Zero to One: Notes on Startups, or How to Build the Future

Distribution Doldrums
In between personal sales (salespeople obviously required) and traditional advertising
(no salespeople required) there is a dead zone. Suppose you create a software service that
helps convenience store owners track their inventory and manage ordering. For a product
priced around $1,000, there might be no good distribution channel to reach the small
businesses that might buy it. Even if you have a clear value proposition, how do you get
people to hear it? Advertising would either be too broad (there’s no TV channel that only
convenience store owners watch) or too inefficient (on its own, an ad in 
Convenience

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Store News
probably won’t convince any owner to part with $1,000 a year). The product
needs a personal sales effort, but at that price point, you simply don’t have the resources
to send an actual person to talk to every prospective customer. This is why so many
small and medium-sized businesses don’t use tools that bigger firms take for granted.
It’s not that small business proprietors are unusually backward or that good tools don’t
exist: distribution is the hidden bottleneck.
Marketing and Advertising
Marketing and advertising work for relatively low-priced products that have mass appeal
but lack any method of viral distribution. Procter & Gamble can’t afford to pay
salespeople to go door-to-door selling laundry detergent. (P&G 
does
employ salespeople
to talk to grocery chains and large retail outlets, since one detergent sale made to these
buyers might mean 100,000 one-gallon bottles.) To reach its end user, a packaged goods
company has to produce television commercials, print coupons in newspapers, and
design its product boxes to attract attention.
Advertising can work for startups, too, but only when your customer acquisition costs
and customer lifetime value make every other distribution channel uneconomical.
Consider e-commerce startup Warby Parker, which designs and sells fashionable
prescription eyeglasses online instead of contracting sales out to retail eyewear
distributors. Each pair starts at around $100, so assuming the average customer buys a
few pairs in her lifetime, the company’s CLV is a few hundred dollars. That’s too little
to justify personal attention on every transaction, but at the other extreme, hundred-
dollar physical products don’t exactly go viral. By running advertisements and creating
quirky TV commercials, Warby is able to get its better, less expensive offerings in front
of millions of eyeglass-wearing customers. The company states plainly on its website
that “TV is a great big megaphone,” and when you can only afford to spend dozens of
dollars acquiring a new customer, you need the biggest megaphone you can find.
Every entrepreneur envies a recognizable ad campaign, but startups should resist the
temptation to compete with bigger companies in the endless contest to put on the most
memorable TV spots or the most elaborate PR stunts. I know this from experience. At
PayPal we hired James Doohan, who played Scotty on 
Star Trek,
to be our official
spokesman. When we released our first software for the PalmPilot, we invited journalists
to an event where they could hear James recite this immortal line: “I’ve been beaming
people up my whole career, but this is the first time I’ve ever been able to beam money!”
It flopped—the few who actually came to cover the event weren’t impressed. We were
all nerds, so we had thought Scotty the Chief Engineer could speak with more authority
than, say, Captain Kirk. (Just like a salesman, Kirk was always showboating out in some
exotic locale and leaving it up to the engineers to bail him out of his own mistakes.) We
were wrong: when Priceline.com cast William Shatner (the actor who played Kirk) in a
famous series of TV spots, it worked for them. But by then Priceline was a major player.
No early-stage startup can match big companies’ advertising budgets. Captain Kirk truly
is in a league of his own.