Why Sales and Distribution Matters
Debunking an Enduring Startup Myth
One of the most enduring myths in the startup world is the belief that great products sell themselves. Many think that if you have a great product, it will inevitably reach customers. However, this couldn’t be further from reality.
History is full of examples where the best product didn’t win. Consider Nikola Tesla, a brilliant scientist who pioneered the alternating current system. Technologically more advanced than Thomas Edison’s direct current system, Tesla’s invention was easier to generate, better over distances, and less expensive. Tesla created the better product, but Edison was the better businessman who went on to establish General Electric and was credited for leading humanity into the electric age. In another twist, Tesla developed the idea of radio transmission, but it was Guglielmo Marconi who capitalized on the idea, commercialized it, and even won a Nobel Prize for pioneering long-distance radio transmission.
The lesson is clear: a great product alone isn’t all that counts. Even if you’ve built a great product, you still have to get it out to customers. In this blog post, we’ll unpack why sales and distribution is harder than it looks and break down how you can make it happen.
Why Is Sales So Poorly Understood?
Frequently, we hear people say: “this product is so good, it sells itself.” Such statements, however, are never true. But why do people make such claims? Usually, it’s an attempt to convince others that their product is, in fact, good. No one would want to say: “our product is so bad, it takes a team of world-class salespeople to get customers to buy it.” Therefore, it’s important to always evaluate such claims critically. Is the statement that a product sells itself based on empirical fact or is it part of a hidden sales pitch?
Sales, in all its various forms – be it advertising, mass marketing, or enterprise sales – isn’t merely about providing prospective customers with all the relevant information needed to make rational, emotion-free decisions. Sales is about being hidden, subtly influencing customers’ choices. This is why many people in sales roles often carry titles unrelated to their actual functions. Those who sell advertising are called Account Executives, those who sell to customers are in Business Development, and those who sell to companies are under Corporate Development. These semantic choices aren’t arbitrary – they shield us from the feeling of being sold to, even though we know that sales exist all around us.
Let’s take a look at advertising. In the U.S., approximately 268K people are employed in the advertising industry, which boasts a $73B market cap. This is because advertising undeniably works. Many of our product preferences are, in all likelihood, influenced by ads. The U.S. software sales industry is even bigger, with around 737K people employed and an impressive $588B market size. The reality is that sales is often underestimated due to the systematic effort to hide it in a world secretly driven by it.
The Dynamics of Engineering vs Sales
Marc Andreessen has observed that engineers often overlook the nuances of sales, primarily because they operate in a world that is very truth-oriented. In engineering, there’s a binary distinction – something either works or it doesn’t. Hence, engineers might regard the art of enhancing the surface appearance of things – essentially, sales – as a form of dishonesty.
Engineering is inherently transparent and hard, with obvious ways of evaluating how good someone is. Are you a proficient coder or are you an elite coder? The lines are fairly clear. Sales, on the other hand, operate in a world that is very ambiguous. While it’s tempting to stereotype salespeople based on clichés, the reality is that there are many skill levels like in chess: ranging from novices to experts, masters, and even grandmasters. The distinction, however, isn’t always apparent because the best salespeople excel at making hard work look easy.
Compensation in sales further underscores its complexity. While top salespeople get paid extremely well, average salespeople earn a lot less than their engineering counterparts. For instance, an entry-level Software Engineering role at Google might earn a base salary of $139K, $36K in stock, with an additional $9K bonus. But an entry-level Business Development role at Google, which prides itself on being extremely engineering-driven, can earn up to a $116K base salary, $14K in stock, $86K in commissions, and receive a bonus of $40K. This doesn’t imply that everyone should go into sales. But those who excel at it do quite well.
The Mathematics of Distribution
At its core, distribution is about getting your product into the hands of customers. In a broader sense, it encompasses strategies to amplify your startup’s message. To succeed, every product has to have a powerful, effective sales and distribution strategy. Even with an undifferentiated product, an excellent distribution strategy can grant you a monopoly. Conversely, having a differentiated product without an effective distribution strategy will get you nowhere. More often than not, it’s poor distribution, not bad products, that leads to failure.
Grasping the importance of distribution is only the starting point. Typically, every successful tech startup not only possesses a unique product but also employs a unique distribution angle. To approach distribution quantitatively, here are two metrics that will set the bounds of your distribution strategy:
Customer Lifetime Value (CLV): the average net profit you accumulate over the duration of your relationship with a customer.
Customer Acquisition Cost (CAC): the average expense incurred to acquire a new customer.
One helpful way to think about distribution is to recognize the different acquisition costs associated with different customers. The process and scalability of your distribution strategy should be tailored based on your product offering and target customer. But no matter what, your average net profit from a customer (CLV) should always exceed your costs associated with acquiring that customer (CAC).
How Does One Actually Distribute a Product?
Distribution strategies vary significantly depending on your average CAC. On one end of the spectrum, consumer-focused products with low price points lean heavily on viral marketing and marketing. On the other end, high-value contracts with large enterprises or governments require a more hands-on, people-driven approach, often involving specialized sales and complex sales teams.
Peter Thiel offers a compelling way to visualize distribution strategies on a continuum based on your CAC:
Viral Marketing – $1 CAC: a product utilizes viral marketing when its fundamental design encourages its users to invite others to join too. While viral marketing is cost-effective and organic, it requires having a product whose core use case intrinsically encourages virality, which not every product will have. For example, LinkedIn leverages this strategy.
Marketing – $100 CAC: marketing and advertising come into play for products that have mass appeal but lack inherent virality. Success in marketing and advertising requires thinking outside the box to set yourself apart from competitors, and the cost of your campaign must make sense relative to the lifetime value of your customer. Warby Parker serves as a case in point.
The Dead Zone: in between mass marketing and personal sales lies a dead zone where there’s actually no good distribution strategy to reach customers. Many startups find themselves trapped here, unable to scale via marketing and not capitalized enough to build a sales team. The dead zone is where potentially good products go unsold due to distribution challenges.
Sales – $10K CAC: for deals around the six-figure range, the focus is often on streamlined and replicable sales processes. These are the bread and butter of many B2B software companies, and the key question here revolves around identifying those who are most likely going to buy the product. Box, for instance, has thrived using this strategy.
Complex Sales – $10M CAC: complex sales are for difficult seven-figure deals that demand significant time, attention, and relationship-building to close. These deals are few and far between, but complex sales or enterprise sales is the only way to sell some of the world’s most valuable products. SpaceX exemplifies the challenges and opportunities inherent in this strategy.
As you shift from consumer products to enterprise solutions, the emphasis on a people-driven sales organization becomes increasingly important. A general rule of thumb is that the larger the deal size – particularly in B2B or enterprise – the more sophisticated your sales structure needs to be. Thus, understanding where you fall on this distribution continuum is crucial for tailoring an effective, efficient strategy for getting your product into the right hands.
The Power Law of Distribution
Distribution, much like many things in our world, isn’t linear – it follows a power law. This principle is evident in startup outcomes and also venture capital performance: a few outshine the rest, creating disproportionate results. Yet, in our egalitarian society that often promotes uniformity, we’re led to believe that differences are minimal and outcomes should be more evenly spread.
Roelof Botha has pointed out that very few companies manage to create multiple revenue streams of equal magnitude. The same is true for distribution, and exceptions are rare. Falling into the trap of believing that you’ll have a bunch of equally effective distribution strategies is like expecting to have multiple equally profitable revenue streams. This is especially common among inexperienced founders who, unfamiliar with distribution, scatter their efforts across sales, business development, advertising, viral marketing, and more, hoping something sticks.
When it comes to distribution, there’s often one strategy that significantly outperforms the rest. The emphasis, then, should be on rigorously identifying and honing that singular, optimal distribution strategy that will likely be far more powerful than every other strategy for your business. Once you’ve found that distribution strategy, double down on it until exponential growth starts to pick up.
Selling is Everywhere
Distribution isn’t just about selling your product to customers. It’s also about selling your startup to potential employees and investors. The often-repeated myth that a product is so good, that it will simply sell itself is misleading. Similarly, it’s dangerous to believe that a startup is so good, people will be clamoring to join it or investors will be banging down the doors to invest. Such occurrences are rarely common. Behind every successful startup is a lot of selling, planning, and hard work that is not always visible on the outside.
With employee hiring, many founders operate under the presumption that information alone can guide good, rational decisions. That’s not true at all. Given that talent makes or breaks startups, it’s crucial for founders to dedicate a significant portion of their time – perhaps 25% to 33% – to hiring, or selling to potential employees. As a startup scales and its valuation crosses significant milestones beyond the seed round, there should also be dedicated people in corporate development whose sole task is to network and engage prospective investors around the world. Not actively selling to investors can result in lots of money being left on the table.
Every tech startup has salespeople. If it doesn’t, there is no startup. If you’re reading this and find no salespeople around – you, then, are the salesperson. Every startup’s heartbeat is its ability to sell, whether it’s a vision, a product, or an opportunity.