One of the most important growth factors that enable a company to blitzscale is distribution. Many people in Silicon Valley like to focus on building products that are, in the famous words of the late Steve Jobs, “insanely great.”
Great products are certainly a positive -- we’ll discuss the lack of product quality as a growth limiter later on -- but the cold and unromantic fact is that a good product with great distribution will almost always beat a great product with poor distribution.
Dropbox is a company with a great product, but it succeeded because of its great distribution. In an interview for Reid’s “Masters of Scale” podcast, Founder and CEO Drew Houston said that he believes that too many startups overlook the importance of distribution:
Most of the orthodoxy in Silicon Valley is about building a good product. I think that’s because most companies in the Valley don’t survive beyond the building-the-product phase. You have to be good at building a product, then you have to be just as good at getting users, then you have to be just as good at building a business model. If you’re missing any of the links in the chain, the whole chain is broken.
"The challenge of distribution has become even greater in the 'mobile first' era."
The challenge of distribution has become even greater in the "mobile first" era. Unlike the Web, where search engine optimization and email links were broadly applicable and successful distribution channels, mobile app stores offer little opportunity for serendipitous product discovery. When you go to Apple’s or Google’s app store, you’re searching for a specific product.
Few people install apps just for the hell of it. As a result, the business model innovators who have succeeded (e.g., Instagram, WhatsApp, Snap) have had to find creative ways to get broad distribution for their product -- without spending a lot of money. These distribution techniques fall into two general categories: leveraging existing networks and virality.
Leveraging Existing Networks
New companies rarely have the reach or resources to simply pour money into advertising campaigns. Instead, they have to find creative ways to tap into existing networks to distribute their product.
When I was at PayPal, one of the major vehicles for distribution of our payment service was settling purchases on eBay. At the time, eBay was already one of the largest players in e-commerce, and by the beginning of 2000 already had ten million registered users.
We tapped into this user base by building software that made it extremely easy for eBay sellers to automatically add a “Pay with PayPal” button to all of their eBay listings.
The amazing thing is that customers did so even though eBay had its own rival payments service, Billpoint! But sellers were required to add Billpoint manually to each of their listings; PayPal did it for them.
Many years later, Airbnb was able to perform a similar feat by leveraging the online classified service Craigslist. Based on a suggestion from Y Combinator’s Michael Seibel, Airbnb built a system that allowed and encouraged its hosts to cross-post their listings to the much-larger Craigslist.
Hosts were told, “Reposting your listing from Airbnb to Craigslist increases your earnings by $500 a month on average,” and were allowed to do so by clicking a single button.
This took serious technology skills -- unlike many platforms, Craigslist doesn’t have an application programming interface (API) that allows other software to interact with it -- but it was technology innovation for the purposes of distribution innovation, not product innovation. “It was a kind of a novel approach,” Airbnb founder Nathan Blecharczyk said of the integration. “No other site had that slick an integration. It was quite successful for us.”
Leveraging an existing network can have downsides, of course. What the existing network gives (or unknowingly allows to be taken), the existing network can also take away.
Zynga, the leading social games company, achieved great success leveraging Facebook for distribution, but had to dramatically reengineer its distribution model after Facebook decided to stop allowing people playing Zynga games to post their progress to their Facebook friends. (Disclosure: I am a member of Zynga’s board of directors.) Zynga founder Mark Pincus was farsighted enough to build a strong enough franchise to survive the change.
In contrast, so-called content farms like Demand Media that leveraged Google’s search platform to generate website traffic and advertising revenues never recovered after Google tuned its algorithms to deprioritize content from what it called “junk” websites.
Despite these dangers, leveraging existing networks can be a critical part of a business model, especially if these networks can provide a “booster rocket” that is later supplemented with virality or network effects.
"Despite these dangers, leveraging existing networks can be a critical part of a business model, especially if these networks can provide a 'booster rocket' that is later supplemented with virality or network effects."
“Viral” distribution occurs when the users of a product bring more users, and those users bring additional users, and so on, much like an infectious virus spreads from host to host. Virality can either be organic -- occurring during the course of normal usage of the product -- or incentivized by some kind of reward.
After launching LinkedIn, the team and I devoted significant time and energy to figuring out how to improve organic virality; that is, how to make it easier for existing users to invite friends to use the service.
One way we did this was to refine what have become some of the standard tools of virality, such as address book importers. For example, we built software that allowed LinkedIn to connect to our users’ Outlook contacts, which made it very easy for them to invite their most important ones.
But equally important was an unanticipated source of virality. As it turned out, users wanted to use their LinkedIn pages as their primary professional identity on the Internet.
This was great, because having a page like this to point others to -- with all the details of their professional life together in one place -- generated value not only for the user but also for the people viewing the page who wanted to learn about that user, and it made viewers realize that they should get their own LinkedIn profile.
As a result, we added public profiles as a systematic tool to boost both the member value proposition and our viral growth rate.
At PayPal, we combined organic and incentivized virality. The payment product was inherently viral; if someone emailed you money using PayPal, you had to set up an account to get paid. But we enhanced this organic virality with monetary incentives. If you referred a friend to PayPal, you got $10, and your friend got $10.
This combination of organic and incentivized virality allowed PayPal to grow seven to 10% per day. As the PayPal network grew, we reduced the incentives to five dollars and five dollars, then finally eliminated them altogether.
Incentives don’t have to be monetary; like PayPal, Dropbox used a similar combination of organic virality (as users share files with non-users) and incentivized virality (Basic account holders get 500 MB of extra storage per user they refer; Pro account holders get 1 GB) to grow.
Even though Dropbox invested in partnerships with leading PC makers like Dell, Drew Houston credits virality with driving the company’s rapid growth, helping them double their one hundred thousand users at launch to two hundred thousand users just ten days later, then skyrocket to one million users just seven months after that.
"If your distribution strategy focuses on virality, you also have to focus on retention. Bringing new users in through the front door doesn’t help you grow if they immediately turn around and leave."
If your distribution strategy focuses on virality, you also have to focus on retention. Bringing new users in through the front door doesn’t help you grow if they immediately turn around and leave.
According to Houston, Dropbox discovered this truth the hard way, when activation rates revealed that only 40% of the people signing up were actually putting a file in their Dropbox and linking it to their computer.
In an interview for my “Masters of Scale” podcast, Drew described a scene reminiscent of the television show Silicon Valley (but with a happier ending):
What we did is we went on Craigslist and offered $40 to anyone who’d come in for half an hour -- a poor man’s usability test. We’re like, "All right, sit down. This is an invitation to Dropbox in your email. Go from here to sharing a file with this email address." Zero of the five people we tested succeeded. Zero of the five even came close. This was just stunning. We’re like, “Oh my God, this is the worst product ever created.” So we made a list of like eighty things in this Excel spreadsheet, then just sanded down all these rough edges in the experience, and watched our activation rate climb.
Virality almost always requires a product that is either free or freemium (i.e., free up to a certain point, after which the user has to pay to upgrade -- Dropbox, for example, offers two GB of free storage). We can’t recall a single instance of a company that grew to a massive scale by leveraging the virality of a paid product.
One of the most powerful distribution innovations is to combine both strategies. Facebook was able to do this by harnessing the organic virality of a social network (where users invite other users to join them) and leveraging existing networks centered around campuses by rolling out the product on a college-by-college basis.
This is an excerpt from “Blitzscaling: The Lightning-Fast Path to Building Massively Valuable Companies,” from Reid Hoffman and Chris Yeh, co-authors of the New York Times Bestseller “The Alliance.” It has been republished here with permission. Order your copy of “Blitzscaling” here.
Originally published Oct 19, 2018 8:30:00 AM, updated October 19 2018