Yeah, and half them bitches sold ‘fore they off the table
Gotta look, nigga wantin’ my half, I’m gonna split it
– 50 Cent (Major Distribution)
Every few weeks I talk with someone who is thinking about leaving their corporate job, or graduating from their MBA program, and starting a company. More often than not the product idea and space are decent but their ideas around distribution are complete crap. It has been helpful to lead them down a thought process around different potential distribution models and the cost structures around each.
When you think about this, it’s not a huge surprise that they have trouble with distribution. Normally they are coming from big company environments where any product that is created gets instant users, global distribution and some press. Here are a few basic distribution models that are common in technology startups.
- Inside sales – You create a funnel to capture contact information from potential customers (usually this is through a content strategy or buying prospective customer lists). You hire a young sales team to call the customers and get them to purchase the product.
- Outside sales – You create a list of your potential customers and hire national, regional or local sales managers or contractor representatives to go “door-to-door” to their connections and sell your product.
- Freemium – You build an amazing product and give people a taste of what it does and sell a premium package to users who want the true value. Don’t get stuck giving away all the value in the free product and expect people to upgrade for piddly add-on features that you created just for monetization.
- Classic eCommerce – You have products and sell products while trying to do some fun things to differentiate yourself and your buying experience
- Advertise on your massively popular website – You’ll experience The Struggle more than most, but power to you if you can make it work
- Viral – Your product has inherent “virality” which whenever it is used gets your name and value proposition in front of new prospective clients. Think about when you sent your first email from your iPhone and it had “Sent from my iPhone” at the bottom of the message, you were part of Apple’s viral strategy.
- Arbitrage with digital advertising spend – If it costs you less to acquire a customer through search engine and/or social media marketing than each conversion then you can exploit this and grow your business by purchasing customers. In most cases where this is true, the total potential revenue from this channel isn’t huge, so you’ll likely need other channels to really gain scale.
I didn’t talk about Franchising even though it’s the subject of the introductory lyrics because it’s not that common with startups that I’ve seen, although I’m sure it’s used (and probably in some very interesting ways). In any case, let me know if there are some other models that should be covered here.
He who knows when he can fight and when he cannot will be victorious.
– Sun Tzu (Art of War)
In my vision of the future, the world of manufacturing is optimized for geography rather than labor cost. In addition to in-home systems, there will also be a network of local manufacturing facilities (think Kinkos) with high end machines and trained staff. Manufacturing is one of the world’s largest industries and this shift will be seismic, disrupting traditional supply chains and opening up new business opportunities.
The question for the entrepreneurs is what part of the industry to be in and which will take the lionshare of the profits. It’s a complex question which I’m still working out in my own head. Here are some of the different models and my thoughts on each:
- Equipment manufacturers – How do the patent portfolios of the established players inhibit the market for new entrants? Are there new technologies that emerge that surpass the capabilities of patented technologies?
- Raw material suppliers – How will demand for new raw materials shift the market and distribution for commodities. Will it create new commodities?
- Equipment repair services – Service contracts for independent manufacturing facilities and home systems. This would likely look a lot like the classic service contracts that GE Aviation and Energy sell as add-ons to their systems. GE Energy and Aviation built their businesses by selling the machines at cost and profiting on long-term service contracts and financing deals. Will today’s equipment manufacturers monopolize this market or will there be space for 3rd parties to provide services?
- Equipment financiers – Will the current manufacturers offer in-house financing or be content letting a 3rd party lender (or many lenders) into the space. Personally I think they’ll create preferential partners in order to remain focused on their core competency in a fast moving space.
- Outsourced manufacturers (distributed versions of Foxconn) – Margins are razor thin for contract manufacturers already, will that change in the 3D printed era? If this is a game of sheer volume and efficiency you’ll need to get into the game before an Amazon (Shapeways?) monopolizes it and their efficiencies of scale are insurmountable.
- Real estate holdings – Will there be a resurgence in prices for industrial zoned property?
- Workflow software – Software packages that run the manufacturing facilities workflow that is optimized for large runs of unique products going to unique places.
- Glue – There will be a software layer that sits between product companies and makers and the facilities that produce their items. There is no use in a digital supply chain if the communication process is still manual!
With the market in its infancy and growing 12x over the next decade, it’s the right time to entrepreneur’s to be thinking about these different models. Some of these businesses aren’t executable until the market is more developed, so the real question is how do you build something now that is profitable and be in the right place to profit as the market evolves. Feel free to reach out to me if you have some thoughts or want to talk about these ideas.