You know what’s even better than Product/Market Fit?
Product/Market/Channel Fit, that’s what.
Last month I met with a longtime Silicon Valley venture capitalist to get his thoughts on updating my Stanford curriculum for 2022. During our conversation in his back yard, Tim said to me “Everyone talks about Product/Market Fit, but I think the key is actually Product/Market/Channel Fit”.
The fact is that having a great product is useless unless you also have the right channels to sell it through. This is particularly true with some sorts of businesses — a winery, for example, will never get to scale unless the product is carried by one of the large distributors (with alcohol, the 3-tier distribution system is actually mandated by law). Medical products are also controlled by a few large distributors. Or if you’re a startup selling a mobile app, your distribution relies completely on the iOS and Android app stores. You’ll never make it if you don’t optimize your presence in that sales channel.
Today, of course, many companies sell directly online instead of through traditional resellers or retail stores. And yet distribution still matters — putting your product on Amazon will get you 1,000x the distribution you could ever get on your own standalone website. And Amazon charges a toll for that.
So all of this really boils down to the one equation that I drill in my students’ heads: CAC < LTV. If you don’t have efficient distribution then your Customer Acquisition Cost will be too high. And if you have to pay a toll in order to get distribution then the Lifetime Value of a customer will be be lower. Just last week, sellers who use Etsy for distribution got a shock as the company announced a 20% increase in the toll they take. Distribution ain’t cheap.
I remember when Apple decided to stop selling through retailers and open their own branded stores instead. It was a dicey move because they were giving up the distribution of Best Buy, Circuit City, and all the rest. But Steve Jobs said “We sell a premium product and we need to take control of the customer experience in order to get the premium price”. So in essence he went from low-cost low-margin distribution model to a high-cost high-margin distribution model. As an Apple shareholder, I can tell you that this decision appears to have worked out very well.
Licensing can also be a way to get distribution. A famous case study from history is consumer video tape systems. Betamax, owned by Sony, was the superior product. But VHS, the competitive system owned by JVC, ended up winning because JVC got distribution by licensing VHS to all the other companies making video players. A more recent example is when Google first released the Android operating system, Apple had a big lead with iOS. Google decided to distribute Android by licensing it to other smartphone companies (so that Google would get the search traffic). Today the worldwide market share is 73% Android, 27% iOS. Distribution matters.
The point of all this, I think, is that while entrepreneurs are working hard to get Product/Market Fit, they should also be experimenting with various distribution channels. The laws of economics say that your startup will fail if you don’t get to CAC < LTV, and ultimately the driver for that is Product/Market/Channel Fit.
So I guess Tim is right. I need to update my Stanford curriculum: Product/Market/Channel Fit > Product/Market Fit.
This article was merged into my new book, The Launch Path, now available on Amazon.
