Investor field notes: distribution and conversion models for consumer startups

Investor field notes: distribution and conversion models for consumer startups

In the world of consumer startups, there are two key metrics that determine their success or failure: distribution and conversion. Distribution is the process by which businesses acquire new customers, while conversion measures how successful a business is at optimizing the user experience to achieve specific goals. Without both of these elements working together, a startup will struggle to monetize effectively.

The landscape of distribution channels is constantly evolving. Every few years, new waves of distribution open up, and businesses rush to experiment with and exploit these emerging channels. However, as these avenues of growth become crowded, they become less attractive for new entrants. Currently, Google, Facebook, and Amazon dominate online advertising, accounting for 90% of US digital advertising in 2020. This oligopoly makes it challenging for startups to acquire customers through paid acquisition alone.

Therefore, distribution alone is not enough. It must be coupled with effective conversion strategies. Conversion is the art and process of deepening and optimizing engagement, ultimately leading to monetization. While many startup founders fixate on monetization, the true focus should be on conversion.

To achieve successful conversion, there are several tactics that startups can employ. One such tactic is leveraging the power of social proof. Social proof is a well-observed consumer behavior where people mirror the actions of others in an attempt to reflect correct behavior. By creating a sense of social proof, startups can drive virality and encourage users to take desired actions.

Another effective strategy is the "Etsy Effect." Driving discovery is often a challenge for startups, as consumers are naturally inclined to engage with the original seller that referred them. However, by creating a platform where users can be discovered, startups can drive loyalty and create brand equity. This approach has been successful for platforms like Etsy, where users feel incentivized to engage with the platform itself.

Influencer marketing is another powerful tool for distribution and conversion. By tapping into the audiences of influencers, startups can access highly fragmented distribution channels with more opportunity for exploitation. While scaling influencer marketing can be challenging, the low cost of customer acquisition often makes it worth the effort. Gymshark, for example, became one of the fastest-growing fitness brands by leveraging celebrity influence and social proof.

New platforms also present new opportunities for startups. These platforms can take the form of mega platform shifts or breakout individual platforms that aggregate consumer eyeballs. While mega platform shifts are less predictable, they offer new distribution opportunities and business prospects. Startups should strive to exploit the features of emerging platforms for distribution, just as Zynga piggybacked on Facebook.

In addition to distribution tactics, startups must also focus on effective conversion strategies. A/B testing is a valuable tool for optimizing conversion rates. By testing different variations of a product or user experience, startups can identify which elements are most effective in driving conversions.

Auctions can also be leveraged to drive conversion. Humans have a natural desire to compete for scarce goods and resources, and auctions tap into this desire. By creating a highly engaging auction experience, startups can incentivize users to constantly observe the behavior of others and make buy/not buy decisions.

Entertainment can also be a powerful conversion tool. Successful livestream experiences often incorporate gamification or surprise elements to keep users engaged. By creating a sense of community and shared experience, startups can increase motivation and drive conversion.

Gamification strategies can also be implemented in non-game settings to enhance conversion rates. Elements such as points, badges, leaderboards, narratives, avatars, and teammates can all contribute to a more engaging user experience.

The concept of gambling psychology is also prevalent in many consumer social feeds. When users refresh their feed, they are essentially spinning a virtual slot machine, hoping for new and exciting content. This element of chance and unpredictability keeps users coming back for more.

Scarcity is another powerful conversion strategy that taps into the fear of missing out (FOMO). By creating a sense of scarcity, startups can drive urgency and increase conversion rates. This strategy works particularly well when combined with social proof, as seen in invite systems that demonstrate a user's friend is already using a product.

In conclusion, distribution and conversion are the driving forces behind the success or failure of consumer startups. By leveraging tactics such as social proof, the Etsy Effect, influencer marketing, and new platform opportunities, startups can effectively acquire customers. Additionally, by focusing on conversion strategies like A/B testing, auctions, entertainment, community-driven experiences, gamification, gambling psychology, and scarcity, startups can optimize user engagement and drive monetization.

Actionable advice:

1. Constantly experiment with newer, less crowded platforms for distribution.
2. Build for niche, underserved communities to create world-class experiences and spur organic growth.
3. Leverage storytelling techniques in pitches to grab the attention of investors and convey the problem you are solving and why you care about it.

Remember, people love stories, not decks. Investors have limited attention spans, so make sure to deliver the most compelling aspects of your startup early in the pitch. Engage their greed instincts and demonstrate your unique value proposition from the start. By crafting a powerful narrative, you can captivate investors and increase your chances of securing funding for your consumer startup.