Investor Field Notes: Distribution and Conversion Models for Consumer Startups

Investor Field Notes: Distribution and Conversion Models for Consumer Startups

Distribution and conversion are the driving forces behind the success or failure of internet businesses. Without effective distribution strategies, businesses struggle to acquire new customers, while poor conversion rates hinder their ability to optimize the user experience and achieve specific goals. In this article, we will explore the importance of distribution and conversion for consumer startups and delve into actionable advice for entrepreneurs looking to excel in these areas.

The Triopoly of Distribution: Google, Facebook, and Amazon

In the world of online advertising, Google, Facebook, and Amazon reign supreme. These tech giants have established a triopoly that dominates the digital advertising space, accounting for 90% of US digital advertising in 2020. For new entrants, breaking into this crowded market can be challenging. However, it's important to note that companies that have achieved mass scale without substantial paid acquisition are often inherently viral messaging platforms like Whatsapp, Snap, and Discord. These companies leverage the power of distribution through social proof and user recommendations.

The Power of Social Proof and Virality

Social proof is a well-observed consumer behavior where people mirror the actions of others to reflect correct behavior in a given situation. By tapping into social proof, startups can create virality and drive user acquisition. People trust the actions and recommendations of their friends and peers, making it crucial for businesses to foster a sense of community and validation. By showcasing positive user experiences and encouraging user-generated content, startups can leverage social proof to drive conversion and growth.

The Etsy Effect: Driving Discovery and Loyalty

Driving discovery is one of the biggest challenges for startups aiming to build an audience of engaged consumers. However, by creating a platform where users can be discovered, startups can drive loyalty and create brand equity. Etsy, an online marketplace for handmade and vintage goods, is a prime example of the "Etsy Effect." By allowing sellers to be discovered on their platform, Etsy has become a trusted brand for consumers looking for unique and artisanal products. Startups should strive to create similar opportunities for discovery and build loyalty among their target audience.

Influencers: Exploiting a Highly Fragmented Distribution Channel

Influencer marketing has become a powerful tool for startups looking to tap into highly fragmented distribution channels. By leveraging the audiences of influencers, startups can reach a wide range of potential customers at a relatively low cost. While scaling influencer marketing is not without its challenges, the potential for low-cost customer acquisition makes it a worthwhile endeavor. Gymshark, a fitness brand, capitalized on 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 find opportunities for low-cost distribution hacks.

New Platforms: Seizing Opportunities in Emerging Trends

New platforms present unique opportunities for startups to gain a competitive edge. These platforms can either be mega platform shifts or breakout individual platforms that aggregate consumer attention and become new distribution channels. While we haven't experienced a major mega platform shift in the past decade, emerging trends like Internet of Things (IoT), voice devices, autonomous vehicles, and blockchain technology hold the potential for new distribution opportunities. Startups should keep a close eye on these trends and be prepared to exploit emerging platforms for distribution.

Actionable Advice for Distribution:

1. Group Purchasing: Pooling purchasing volume through Group Purchasing Organizations (GPOs) can lead to negotiated discounts for users. Incentivize users to share deals with their networks to secure discounts, benefiting both users and merchants.

2. Niche Markets: Focus on building for niche, underserved communities to create world-class experiences that generate organic growth through word-of-mouth. Many Reddit communities have the potential to be turned into discrete products with the right approach.

3. Standing on the Shoulder of Giants: Exploit large incumbent platforms for cheaper distribution, leveraging privileged relationships when possible. While platform dependency poses risks, rapid growth can render it irrelevant as the company generates cash flows to invest in other customer acquisition engines.

Conversion: The Art of Optimizing Engagement

While distribution is crucial for user acquisition, conversion is the never-ending process of deepening and optimizing engagement. Monetization is the end result, but conversion is the key to success. Founders often prioritize monetization, but the focus should be on conversion strategies that drive user engagement and retention.

Actionable Advice for Conversion:

1. A/B Testing: Continuously experiment with different variations of your product to identify the most effective conversion strategies. A/B testing allows you to make data-driven decisions and optimize the user experience.

2. Auctions: Tap into the human desire for competition and scarcity by implementing auction-style features. Auctions create an engaging experience where users observe the behavior of others to make buy/not buy decisions.

3. Gamification: Incorporate gamification strategies into your product to increase user engagement and motivation. Elements like points, badges, leaderboards, narratives, avatars, and teammates can enhance the user experience and drive conversion.

Conclusion: The Power of Strategic Investors

In the journey of a startup, finding the right investors is crucial. Having two investors who specialize in product-market fit (PMF) and scaling can significantly increase your chances of success. Look for investors who have a proven track record of helping companies achieve PMF and scale. The partner leading your deal is often more important than the firm they represent. Be intentional about finding a partner who aligns with your vision and can provide valuable guidance and support.

In summary, distribution and conversion are the pillars of success for consumer startups. Leveraging social proof, driving discovery, and exploiting emerging platforms can give startups a competitive edge. Additionally, focusing on niche markets, utilizing existing platforms, and implementing conversion strategies can optimize user engagement and drive growth. By following these actionable advice, startups can navigate the ever-changing landscape of consumer startups and increase their chances of success.