Investor Field Notes: Distribution and Conversion Models for Consumer Startups

Investor Field Notes: Distribution and Conversion Models for Consumer Startups

Introduction

In the world of consumer startups, success or failure often hinges on two key metrics: distribution and conversion. Distribution refers to how businesses acquire new customers, while conversion measures the ability of a business to optimize the user experience and achieve specific goals. Without a proper distribution strategy, even the best product or service can go unnoticed. Similarly, without effective conversion tactics, businesses struggle to monetize their offerings. In this article, we will explore various distribution and conversion models that can help consumer startups thrive in today's competitive landscape.

The Power of Distribution

Distribution channels play a vital role in the growth of consumer startups. However, these channels go through cycles of popularity and saturation. For instance, Google, Facebook, and Amazon currently dominate the online advertising space, accounting for 90% of US digital advertising in 2020. As these channels become crowded, new entrants may find it challenging to gain traction through paid acquisition. Therefore, it is crucial for startups to identify alternative avenues for distribution.

• 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 among potential customers. This can be achieved by showcasing positive reviews, testimonials, or user-generated content. When people see others engaging with a product or service, they are more likely to follow suit.

• 2. The Etsy Effect

Driving discovery is often a significant challenge for startups. However, by building platforms that allow users to be discovered, startups can foster loyalty and create brand equity. Etsy, for example, enables sellers to showcase their products and be discovered by a broader audience. When users realize they can find unique offerings on a platform, they are more likely to remain engaged and become repeat customers.

• 3. Influencers as Distribution Channels

Influencers have become a powerful force in the world of marketing. By tapping into the audiences of influencers, startups can reach a highly targeted demographic. While scaling influencer marketing is not always easy, the low-cost customer acquisition potential makes it worthwhile. Gymshark, a fitness brand, leveraged the influence of fitness influencers to become one of the fastest-growing brands in history. Startups should constantly experiment with newer, less crowded platforms to maximize their distribution efforts.

New Platforms and Opportunities

New platforms provide startups with fresh opportunities for distribution and growth. These platforms can come in two forms: mega platform shifts and breakout individual platforms. Mega platform shifts, such as the rise of IoT devices or blockchain technology, can create new distribution channels. Startups that can leverage the features of these emerging platforms early on have a higher chance of success. Just as Zynga piggybacked on Facebook's platform, startups should exploit the unique characteristics of emerging platforms for distribution purposes.

Distribution Tactics

• 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

Building for niche, underserved communities allows startups to create world-class experiences that generate organic growth through word-of-mouth. Investors believe that many Reddit communities with tens of thousands of members have the potential to be turned into discrete products. Startups should focus on providing exceptional value and experience to specific verticals.

• 3. Leveraging Incumbent Platforms

Some startups can exploit large incumbent platforms for cheaper distribution. This strategy works best when there is a privileged relationship with the giant platform. However, there is a risk of platform dependency. Startups must strive to grow quickly and diversify their customer acquisition engines to mitigate this risk.

Conversion Tactics 2.0

Conversion is the art of deepening and optimizing user engagement to drive monetization. Startups must focus on converting users into paying customers and maximizing their lifetime value. Here are some effective conversion tactics:

• 1. A/B Testing

A/B testing involves comparing two versions of a webpage or user experience to determine which performs better. By systematically testing different elements and analyzing user behavior, startups can make data-driven decisions to optimize conversion rates.

• 2. Auctions

Auctions tap into the human desire to compete for scarce goods. By creating a highly engaging experience, startups can encourage users to constantly observe others' behavior and make buy/not buy decisions. Auctions can be an effective strategy to drive conversion.

• 3. Entertainment as Conversion

Livestream experiences that incorporate gamification or surprise elements can significantly enhance conversion rates. By creating an entertaining and interactive user experience, startups can keep users highly engaged and motivated to take desired actions.

Conclusion

Distribution and conversion are the driving forces behind the success of consumer startups. By identifying effective distribution channels and implementing conversion tactics, startups can maximize their growth and monetization potential. In a rapidly evolving landscape, it is crucial for startups to stay agile, experiment with emerging platforms, and constantly optimize their strategies. By aligning value creation with value capture, startups can thrive in the ownership economy and create positive-sum outcomes for all stakeholders.

Actionable Advice:

• 1. Leverage social proof and user-generated content to create trust and validation among potential customers.

• 2. Identify niche markets and focus on providing exceptional value and experiences to specific verticals.

• 3. Constantly experiment with new and emerging platforms for distribution, and adapt strategies accordingly.