The Product vs Distribution Framework
In the startup world there is an ongoing debate about the importance of having a very solid product versus having great distribution. A few weeks ago at a dinner hosted by David Skok and Antonio Rodriguez we had a very active and interesting debate about the merits of each. Antonio posed a question about which of the two we would prefer. Since then I’ve continued to think about this issue, and created a framework to help me think about it and evaluate the tradeoffs.
The Product-Distribution Framework
Given that the product vs distribution debate is not just an either or, I wanted to create a framework to help me think and evaluate the tradeoffs of each, and take into account the strength of each. So I created a simple 2×2 matrix comparing weak and strong product vs weak and strong distribution, using a fun theme of plants to characterize the various types of companies (trust me, it’s much safer for work than the initial images).
The Oak Trees – Great distribution and product feed on each other to build great companies
At the top right are the truly great companies, that have created solid products and achieve successful distribution to reach enough people. These great companies are household names, including Facebook, Apple, and Google. There are various paths to get there, but most of these companies have a fanatical devotion to creating a solid product, coupled with a very smart, disciplined, and powerful distribution. Throughout the growth, these two strengths continually feed on each other creating a positive feedback loop.
Example: Apple in 2010 – Apple is firing on all cylinders, led by Steve Jobs’ literally maniacal focus on creating a perfect product. But it’s easy to forget how strong the Apple marketing engine is, creating hundreds of millions of dollars of free publicity with every product launch. They have also created one of the world’s strongest brands, and use their huge profit margins to build a wildly successful retail distribution channel.
Example: Google – Google is the undisputed search leader with about 70% of the market (and holding strong). Early on they built a fundamentally superior search product, perfected it through continual execution and improvement, and leveraged the strength of the product to grow distribution. Now the two build on each other, with their market share in search enabling them to continue to improve their product through more data and more servers, and that continually improving product keeps people coming back to use their search engine.
The Weeds – Potentially profitable by eventually doomed
At the top left are companies that have created great distribution despite a weak product. Contrary to conventional wisdom, these companies can be very profitable despite the weak product because of various channels to reach customers and user habits.
Example: MySpace – MySpace leveraged huge email lists to spam users and build a large social network. They grew quickly and sold for $580 million, but continual lack of execution on the product led to their downfall and imminent irrelevance.
Example: Microsoft – A monopoly is about as strong a distribution strategy you can have, but even that is not enough to sustain a company that continues to make inferior products. Despite being wildly profitable, their stock has gone nowhere in 10 years, and their lack of product execution has put them in weak positions in the next computing wave (mobile and tablet).
Example: American auto makers – The analogy even applies outside consumer technology, as evident by the downfall of the American automotive industry, which for too long relied on patriotism, customer loyalty, and a saturated dealer network to distribute an inferior product. Eventually it caught up with them, and now even though they are building better products, decades of perception still linger with consumers and they face an uphill battle.
The Desert Flowers – Potentially great but need some breaks
At the bottom right are companies that have created a truly interesting and innovative product, but have struggled to get it out to the people that care about it. Many companies founded by techies have a strong risk to go down this path, continuing to focus on building the perfect product and not spending enough time getting it out there. And make no mistake, Facebook was not one of these companies in the early days, aggressively crawling online groups to get initial profile pictures and emailing whomever they could.
Example: original Mac-only iPod – Given the rapid success of the iPod franchise, it’s easy to forget that it originally launched exclusively for the Mac as a way to drive Mac sales, and took almost 2 years to sell 1 millions units (vs. 74 days for the original iPad, 28 days for the iPad, and about 1 day for the iPhone 4). It was only when they began offering a PC version and leveraging their iTunes distribution platform that sales began really accelerating.
The Tumbleweeds – Also Rans – Lots of challenges, but could work in certain offline niches
In the lower left quadrant are the companies that don’t have a particular strength in either product or distribution, and are thus left facing many challenges. In certain commodity local businesses with limited competition, this may not be an issue (for example the only dry-cleaner in a neighborhood), but for online businesses this can be a killer.
Examples: Most clones that lack distribution – Clones often try and replicate a successful product but lack many of the soft traits and methodologies that made those products successful in the first place, and thus often create weak imitations. If those are coupled with distribution advantages, they can be profitable, but often they are mired in the bottom left quadrant to hang on and pray.
What this means on a practical level
Coming back to Antonio’s question from that dinner, if I had a choice of having either great distribution or great product, I would choose great distribution, turn that into profitability, and leverage that to build a great product. Practically speaking, however, those choices are rarely presented. Therefore, when starting a new company, the important point is to clearly understand the tradeoffs as well as the strengths of the early team and company. Then use that to built a great company, whether it means leveraging distribution to get to a great product, or building a great product and figuring out the distribution.
And the truly great companies are constantly focused on both, like an oak seed going deep into the ground for a solid foundation (the product), and reaching for the skies to get sun and spread the branches (the distribution).
I’d love to hear other thoughts about this framework as well as other good examples. I’m also planning a follow up post about how to move between areas in the quadrant, and specific industry dynamics.