Investor Field Notes: Distribution and Conversion Models for Consumer Startups

Investor Field Notes: Distribution and Conversion Models for Consumer Startups

The success or failure of internet businesses often hinges on two key metrics: distribution and conversion. Distribution refers to how businesses acquire new customers, while conversion measures a business's ability to optimize the user experience to achieve specific goals. Without both distribution and conversion, a business will struggle to monetize effectively.

In the consumer ecosystem, new waves of distribution channels open up every few years. These emerging channels are initially exploited by businesses and lead to significant growth opportunities. However, as more companies jump on the bandwagon, these channels become crowded and less attractive to new entrants. Currently, the dominant players in online advertising are Google, Facebook, and Amazon, accounting for 90% of US digital advertising in 2020. However, there are exceptions to this trend, with messaging companies that are inherently viral, such as WhatsApp, Snap, and Discord, reaching mass scale without substantial paid acquisition.

While distribution is essential, it is not enough on its own. Distribution must be paired with conversion to achieve monetization. Conversion is the ongoing process of deepening and optimizing engagement with users. Too often, startup founders focus solely on monetization, when their attention should be on improving conversion rates.

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

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 encourage users to emulate behavior validated by their peers, driving virality and user engagement.

2. The Etsy Effect: Building an audience of engaged consumers requires driving discovery. One effective strategy is to create a platform where users understand they can be discovered, driving loyalty and creating brand equity. The Etsy Effect is the phenomenon where consumers are not solely focused on engaging with the original seller but are open to exploring other sellers on the platform.

3. Influencers Enable Disintermediation: Influencer marketing has become a highly fragmented distribution channel with significant opportunities for exploitation. Startups can tap into the audiences of influencers, leveraging their influence and social proof to attract new customers. While scaling influencer marketing is challenging, the low-cost customer acquisition potential often makes it worth the investment.

In addition to these distribution and conversion strategies, startups should also consider exploring new platforms. New platforms can provide fresh opportunities for growth and distribution. Mega platform shifts, such as the emergence of IoT or voice devices like Amazon Alexa, autonomous vehicles, or blockchain technology, create new distribution channels and business opportunities. By piggybacking on these emerging platforms' features, startups can leverage their growth potential.

Furthermore, startups can employ various distribution tactics to enhance their reach:

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.

2. Niche Markets: Building for niche, underserved communities can create world-class experiences that generate organic growth through word-of-mouth. Many Reddit communities with tens of thousands of members have the potential to be turned into discrete products, providing startups with a focused audience.

3. Standing on the Shoulder of Giants: Startups can exploit large incumbent platforms for cheaper distribution. Establishing privileged relationships with these platforms can lead to more accessible and cost-effective customer acquisition. However, it is essential to be aware of the risks of platform dependency and strive for diversification as the company grows.

As startups focus on conversion, there are several tactics they can employ:

1. A/B Testing: Testing different variations of user experiences can help identify the most effective conversion strategies. By continuously refining and optimizing their approach, startups can improve conversion rates.

2. Auctions: Auctions tap into the human desire to compete for scarce goods and resources. By creating a highly engaging experience, startups can leverage auctions to drive conversion. Users are incentivized to observe the behavior of others and make buy or not buy decisions.

3. Entertainment as Conversion: Livestream experiences that incorporate elements of gamification or surprise can be highly effective in driving conversion. By creating an engaging and entertaining experience, startups can capture and retain user attention.

In summary, the distribution and conversion models for consumer startups are crucial for success. Startups must focus on both acquiring new customers and optimizing user experiences to achieve specific goals. By leveraging strategies such as social proof, exploiting new platforms, and implementing effective conversion tactics, startups can maximize their growth potential. It is essential to continually experiment with new channels and tactics to stay ahead in the ever-evolving consumer ecosystem.