that sometimes our channel involves strategies that utilize other traction channel tactics. One channel is still dominant, but others feed into it. We use these other channels to support our client’s channel tactics.
Let’s say our core channel is Content Marketing, a great channel to promote our new client as a specialist or leader in their field. The client may have started by blogging on their website and our early tests showed it had the best conversion rates. But it’s still too early and isn’t reaching a large enough audience. We’ve since experimented and understood that by guest posting in other similar smaller blogs this method has also spiked our client’s reach. We might then consider buying social display ads in Facebook or Linkedin to amplify our best posts. We’re using these secondary channel we may have already tested with, to now help feed into our client’s core channel.
The Funnel and Sieve method is data-driven and results-orientated. It often means iterating the process over again if a channel is difficult to identify. But the process also leads to a clear analysis of our client’s entire marketing efforts, as well as an understanding of where along the customer acquisition funnel the channel tactic may be eventually failing.
Whilst we are building a product, we make many assumptions. We often assume what our customers will want, how the product design should look like, what monetization and marketing strategy to use to make our business grow. The truth is some of your assumptions are going to be wrong. The greatest challenge though is finding out which ones.
Just like the MVP methodology, our distribution discovery and validation method also bases its strategy on carrying out small experiments to test and validate our assumptions within our market. It will help identify a distribution strategy and validate the right channel tactics to reach your customers.
Imagine your distribution strategy as a ladder that takes you from A to B. If it is not leaning against the right wall (channel), every step you climb (dollar you spend) just gets you to the wrong place faster (path to failure). Our distribution methodology will help you find and sieve out the best growth channel.
What to learn more how to find the best distribution channel to reach your customers? Want more traction channel examples? Please get in touch with our team to learn how we can look for customers where others aren't looking. We’ll develop-cutting edge tactics that provoke and create impact for your brand and drive growth.
We’ll knock on your customer’s door!