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Think Big. Move Fast.

I’ve previously posted on the importance of distribution during the initial phase of a startups life. To be more accurate, I think that distribution is the most important factor for a consumer facing company competing in a new category.

However, I think that this is just the first act of a three act play, with a different factor being critical to success in each act.

ACT ONE: DISTRIBUTION

To summarize the earlier post; early in a category’s lifecycle, users don’t recognize that they have a particular need/problem. They don’t recognize that a category exists and so there is no demand pull. If even your own mother doesn’t know what it is you do; ESPECIALLY if your own mother doesn’t know what it is you do, then you likely face this problem!

Having the best product is neither necessary nor sufficient. Having a decent product is good enough.

You need to get to users as they won’t get to you. Hence the importance of distribution. Read the original post for flavors of distribution and how to get them, plus examples.

ACT TWO: PRODUCT

Over time, categories become established in the minds of consumers. In the case of online travel agencies it took about 3-5 years. In the case of user generated video, it took only 12-18 months. Consumers start to understand who the competitors are in an industry. If switching costs are low (as they are in both online travel agencies and user generated video), users often sample the offerings from multiple competitors. At this stage, assuming that you have done enough to get into the consideration set, product and user experience matters a lot. Distribution has become the ante, and the companies that win will win on the best product.

Having the best product means much more than having the most checks in a feature comparison matrix. It goes far beyond the technology. It can mean having the best prices, the best selection/range, the best customer service or the best community. In the early days of online travel Travelocity won on distribution through its deals with AOL and Yahoo! But once the category became established in people’s minds, Expedia slowly took market share from Travelocity on the back of a better overall user experience, one important factor being better pricing (mostly hotel pricing). [Update: Note comments below from Rich Barton, founding CEO of Expedia, on his view of why Expedia overtook Travelocity.]

Similarly, many user generated video sites claim better features than Youtube, yet Youtube never lost its lead because it had the biggest range of content (and the biggest audience for people looking to upload videos). As technologists we can fall into the trap of defining “best product” too narrowly, but our customers are not technologists and they look at the whole experience.

ACT THREE: BRANDING

As a category continues to mature, it becomes harder to maintain product differentiation. There are some exceptions; when there are positive network effects an early leader like Ebay or Youtube can often hold their leads. But if the advantages built in Act Two stem from technology, process or supply advantages, these often get whittled away as competitors copy, innovate and partner to make up lost ground. At this stage of a category’s evolution, branding is the most important factor and product has become the ante once again. (Note that I distinguish here between branding and marketing. Online marketing that is more direct response (CPC or CPA) in nature is really more a form of distribution.)

Google is sometimes presented as the canonical example of the best technology winning over time. However, as I mention in the post on distribution, Google‘s traffic only really started to climb after its distribution deals with Y! and AOL. It really did pull away from the other search engines on the basis of its better product during Act Two. But today, its not at all clear that its search results are that much better than anyone elses.

When I was at AOL a couple of years ago, we used to test search relevance from multiple engines by taking the results from all the major search engines, stripping all branding and UI, and showing the lists to users who scored the quality of the search returns. The results were surprising – all the search engines were very close to each other in relevance, with variations as to who was “best” from month to month and search term to search term. Interestingly enough, when you put the branding and UI back in, the users always rated
Google as having the best search results.

Google‘s dominant brand is now what enables it to hold and grow its search market share. And in mature categories such as online travel, you see the big players compete purely on branding ads.

In some categories, branding never matters and we never reach Act three. If your users are unlikely to transaction with you more than once (say you sell rowing machines or curio cabinets) then your category will likely never develop beyond Act One. But if you’re in a category with repeat users, whether books, DVD rentals, online auctions, or shoes, branding matters.

CONCLUSION

Distribution, product and branding, all are critical but at different times. Making sure you focus on the right factor at the right stage in the evolution of your category can help you make sure you’re fighting the next war, not the last one.

  • http://www.zillow.com Rich Barton

    Having a little experience with Expedia, I’d wager that superior product had as much or more to do with Expedia’s beating Travelocity in the 99-03 timeframe than better pricing on hotel rooms. Both mattered, of course, but Expedia came out with a very advanced piece of search software called “Best Fare Search” (BFS) that placed the cominatorics and pricing of flights onto modern PC platforms for the first time (previously, it was all inflexible mainframe-based). BFS enabled a user to ask a basic question: i’m interested in a round trip to San Diego what are the best priced flights that are actually available?” Previously, an agent needed to find fares first then price them or vice versa, making the answer to the obvious question conveniently difficult for a consumer to answer.

    Anyway, BFS combined with fantastic wholesale hotel rates, are what took Expedia from 1/2 the market share of Traveolocity in 99 to twice as big and infinitely more profitable in 03.

    Another relevant point on the importance of distribution in Act I — At Expedia we only entered into “distribution” deals that made economic sense from a cust acq perspective. We were always much bigger believers in taking our message straight to the people and viciously protecting the brand. Others sold out their brands to portals and this was a mistake, imo. So, be careful what you are willing to do in order to get that precious distribution.

  • http://lsvp.wordpress.com jeremyliew

    Rich,

    You’re absolutely right, Expedia had a much better search product at the time as well. I’ve amended the post to reflect that pricing was only part of the better experience.

    On distribution, I’ve spoken about winning from a market share point of view. I can’t speak to the economics of the deals that were struck.

  • http://www.bouncebase.com David Armstrong

    Jeremy – we are in Act I We’re ready to launch a content/product distribution system. We are aggregating content and products through a use of dynamic RSS. We then enable our users to “broadcast” themselves via found articles/products, to include comments or fresh postings..ala blog like. Our product is both a website and a behind the scenes API…so we are not so dependent upon traffic if someone is already using an existing start page. I agree…distribution and using viral techniques to get it done is Act I. Thanks for the post, it continues to give us the energy to get it done.

  • http://www.flixster.com joe

    Jeremy –

    Wow, that makes a lot of sense. Why didn’t someone tell me this sooner? I want my b-school money back!

    ~j

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