Startup general interest

Why product now trumps distribution – a framework

By December 9, 2015 4 Comments

Hat tip to Ben Thompson of Stratechery for the inspiring this post with his article on Selling feelings.

Back in 1999 when I got my first job in the venture industry I remember having a debate with my boss about the relative importance of product and distribution for startups. It was in the context of software companies and as a naive young meritocrat I was arguing that having a great product was most important whilst my boss said it was better to have a great sales team.

He was right.

Since then the internet has changed everything and for most industries product is now far more important than distribution.

The 4Ps marketing framework can be used to explain why. According to the framework there are four key components to a marketing plan:

  • Product (what is actually sold)
  • Price (how much the product is sold for)
  • Promotion (how customers find out about the product)
  • Place (where the product can be found)

In the words of Ben Thompson:

Of these four the most difficult and expensive — and thus, the greatest barrier to entry (i.e. the biggest moat) — was place. Actually getting your product in front of customers required relationships with wholesales and retailers, not to mention significant investments in logistics. Indeed, the companies who controlled distribution were often the most profitable of all.

But now anyone can put a product on the internet, so the key to success has moved from having distribution to having great product. Returning to my 1999 debate – product now wins over sales. Customers can take free trials of software over the web and will use the best one. The meritocrat in me is happy.

It’s interesting to note in this context the swathe of companies that have emerged to help us buy the best product. There’s Amazon, Trustpilot and others with their reviews, MoneySupermarket and the other price comparison sites for many financial services products, and, in their own way, social media sites like Twitter and Facebook.

A caveat is important though. Whilst it is true that great product is a necessary condition of success, it is not sufficient. Distribution must still be mastered. My point is that the relative importance of product and distribution has shifted.

All this is, of course, great for us as consumers, because we now have much higher quality products. We also have them at lower prices, partly because the internet has taken out lots of middlemen and partly because the internet has ushered in ruthless price competition. It’s not all bad for product companies though because they do get to keep more of the margin.

That said, for companies where the marginal cost of production is zero the news is pretty much exclusively bad. The aforementioned ruthless price competition means their prices are headed towards zero.


Takeaways for founders

  • Make sure your product is great – which means better than the competition on dimensions lots of people care about
  • If the marginal cost of distribution is zero then find another way to make money – e.g. free content with an advertising model, or free software and sell insurance