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The Business Engineer

distribution framework

Published about 1 month ago • 11 min read

When I first changed my career path in 2014, moving away from finance, my analytical approach made it very hard for me to transition toward understanding one of the most critical concepts in business: Distribution!

Today, after almost a decade of building/and helping build various digital, software, and tech businesses from scratch, I formed my own understanding of the concept of distribution.

I'll give you, then, a more technical description before jumping to the practical side of it.


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Distribution: a quick technical intro!

To me, distribution is about enabling patterns of matching between available resources in the market, organized in such a way as to become valuable to a group of people, which will become your audience or customer base.

The implications of it are quite interesting, as distribution creates price patterns that didn't exist before, whether at a small or large scale.

The matching between a product/service and a customer base is a valuable market dynamic that improves the whole system, and it's (almost) all there is to entrepreneurship!

In other words, as entrepreneurs and executives, the main job is to create distribution by bridging the gap between existing resources (in the form of physical or digital products) to match the needs (often unspoken, hidden, and hard to explain in words) of a group of people, that will show their preferences via the implicit acceptance of a pricing/revenue model (again this process is entirely subconscious, rather than deliberate, but we can facilitate it via experimentation).

To close the technical intro, the value of distribution stands in creating market liquidity for a product/service that delivers (often hidden) value to a group of customers, expressed via a price mechanism.

By arranging these resources toward a customer base in a way that is perceived as valuable enough to justify the formation of a pricing mechanism, distribution enables the creation of valuable information (in the form of market dynamics) that didn't exist before, thus helping the extension of the whole market order!

Looking at it from this perspective, isn't distribution a beautiful idea with essential and positive second-order effects on the whole?

How do you build your own distribution?

If you're trying to digitalize your business or build a digital business, getting lost in the plethora of platforms and available channels might be easy.

How do you make an order for that?

Let me start with a quick premise about distribution channels, so we're all on the same page, and then we move on to define two significant factors when building up distribution for your business.

This framework takes into account existing distribution channels. Yet, it can also be used in the future as new distribution channels emerge (one example is the emergence of language models as distribution channels).

At the end of this, you'll also find a video lecture!

A distribution channel is the set of steps it takes for a product to get into the hands of the key customer or consumer. Distribution channels can be direct or indirect. Distribution can also be physical or digital, depending on the kind of business and industry.

Business distribution (being able to match customers with your product) is a vital asset. Without distribution, the business will always be fragile.

But how do you build a strong distribution strategy?

Getting lost in the plethora of digital channels

A digital channel is a marketing channel, part of a distribution strategy, helping an organization reach its potential customers via electronic means.

There are several digital marketing channels, usually divided into organic and paid channels.

Some organic channels are SEO, SMO, and email marketing.

And some paid channels comprise SEM, SMM, and display advertising.

There isn't a single way to build a distribution strategy, and in many cases, it will depend on factors like what channels might be more suited for your product, what channels enable faster growth, and whether those distribution channels are also stable over time.

Lastly, distribution is also a matter of choice. Indeed, some companies (also based on their vision and culture) prefer certain distribution channels over others.

So how do you find the right mix?

We need to look at two key elements.

The key elements of a distribution strategy

When building up a distribution strategy, there are many factors to take into account. For the sake of this guide, we'll look at two primary, major factors that affect a business over time:

  • Control: How much do you own that distribution channel?
  • Growth: What kind of growth does the channel unlock?

Let's look at them.

Control: Owned vs. non-owned distribution channels

When building up a business from scratch, chances are, none will know you. There is no customer base. There is no product recognition. So, how do you unlock growth?

Usually, companies tap into existing distribution networks, where they have no or little control over how the product will be delivered to customers.

This might dilute the customer experience. However, it will enable the first traction of growth. As the business grows and it acquires its customer base, the same company might start investing in its own platform, thus asserting more control over how the product gets distributed.

For instance, if you take a company like Apple, it leverages both a direct (controlled) distribution strategy where it sells its products via its stores.

And an indirect (partially controlled thanks to Apple's branding power) distribution strategy.

In 2022, most of Apple's sales (62%) came from indirect channels (comprising third-party cellular networks, wholesalers/retailers, and resellers).

These channels are critical for sales amplification, scale, and subsidies (to enable the iPhone to be purchased by many people). In comparison, the direct channel represented 38% of the total revenues. Stores are critical for customer experience, enabling the service business, and branding at scale.

While some businesses thrive in the long term without building a mix between controlled (owned) distribution and non-controlled distribution by solely relying on one or the other.

A solid distribution strategy needs to leverage both for several reasons:

  • Diversify the product distribution
  • Enhance and amplify the product
  • Scale customer base by maintaining a good customer experience

Growth type: Organic, paid, and viral channels

On the other end, when building a distribution strategy, you might want to consider the kind of growth strategy to adopt. In this guide, we take into account three main types of growth:

  • Organic: This kind of growth is built over a long period of time, and it's bottom-up. As more customers join, they give slow but less noisy feedback on the product.
  • Paid: In a paid growth strategy, the company allocates resources to push its products into the hands of potential customers. In this case, the budget allocated for growth is primarily used to distribute the existing product to as many potential customers as possible.
  • Viral: In a viral growth strategy (usually the less expensive but also the riskier), a brand leverages the features of its product to push it into the hands of as many users as possible, independently from the fact that those will convert into paying customers. As a classic example, think of a freemium strategy.

Distribution mix matrix

From the balance between a controlled and non-controlled channel and the growth strategy (organic, paid and viral), we can find the right mix.

A solid distribution strategy will leverage both controlled and non-controlled channels. And at the same time, those who are organic, paid, and viral.

As you build up your distribution strategy, you want to move from non-controlled to controlled distribution channels to build a solid company.

Some examples are below.

Media-driven PR

A media-driven PR growth strategy is a viral strategy where you do not have much control. You can change the message to fit the market; as you do that, you might get good media coverage.

This is a viral strategy as it is usually inexpensive. At the same time, you're not changing the underlying characteristics of the product.

While you're working on the perception of the product, you want to make sure to develop its core parts in line with its new perceived value.

This leads us to a product-driven word-of-mouth strategy.

Product-driven word-of-mouth

In a product-driven word-of-mouth strategy, you iterate on the product's core features to make it more appealing to a wider customer base.

As those features will gain traction through word of mouth, that will also make your brand known.

With this strategy, the product will evolve to fit the market needs. Therefore, you can push it further also at the PR level, as a solid product can scale in terms of attention and user base without too much risk.

Beware, though, as more people get to know your product, the more your product will need to evolve.

SEO

Search engine optimization (ranking your pages on Google organic results) is an organic growth strategy that does not control. While you can structure content to be picked up by Google's algorithm, changing those core algorithms might cause your website to lose traffic (and customers) overnight.

While SEO rankings might be stable over time.

You still want to diversify this organic growth strategy that you do not control with a growth strategy where you have more control.

Email list

As you build up an organic audience via search engine optimization, building an email list from the contacts that reach you organically is a great way to move from a channel where you have little control to another where you have more control.

Recap: In This Issue!

  1. Enabling Value: Distribution is about organizing available resources in the market in a way that creates value for a specific group of people, who become your audience or customer base.
  2. Price Patterns: Distribution creates new price patterns in the market by matching products or services with customers. These patterns didn't exist before and contribute to the overall dynamics of the market.
  3. Market Dynamics: The matching between a product/service and a customer base is a valuable market dynamic. It improves the overall system and is a fundamental aspect of entrepreneurship.
  4. Bridging the Gap: Entrepreneurs and executives play a crucial role in creating distribution by bridging the gap between existing resources and the needs of a specific group of people. This involves understanding unspoken, hidden, and hard-to-explain preferences.
  5. Implicit Acceptance: Customers demonstrate their preferences through the implicit acceptance of a pricing/revenue model. This process is often subconscious but can be facilitated by entrepreneurs and executives.
  6. Market Liquidity: Distribution creates market liquidity for a product/service, making it accessible to customers and delivering hidden value. The pricing mechanism indicates the perceived value of the product/service.
  7. Creation of Information: By arranging resources towards a customer base, distribution generates valuable information in the form of market dynamics. This information contributes to the expansion and order of the entire market.
  8. Positive Second-Order Effects: Distribution can be considered as a beautiful idea with important and positive second-order effects on the market as a whole. It enhances market liquidity, creates value, and fosters market dynamics, benefiting both businesses and customers.
  9. Distribution channels play a crucial role in business success, whether physical or digital, direct or indirect.
  10. Digital marketing channels can be categorized as organic (e.g., SEO, SMO, email marketing) or paid (e.g., SEM, SMM, display advertising).
  11. Building a distribution strategy requires considering factors such as product suitability, growth potential, and stability of channels over time.
  12. Control and growth are two key elements to consider in a distribution strategy.
  13. Control refers to the level of ownership and influences a business has over its distribution channels, which may start with relying on existing networks and later investing in building proprietary platforms.
  14. Growth can be organic (built over time), paid (using resources to reach potential customers), or viral (leveraging product features for widespread adoption).
  15. A successful distribution strategy often involves a mix of controlled and non-controlled channels and a combination of organic, paid, and viral growth strategies.
  16. The distribution mix matrix helps determine the right balance between control and growth strategies.
  17. Examples of distribution strategies include media-driven PR, product-driven word of mouth, SEO, and building an email list.
  18. Moving from non-controlled to controlled channels and diversifying growth strategies can contribute to building a strong distribution strategy.

Video Lecture

Key Highlights

  • Understanding Distribution in Business:
    • Value Creation through Alignment: Distribution is the process of aligning available resources, whether physical or digital products or services, to meet the needs of a specific group of customers. This alignment creates value by fulfilling customer demands effectively.
    • Price Patterns and Market Dynamics: When distribution matches products with customers, it generates price patterns in the market. These patterns contribute to the overall dynamics of supply and demand, enabling the market to function efficiently.
    • Entrepreneurial Role: Entrepreneurs play a vital role in distribution by bridging the gap between resources and customer preferences. They decipher unspoken, hidden customer needs and offer solutions that resonate. This leads to implicit acceptance of pricing, where customers demonstrate their willingness to pay for perceived value.
    • Market Liquidity and Information: Distribution enhances market liquidity by making products accessible to customers, effectively increasing market participation. This process also generates valuable information in the form of market dynamics, which contributes to a more informed and organized market environment.
  • Creating a Distribution Strategy:
    • Digital Distribution Channels: In today's business landscape, distribution channels are essential for connecting products to customers. These channels can be physical or digital, encompassing platforms and methods to reach target audiences.
    • Organic and Paid Channels: Digital marketing channels are categorized as organic or paid. Organic channels involve strategies like search engine optimization (SEO), social media optimization (SMO), and email marketing. Paid channels include search engine marketing (SEM), social media marketing (SMM), and display advertising.
  • Distribution Strategy Factors: Control and Growth:
    • Controlled Channels: In the early stages of a business, leveraging existing distribution networks can help gain traction quickly. While this may entail less control over how the product reaches customers, it provides initial growth opportunities.
    • Transition to Controlled Channels: As a business grows and establishes its customer base, investing in proprietary platforms or distribution channels becomes important. This allows the business to exert more control over the customer experience and delivery process.
    • Growth Strategies: Growth strategies vary based on resource allocation. Organic growth involves gradual expansion over time. Paid growth allocates resources to reach potential customers, often involving advertising expenses. Viral growth leverages product features to encourage widespread adoption, potentially through freemium models.
  • Balancing Distribution Strategy:
    • Control and Growth Mix: A successful distribution strategy strikes a balance between controlled and non-controlled channels. This balance ensures both rapid growth through existing networks and long-term control over the distribution process.
    • Distribution Mix Matrix: The distribution mix matrix helps businesses determine the right combination of control and growth strategies based on their unique goals and circumstances.
  • Examples of Distribution Strategies:
    • Media-Driven PR: Leveraging media coverage to introduce products to the market and gain initial recognition. While control is limited, positive press can amplify brand visibility.
    • Product-Driven Word of Mouth: Focusing on iterative product improvement based on customer feedback. As customers experience value, they spread positive word of mouth, contributing to brand recognition.
    • SEO: Employing organic strategies like SEO to improve search engine visibility and attract customers through relevant content. SEO requires ongoing effort to maintain rankings.
    • Email List Building: Building an email list through organic growth, often aided by SEO efforts. This channel provides businesses with more direct communication and control over customer engagement.
  • In Conclusion:
    • Distribution's Role: Distribution is a critical aspect of business success, enabling products to reach customers and create value.
    • Factors to Consider: Building a distribution strategy involves considering factors such as control, growth potential, and channel stability.
    • Strategic Balance: An effective distribution strategy combines both controlled and non-controlled channels and integrates various growth strategies to achieve optimal outcomes.

Ciao!

With ♥️ Gennaro, FourWeekMBA


Business Engineering Printed



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The Business Engineer

The Only Official Newsletter of FourWeekMBA - By Gennaro Cuofano

At the intersection of business model strategy, technology, and business development, The Business Engineer is the only official newsletter of FourWeekMBA.com, the leading blog about business model strategy and business engineering. The blog reaches millions of business people each year.

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