The Secret Core of Every Successful Business: Distribution
Note: Republishing this post I shared on the Medium paid subscription a few years ago. This was originally written in February 2015.
You Can’t Win Without Distribution
As we’ll learn from Peter Thiel, there is one thing that every company MUST have in order to be successful. Businesses can be built off of various Competitive Advantages and Brand messages, but without a winning Distribution strategy, there is no business.
What Distribution is…
Because I had to look it up on Wikipedia to be exactly sure:
Distribution is the process of making a product or service available for use.
or
Distribution refers to providing the product at a place which is convenient for customers to access.
These definitions include both Direct and Indirect Distribution strategies. Companies that engage in Direct Distribution allow customers to purchase from them directly. When you buy glasses from the Warby Parker website, or an iPad from the Apple Store, you’re purchasing directly from the company.
Indirect Distribution refers to any process where consumers purchase products from an intermediary. Most retailers are intermediaries, so you’re not buying that Deodorant from Old Spice, but from Walgreens who bought it from Old Spice. You’ve never bought a drink directly from Coca-cola—every coke goes through an intermediate distributor.
What Distribution is not…
The concept of distribution is often conflated with concepts surrounding it, which tends to leave it under-appreciated and misunderstood as a core function in business.
Distribution is NOT promotion, which creates awareness and desire:
Promotion encompasses all forms of communication that a marketer may use to provide information about the product, including advertising, public relations, and sales.
Distribution is NOT fulfillment, which happens AFTER the purchase:
Fulfillment is the process of taking an order and executing it by delivering it to the intended customer.
Digital vs. Physical Distribution
Distribution of physical goods has been a core function of business since the dawn of time—solving the problem of getting a product in front of a customer. Gypsies, Merchants, Traders and Peddlers all solved the distribution problem throughout history. Now, distribution companies that buy from manufacturers and deliver to retailers solve that problem for physical goods.
But…
Distribution is changing—the analog model of items being shipped all over the world to retail shelves near prospective customers applies to less industries than it used to. As software eats the world and more products are available digitally rather than physically, (books, music, movies) distribution strategies change. Also, as companies sell directly to consumers online,(Warby Parker, Casper, Apple) distribution in those industries changes.
When customers can purchase instantly online, promotion and distribution are much more intertwined than ever before. In some channels, promotion and distribution can happen in the same moment. As those disciplines converge, we have a lot to learn about what is now possible.
(After lots of suggestions focused on Growth Hacking, and doing some research, I suspect that it’s from this conflation that the Growth-Hacking movement was born. Can anyone confirm that? We’ll explore this more in another Edition.)
This is a fascinating situation. If you come across resources on this development, please get in touch. I’d love to read it, and add it to this piece.
Peter Thiel on Distribution
Thiel’s definition of distribution is a good example of the conflation of promotion and distribution that is happening in the tech industry:
Distribution—a catchall term for everything it takes to sell a product
His chapter on Distribution in Zero-to-One (Or the post from the Class notes) is fantastic, and crisply explains it’s importance:
Superior sales and distribution by itself can create a monopoly, even with no product differentiation. The converse is not true.
No matter how strong your product—even if it easily fits into already established habits and anybody who tries it likes it immediately—you must still support it with a strong distribution plan.
How do companies ensure a strong distribution plan? A direct distribution strategy must be part of the creation of the product, a core part of the business model:
It’s better to think of distribution as something essential to the design of your product. If you’ve invented something new but you haven’t invented an effective way to sell it, you have a bad business—no matter how good the product.
With that wisdom from Thiel, let’s explore some companies where their Distribution is what made them successful.
Distribution as Competitive Advantage
Distribution isn’t just a competency that enables a company to display it’s other product and brand attributes—it can also be a Competitive Advantage of it’s own.
The Hard Thing About Dealing Drugs
In some industries, physical distribution is ‘the hard part’ of the business. Take Drug Dealers, for example. The sale isn’t difficult — it’s getting the drugs from production facilities across borders and into the street unnoticed that separates successful enterprises from the unsuccessful.
Walgreens’ Focus on Convenience
As a retailer, Walgreens is the distribution channel for the products they sell. In order to be a successful retailer, Walgreens must make themselves convenient and available. Their relentless focus on convenience is what made them such a monster company that they were featured in Jim Collins’ Good to Great. Walgreen’s returns were 15x better than the market during 1975–2000.
It embarked on a systematic program to replace all inconvenient locations with more convenient ones, preferably corner lots where customers could easily enter and exit from multiple directions. If a great corner location would open up just half a block away from a profitable Walgreens in a good location, the company would close the good store (even at a cost of $1 million to get out of the lease) to open a great new store on the corner.
Walgreens pioneered drive-through pharmacies, found customers liked the idea, and built hundreds of them.
In urban areas, the company clustered it’s stores tightly together, on the precept that no one should have to walk more than a few blocks to reach a Walgreens. In downtown San Francisco, for example, Walgreens clustered nine stores within a one-mile radius.
Those locations and those drive-throughs are a competitive advantage—superior distribution over competitors who are more sparsely available.
Tesla Following Apple’s Lead
It is an interesting strategic difference that Tesla owns their own retailers—when you buy a Tesla, you buy it directly from the company, not from a Third-party Dealership.
There is a strong parallel here to Apple—who made a similar decision to create their own retail locations. This lets them control distribution, rather than relying on an intermediary (as other computer companies did, selling through Circuit City or Best Buy).
This post on Tesla’s website, directly from Elon Musk, founder and CEO, explains in detail why they are creating their own distribution network, and what the advantages and challenges are:
That is why we are deliberately positioning our store and gallery locations in high foot traffic, high visibility retail venues, like malls and shopping streets that people regularly visit in a relatively open-minded buying mood.
This allows us to interact with potential customers and have them learn about our cars from Tesla Product Specialists before they have decided which new car to buy.
To see into the world of dealerships, whom Tesla is competing with, check out this story from Planet Money. Great listening on the legacy and legal reasons we’re stuck with dealerships.
Microsoft’s Distribution Offensive
When Microsoft gained monopoly power in the Operating Systems market, it was in part because of their Distribution strategy, being sold along with computers.
And when their monopoly was threatened by Middleware (browsers, mainly Netscape Navigator), it’s competitive move was to restrict Netscape’s distribution. That was the basis of the Anti-trust case brought against Microsoft, which we can read about from the Department of Justice’s case:
Microsoft acted quickly to squelch this evolving middleware threat to what it sometimes called its “desktop paradise,” first by proposing an illegal division of markets, and then by embarking on a predatory campaign to restrict the distribution and usage of Netscape’s browser and, in Microsoft’s words, to “cut off Netscape’s air supply.”
[…]
Microsoft’s conduct has succeeded in blunting cross-platform middleware threats and thereby maintaining the applications barrier to entry. Microsoft substantially impeded the most effective channels of distribution for both Netscape and Java, raised its rivals’ costs, and, ultimately, effectively eliminated Netscape as a platform threat, further entrenching and maintaining Microsoft’s operating system monopoly.
As Peter Thiel said: “Superior sales and distribution by itself can create a monopoly, even with no product differentiation. The converse is not true.”This is an example of the converse—without sales and distribution, a company cannot capitalize on it’s other competitive advantages.
Dropbox’s Early Failures
Dropbox has an interesting story of the evolution of their Distribution strategy. This thorough case study from Harvard Business School explores the assumptions that CEO Drew Houston started with. Then it explains what happened in the market, and which strategies ended up working.
Here’s where they started trying to acquire early customers:
Early on, Dropbox attempted to acquire new customers through paid search advertising. However, incumbents had bid up the cost per click for obvious search keywords. As a result, it cost dropbox more than $300 to acquire a paying customer. This was not economically sustainable, since an annual subscription for 50 GB service was priced at $99.
When that didn’t work, Drew Houston set his sights on partnerships:
Houston initially believed that partnering might be another strategy for accelerating growth. […] After wasting weeks on discussions that invariably stalled, Houston decided to scrap the idea.
From Houston: “I came back and looked at my board slides, which showed how we’d take over the world with distribution deals. I felt like an idiot. Arash (co-founder) was furious; he said, “I told you this would happen.” Since then, I’ve realized that no significant tech company has been built solely through distribution deals without having a strong brand of it’s own.”
Despite none of these channels becoming economical, Dropbox grew well, through word-of-mouth referrals and viral distribution.
In mid-2009, Dropbox management abandoned paid search advertising entirely in favor of an exclusive focus on organic customer acquisition efforts. Houston commented, “It dawned on us that Dropbox was different. It’s not like the average user wakes up in the morning wishing to get rid of their USB drive. If you don’t think you have a problem, you’re not going to look for a solution. Search is great for harvesting demand, not for creating it.”
We all know how this story goes—it goes well for Dropbox, and we’re still watching this unfold.
The World’s Most Impressive Distribution System
Coca-cola is the farthest-reaching brand on Earth. Remote villages that barely have electricity, have Coke for sale. In addition to being wide-spread, Coke is incredibly pervasive in the developed world. Available in nearly every store, shop and restaurant, as well as 30,000 feet in the air.
Distribution is a core part of Coca-cola’s competitive advantage. Charlie Munger explains more in this lecture:
We will make it a permanent obsession in our company that our beverage, as fast as practicable, will at all times be available everywhere throughout the world. After all, a competing product, if it is never tried, can’t act as a reward creating a conflicting habit. Every spouse knows that.
[…]
As we expand fast in our new-beverage market, our competitors will face gross disadvantages of scale in buying advertising to create the Pavlovian conditioning they need. And this outcome, along with other volume-creates-power effects, should help us gain and hold at least 50 percent of the new market everywhere. Indeed, provided buyers are scattered, our higher volumes will give us very extreme cost advantages in distribution.
[…]
We will be so far ahead, with such strong trademarks and complete, “always available” worldwide distribution, that good flavor copying won’t bar us from our objective.
To achieve distribution in the farthest reaches of the world is no small feat. It involves systems based on individual entrepreneurs carrying and biking beverages themselves.
Open Questions
There is a lot more to learn about Distribution—it’s changing rapidly, and strategies vary wildly by industry and by company. Here are some things that I’m still curious about:
Who in your organization is responsible for Distribution?
Where does Promotion end and Distribution Begin?
In which Channels are Promotion and Distribution integrated? Where are they separated? How do you treat those channels differently due to that?
How do you know when Distribution is your bottleneck? (Rather than promotion?)