Investor field notes: distribution and conversion models for consumer startups

Investor field notes: distribution and conversion models for consumer startups

In the fast-paced world of consumer startups, success or failure hinges on two crucial metrics: distribution and conversion. While distribution refers to how businesses acquire new customers, conversion measures their ability to optimize the user experience and achieve specific goals. Without a balance between the two, even the most promising startups can struggle to monetize their offerings effectively.

Distribution is a constantly evolving landscape, with new waves of opportunities opening up every few years. However, as these channels become crowded with competitors, they lose their appeal for new entrants. Currently, the triopoly of Google, Facebook, and Amazon dominates online advertising, accounting for a staggering 90% of US digital advertising in 2020. This makes it challenging for startups to achieve mass scale without substantial paid acquisition.

However, distribution alone is not enough. Without effective conversion strategies, businesses risk squandering their acquisition efforts. Conversion is an ongoing process of deepening and optimizing engagement, ultimately leading to monetization. Startup founders often prioritize monetization, but it is conversion that should be their primary focus.

So, how can startups improve their distribution and conversion models? Let's explore some actionable advice:

1. Virality via social proof: People tend to mirror the actions of others, seeking validation from their peers. This phenomenon, known as social proof, can be leveraged to create virality. By encouraging users to engage with a product or service and showcasing its popularity, startups can tap into the power of social proof to drive conversion.

2. The Etsy Effect: Driving discovery is a significant challenge for startups. However, by positioning themselves as platforms where users can be discovered, startups can drive loyalty and create brand equity. Etsy, for example, enables sellers to showcase their products and be discovered by interested buyers. This not only benefits the sellers but also creates a vibrant ecosystem that attracts more users.

3. Influencers enable disintermediation of social media superpowers: Influencer marketing has become a popular method for startups to tap into highly fragmented distribution channels. By collaborating with influencers who have dedicated followings, startups can reach their target audience effectively and at a lower cost. Gymshark, a fitness brand, achieved rapid growth by partnering with fitness influencers, leveraging their celebrity influence and social proof.

In addition to these strategies, startups should also keep an eye on new platforms that emerge. These platforms can provide fresh opportunities for distribution and business growth. There are two types of new platforms to consider: mega platform shifts and breakout individual platforms. Mega platform shifts, such as the rise of Internet broadband, create new distribution channels and business opportunities. Breakout individual platforms aggregate consumer attention and become valuable distribution channels in their own right.

To take advantage of these platforms, startups should experiment with newer, less crowded options. Just as Zynga piggybacked on Facebook, startups should exploit emerging platforms' features for distribution. The less mature a platform, the greater the opportunity for low-cost distribution hacks.

Aside from distribution tactics, startups should also focus on improving conversion rates. Here are three actionable strategies to consider:

1. A/B testing: By conducting experiments and testing different variations of their offering, startups can identify the most effective strategies for conversion. A/B testing allows them to make data-driven decisions and continuously optimize their user experience.

2. Auctions: Leveraging the human desire to compete for scarce goods and resources, startups can create engaging experiences that drive conversion. Auctions combine competition with the incentive for users to observe others' behavior and make buy/not buy decisions.

3. Gamification: Implementing gamification strategies in non-game settings can be a powerful conversion tool. By incorporating elements such as points, badges, leaderboards, and narratives, startups can make their offerings more engaging and increase user motivation.

In conclusion, distribution and conversion are the driving forces behind the success or failure of consumer startups. While distribution channels may change over time, startups should focus on optimizing their conversion strategies to deepen engagement and drive monetization. By leveraging social proof, exploring new platforms, and embracing conversion tactics, startups can increase their chances of achieving sustainable growth. Remember, good thinking is also essential for making sound business decisions, so take the time to concentrate, explore different perspectives, and arrive at original ideas.