Investor field notes: distribution and conversion models for consumer startups

Investor field notes: distribution and conversion models for consumer startups

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In the world of consumer startups, success or failure hinges on two key metrics: distribution and conversion. Distribution refers to how businesses acquire new customers, while conversion measures a business' ability to optimize the user experience and achieve specific goals. These metrics are the driving forces behind the tectonic shifts in the consumer ecosystem that create seismic changes.

Every few years, new waves of distribution channels emerge within the consumer ecosystem. Businesses experiment with and exploit these channels, but as they become crowded, they lose their appeal for new entrants. Currently, the triopoly of Google, Facebook, and Amazon dominates online advertising, accounting for 90% of US digital advertising in 2020. However, companies that have achieved mass scale without substantial paid acquisition are typically messaging companies that benefit from inherent virality, such as Whatsapp, Snap, and Discord.

While distribution is crucial, it is not enough on its own. Distribution without conversion is like being eight feet tall on the basketball court but missing every layup. Monetization is the end result, but conversion is an ongoing process of deepening and optimizing engagement. Startup founders often focus too heavily on monetization when they should prioritize conversion.

Here are three actionable pieces of advice for consumer startups looking to improve their distribution and conversion models:

1. Virality via social proof: Social proof is a well-observed consumer behavior where people mirror the actions of others to reflect correct behavior. By leveraging social proof, startups can create a sense of trust and validation, encouraging users to emulate the behavior they see. This can lead to increased virality and user acquisition.

2. The Etsy Effect: Driving discovery is challenging, but by creating a platform where users can be discovered, startups can drive loyalty and create brand equity. The temptation for consumers to engage only with the original seller that referred them can be overcome by emphasizing the potential for discovery on the platform.

3. Influencers enable disintermediation of social media superpowers: Influencer marketing can be a highly effective and low-cost distribution channel. By tapping into the audiences of influencers, startups can reach a highly fragmented market and exploit the opportunities presented by this channel. Gymshark, for example, became a leading fitness brand by leveraging celebrity influence and social proof.

New platforms also present opportunities for startups. Mega platform shifts, such as the emergence of IoT or voice devices like Amazon Alexa, autonomous or connected vehicles, and blockchain technology, can provide new distribution channels and business opportunities. Startups should be proactive in exploring and exploiting these emerging platforms for distribution.

In terms of distribution tactics, startups can consider the following:

1. Group purchasing: Group purchasing organizations (GPOs) allow organizations to pool their purchasing volume to negotiate discounts. By incentivizing users to share deals with their networks, startups can secure discounts while benefiting from streamlined supply chains and aggregated deliveries.

2. Niche markets: By focusing on underserved communities, startups can create world-class experiences that generate organic growth through word-of-mouth. Investors believe that most Reddit communities with tens of thousands of members have the potential to be turned into discrete products.

3. Standing on the shoulder of giants: Startups can exploit large incumbent platforms for cheaper distribution. While there is some risk of platform dependency, rapid growth can make this dependency irrelevant as the company generates cash flows and dedicates resources to other customer acquisition engines.

Additionally, startups can leverage conversion tactics 2.0 to optimize the user experience and drive conversion:

1. A/B testing: Testing different variations of a product or website can help identify the most effective conversion strategies. By continuously iterating and improving, startups can optimize their user experience and drive higher conversion rates.

2. Auctions: Auctions tap into the human desire to compete for scarce goods and resources. By creating engaging experiences that combine competition with the observation of others' behavior, startups can motivate users to make buy/not buy decisions.

3. Entertainment as conversion: Livestream experiences that incorporate gamification or surprise elements can increase engagement and drive conversion. By creating an entertaining and interactive experience, startups can capture and retain users' attention.

In conclusion, distribution and conversion are the driving forces behind the success or failure of consumer startups. By leveraging social proof, exploring new platforms, and implementing effective distribution and conversion tactics, startups can increase their chances of achieving mass scale and monetization. It is essential for startup founders to prioritize conversion over monetization and constantly experiment with new strategies and platforms to stay ahead in the evolving consumer ecosystem.