Start With Distribution

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.

  1. 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.
  2. 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.
  3. 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.
  4. Classic eCommerce – You have products and sell products while trying to do some fun things to differentiate yourself and your buying experience
  5. Advertise on your massively popular website – You’ll experience The Struggle more than most, but power to you if you can make it work
  6. 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.
  7. 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.

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Start With Distribution

Greeting Cards Aren’t Dead

In most conversations that I have about our company, a question comes up about the viability of the card market. Aren’t cards going away? Isn’t that market dead? It’s not surprising because that’s the story line in the media, but it’s so completely wrong that I feel compelled to defend it.

The simple truth is that cards are a gift, and connecting meaningfully with other people through gifts is not going away. Last year 6.5 billion cards were purchased in the United States. That represents a steady no-growth environment for the last 3 years since we started. No growth isn’t something to celebrate, but it’s not a hemorrhaging market by any stretch of the imagination.

What we are seeing is a channel shift reminiscent of what happened to other content businesses since the early 2000s. Online sales are increasing as a percentage of total sales and brick & mortar sales are declining (particularly at specialty retailers). Whereas online sales represent only 8% of total sales today, by 2016 it will almost double to 14% and by 2018 it’ll be 32%. By 2018 almost $2.3B in card orders will be done through the internet if current trends to continue.

Screen Shot 2013-03-20 at 9.31.28 AM

The average american family buys 31 cards a year. Roughly a third are Holiday Cards, another 1/3 are Happy Birthday Cards and the remaining 1/3 are everyday cards and non-Christmas holidays like Mother’s Day, Father’s Day and Valentine’s Day.

Bottom line, the card market isn’t dead.

Greeting Cards Aren’t Dead

A small highly-motivated user base that loves your product is better than a massive uninterested one

He will win whose army is animated by the same spirit throughout all its ranks
-Sun Tzu (The Art of War)

I would rather command a company of Marines than a brigade of volunteers.
– Capt. John R.F. Tattnal

I’ve spent the last 7 months actively nurturing a community of greeting card artists into existence. Despite my “go big” entrepreneur mentality, it is clear to me now that going slower and developing a small highly-motivated core group of users was vital. Swinging for the fences right away and having a massive but uninterested user base shouldn’t be considered a success. The slow growth has allowed us to work with them personally and has endeared them to our cause. They tell their friends to buy from us, they actively recruit their favorite artists for us and they help each other through issues instead of requesting support.

The word of mouth that these users generate is incredible. A full 25% of all our traffic is new direct visits (people typing CardGnome.com into their browser after they are told about us) and 95% of our new artist acceptance has come from word-of-mouth referrals. They are starting to cost us less to support because they take the time to know the system better, and because they ask each other for support on our forums instead of emailing us.

They spend more, they cost us less to support, they recruit artists and they find us new customers. I don’t just view this in terms of economics, but they lower our cost of customer acquisition and increase our average lifetime value. If you are just starting, focus on making a few users extremely happy instead of spending money to acquire uninterested ones.

A small highly-motivated user base that loves your product is better than a massive uninterested one

A lesson in marketing from Jay-Z

Until I met Dre, the only one to look past, gave me a chance,
and I lit a fire up under his ass, helped him get back to the top,
every fan black that I got, was probably his in exchange
for every white fan that he’s got, like damn, we just swapped.

– Eminem (White America)

Over the past year I’ve started to really take an interest in the strategies companies use to distribute their product. One of my favorites is a sub-set of co-promotion that I’ll call the “Network of networks” strategy whereby a single product brings together a couple small but passionate groups. Rappers do this extremely well by featuring many artists into each song. Each artist comes with their own small but passionate group. Each group is strong within its own social network, but nothing on a macro-level, when they come together they can bring a product to its tipping point.

“Social” startups are trying to take advantage of this and are starting to make it work. This or That, for instance, runs contests where one networked group competes against another networked group. Each group feels compelled to mobilize their group to get votes and thus build a user base for the company.

The next time you sit down to think about your own strategy, think about how you can build this network effect into the model.

A lesson in marketing from Jay-Z

Immediate Differentiation: A lesson from being foreign

Look at my sales, let’s do the math, if I was black, I would’ve sold half,
I ain’t have to graduate from Lincoln high school to know that

-Eminem (White America)

One of the lessons I focused on during my recent trip in South America was differentiation. Most of us spend our entire lives trying to fit in and be accepted and yet those that differentiate are the most successful. While not new, it fascinated me that my foreignness drew curious people towards me and got me preferential treatment at bars and restaurants.

All it took was saying a few sentences in heavily accented Spanish and they’d be interested in a conversation. Where are you from? What are you doing in Argentina? The fact that I was different, made me interesting immediately, and they wanted to engage. I did nothing to hide my American accent, actually I did the opposite (much to the Chagrin of my embarrassed brother).

So the question I ask myself is how does Card Gnome create the same sense of differentiation. How can I get people to immediately feel that we’re special and take steps to engage with us. To me, it comes down to three areas:

Visual Branding: Use bold stylistic cues that are different than one would expect from your industry. House Wine, has done this well by taking a completely different take on wine labels. You may not like it, but you won’t miss their bottles when you stroll the aisles. Steve Lowtwait has done an excellent job giving our logo the same special treatment.

Informality: Companies have traditionally used buzz words and conservative language when communicating with customers. We decided a long time ago to talk with our customers as if they were our family and friends. Our informality helps them to feel comfortable having a conversation with us. We already see the fruits of this labor in an active artist community that is willing to give us candid feedback and refers to us by our first names. Consequently all company updates come from “Chad and Joel” never from an anonymous no-reply email address (thank you Holly Hamann for leading the way on that with the BlogFrog video updates)

Trust people: Don’t be overly-protective with your product. Let customers touch it, feel it and play with it. Have you ever felt welcome in a store that prominently displayed signs that said “you break, you buy” or that has metal detectors? No. Websites that force you to sign-up before a purchase or into onerous sign-up processes are the virtual versions of these unwelcoming environments.

What methods have you found for differentiating your product?

Immediate Differentiation: A lesson from being foreign

Distribution is the only obstacle

Hi, my name is, my name is
(What? Who?)
My name is Slim Shady

Ahem, excuse me
Can I have the attention of the class
For one second?

– Eminem “My name is”

Distribution is the ability to get a product in front of its target audience. Hopefully most of the people in it. This is the hardest obstacles for startups, and plenty of companies build amazing products but fail because they lack distribution.

We don’t need to reinvent the wheel to do it successfully. There are plenty of examples that entrepreneurs can adopt and tweak to their own unique needs. Over the past year we’ve seen a lot of strategies, but most of them fall into a few high-level categories:

The PR machine – Constant attention from traditional and non-traditional media. Constant new “events”, “deals”, “scandals” keep the companies name in popular discourse and bring in a steady stream of new users.

The Social Virus – A product that by its very nature, or through added game mechanics, incentivizes you to share it with your friends. Twitter, Facebook, Quora, Groupon and Zynga have exploded into public consciousness through intelligent use of this strategy. You’ll find some of the top minds in the tech startup world, from Dave Morin to Tom Higley amongst many others, are working on mastering this new strategy.

We’re Mad Men – You can pay someone else to give you millions of target market eyeballs on your product. Its expensive, but if you can successfully acquire customers for less than you make from them in the lifetime that they are a user, then keep spending money.

The Partner – The idea here is to find a partner that has the right eyeballs, but wants additional ways to monetize them. The startup offers the company a cut of its profits in exchange for help getting them to adopt the new product.This is one of the most popular strategies, because it normally requires less up-front costs and improves a new company’s brand.

Word of Mouf – It needs to be included, because nearly all new companies think that if they build a cool product people will instantly get the word out. The truth is that most startups take time to get product/market fit during which time their product isn’t something groundbreaking. Its an avenue for growth, but companies will normally run out of money before it gets them enough traction.

At the end of the day, the right distribution method will likely be a combination of a few of these strategies. Have you used any of these strategies? Have any pros and cons you can share? We’d love to hear what you (our awesome readers) think.

Distribution is the only obstacle

Timing is what makes us different

Almost anything you build on the web has already been tried in one form or another. This should not deter you.

-Chris Dixon on “Timing your startup

We are asked a lot of questions about CardGnome everyday. My favorite is “how are you different.” To which the answer is not a litany of product features or marketing strategy, although both do differentiate us, but rather a conversation about the timing of the market. We’re not the first to try “we mail it for you” greeting cards, but unlike the previous companies, the printing technology is finally good enough that we can print one-off cards as cheaply as large companies can print in large runs.

Current print-on-demand presses, like the one we use, can print thousands of unique cards in a single run and can be programmed to work alongside other machines to automatically stuff the envelopes and stamp them. Its cheap. This is how Barack Obama printed personalized appeals to you for money and votes during the election. The systems have improved so much in the last few years that the cost compared to factory presses is comparable. Previous companies could only feasibly offer bulk customized cards at a reasonable rate, so they weren’t able to do the mailing of just one card for you.

So why doesn’t a large company switch to our model? To be successful in the greeting card market today means being great at choosing the right mix of cards to offer. Stores have about 250ft of card space to offer you cards for hundreds of occasions and personal tastes. Psychologists, market researchers and retailers work together to maximize the space with the cards that will sell.  They leave money on the table because some customers will not like the options offered or didn’t go to the store because it was a big pain in the butt. eCommerce sites like ours solve this problem by offering hundreds of thousands of cards and the tools to quickly find the ones that fit what the customer needs exactly. On top of that our site can schedule cards to be sent at a later date and set to remind you of important dates in time to send the card.

Can our established competitors learn to operate in this new model? Probably, but changing the company culture from large scale printing of a few hundred cards to the lean print-on-demand model demanded by an eCommerce distribution model will not be easy. In my experience, old-school factory managers don’t readily give up their budget or adopt new methodologies. It will take them some time just like it did with Blockbuster. In the meantime we’ll build our content library and customer list.

Timing is what makes us different