Distribution: Innovation’s Pathway to Adoption

What's Next In Payments®
6:21 AM EDT August 9th, 2013

Welcome to the latest edition of PYMNTS.com’s VC Voices: a weekly column where we bring you commentary from the best of the best around the world of payments investment. Want to know what the biggest backers of our industry’s innovators and disrupters think? We give our VCs 500 words of unedited space to do with as they please, so you’ve come to the right place.

This week, PYMNTS.com hears from Dan Rosen and Chip Kahn of Commerce Ventures to hear about four distribution strategies for startups and their pros and cons.

By Chip Kahn & Dan Rosen, Commerce Ventures

Most tech companies today have product-centric cultures and our lean startups focus on getting to product/market as quickly and inexpensively as possible. At Commerce Ventures, we often invest in companies that sell to or work with merchants and, although building a great product is critical for these businesses, distribution is perhaps even more important. There are millions of merchants in the United States, most of them run by owner-operators with no marketing or IT budgets whatsoever. Reaching and selling to such merchants is perhaps the most challenging task for commerce-focused tech companies.

For years, merchants have relied upon a cottage industry of over 25,000 Value Added Resellers (VARs), with whom they spend over $35 billion each year on technology-related products, services and support. In addition, there are over 10,000 sales people advising merchants on which payments processors to use – they are referred to as Independent Sales Organizations (ISOs for short). Heck, Groupon employed as many as 4,000 local sales people at its peak. Simply stated, distribution matters…and we shouldn’t design and build a product in this industry without thinking about how to get it in the hands of merchant targets.

Although there are several types of distribution strategies to consider, we’ve outlined the four core approaches we’ve seen most frequently:

- Organic: We like to think of this as “If you build it, they will come.” However, there is a lot more to it than that. Organic customer acquisition typically relies upon awareness, and awareness needs to be built in the market. For example, Search Engine Optimization (SEO) can be utilized to capture customer demand at the time of maximum intent (a search query) and nearly without cost. Merchant Warehouse was a successful early SEO expert and, as a result, has built an at-scale merchant acquiring business. Square enjoys a very different organic distribution advantage because its Founder/CEO, Jack Dorsey, happens to be the former Founder/CEO of Twitter, a massive social media platform which provides broad organic awareness.

- Field Sales: Building a direct sales force is undoubtedly the most expensive distribution strategy and the most challenging for venture-back startups. If done correctly, this strategy provides the most in-house sales control, but at a very steep cost in terms of compensation and time required for hiring and training. This is the approach that ISOs and the Daily Deal providers (e.g. Groupon) have used, but its costliness is typically prohibitive for startup companies.

- Integrated Marketing & Telesales: This is all about building a funnel, with leads flowing in from marketing activities and employing low cost (often phone-based) sales teams to nurture and close sales opportunities remotely. This approach requires savvy digital marketing teams and metrics-driven sales organizations working in concert with each other. Some of the companies who have best leveraged this approach include Constant Contact (Email and CRM SaaS), VistaPrint (Small business products) and HubSpot (Inbound marketing SaaS).

- Distribution Partnerships: As we discussed above, several organizations already serve the target customer. Partnering with networks, channels and platforms that have existing scale is a great approach if your product is highly complementary with that of the underlying distribution partner. Some successful examples include PayPal’s partnerships with Discover and Alliance Data, Square’s Starbucks partnership and LeapSet partnering with Sysco. There are many challenges to successful partnerships, and even those that work end up being measured over years, not months.

Most of the successful companies we see adopt a combination of the above strategies. At their best, companies identify innovative ways to feed their marketing funnel with organic or low cost leads from digital direct or partnership channels. For example, SinglePlatform developed relationships with large digital publishers (e.g. NYTimes.com) which allowed them to call restaurants under the banner of “managing the menu section for the [New York Times]”…as well as dozens of others like Yelp, TripAdvisor and Foursquare. This approach enabled SinglePlatform to acquire new merchant customers over the phone at an unprecedented pace. In the case of OwnerListens, consumers leave feedback for any merchant through a universal mobile app. OwnerListens then finds the merchant’s owner (or manager) and conveys the customer’s feedback message. Receiving the feedback requires the merchant to claim their profile in the system and, when they do so, OwnerListens then sends the merchant store signage which encourages consumers to leave feedback through the application. This generates more consumer usage as well as other merchant adoption.

True distribution success is an output of experimentation and continuous learning based on who the users are and how they engage with the company’s products. Great distribution won’t make up for a bad product, but it can surely beat the competition when product superiority is poorly understood by the customer. For those building commerce-related companies, just remember to think about distribution holistically, creatively and with the advice of an expert who has solved a similar challenge in the past. When you get that right, we hope you’ll come speak with us about your next round of funding. Good luck!

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