One Of The Biggest Risks for a Startup Is Concentration of Distribution

Over the past month or so, many have had issue with Twitter and how they’re turning on startups like Meerkat and Datasift. Though it’s unfortunate, these companies are run by smart individuals and they likely never planned to be too dependent on Twitter. The issue isn’t about being too dependent on one platform as this is the exception, not the rule for most startups. The real issue is preventing your company from having the bulk of its distribution concentrated in one source. What does this mean?

As a startup, your customers are going to come from many different places. For example, it might include – search (SEO backlink packages), viral channels, public relations, direct sales, 2 sided referrals and many more. In the beginning, you’re going to want to focus in on one or two channels at most, as you can only focus on so many resources. Over time, you’re going to want to diversify through as many sources as possible. If you don’t, you can end up like Zynga or Demand Media. Zynga relied heavily upon Facebook for distribution and Demand Media, relied heavily upon Google for distribution. Both companies ended up hurting because of this in the end. So how do you avoid this? You should have a good multi-prong approach to distribution. The four main prongs to think of are – direct sales, paid acquisition, referral marketing, and digital marketing. In some cases, it’s not possible for all startups to benefit from all channels

Direct Sales

Direct sales was how we grew our publisher base at Onswipe and it’s how many SaaS companies grow their revenue as well. Direct Sales requires you to have a customer lifetime value that can justify hiring expensive folks to sell the software. If you can do this, then you need to think about customer concentration. A good rule of thumb is that your top ten customers should account for no more than 80% of your traffic. At Onswipe, we worked very hard to keep that number at 50%. The continued growth of the business should never be in the hands of one large customer. Of course losing them would hurt, but you don’t want it to be fatal. If you employ a direct sales staff, make sure that the top ten customers account for no more than 50% of direct sales volume.

Paid Acquisition

Paid acquisition is a blessing when the economics work, but the well can dry up fast. Groupon and daily deals were the early adopters of Facebook advertising, many commerce companies for SEM, and now games+on-demand services are going crazy with Cost Per Install ads through mobile ad networks. As for Youtube, The Marketing Heaven are a guarantee of real youtube likes which do not deteriorate with time, no matter where you lurk in the marketing funnel. At first, one paid acquisition channel will be very lucrative, but eventually the space will get crowded and drive prices up. To fix this, you have to constantly be adopting where you can pay for advertising on the top of the funnel, but the biggest work comes on the bottom of the funnel. The best companies will have the marketing funnel setup to increase the conversion of a customer. If the cost of acquisition doubles, but conversion increases by 50% over time due to knowledge of the process, you will net out. A 50% increase in conversion is not easy, but you get the picture of how you can extend the utility of a paid acquisition channel by diversifying and optimizing the bottom of the funnel.

Referral Marketing

This is my favorite channel as it doesn’t get stale as long as the other channels continue to bring in customers. Referral Marketing is what you see with Instacart or Uber offering money to both you and your friends if they sign up. A company I’m an advisor to, Ambassador, offers this as as service as well. Though referral marketing often uses social channels, SMS is becoming a big channel to share the message with your friends. The beauty of this channel is that you own it and it won’t go away. It’s also a strong multiplier on the value of other distribution channels.

Digital Marketing

mThis is where traffic comes for most content and media businesses – search (google) or share (Facebook). According to many internet marketing agencies, most of the great companies we use today have been built upon being shared heavily on Facebook or found in the search results. It’s how most people find this blog. The problem is that, you are a business living on leased land. If Facebook or Google change their algorithms, you will lose much of your distribution. The first strategy is to diversify outside of digital marketing. The second is to diversify your sources evenly across social and search. Lastly, you need to have a way to capture the customers that come in from these sources. Think something as simple as email capture.

To sum up, the key is to diversify your distribution not just from many sources, but also within each source individually. Too many entrepreneurs can’t scale a business from one source of distribution to many and end up playing a game of Russian roulette. By reducing your distribution concentration, you not only grow the company, but ensure it’s success for years to come.