11 IF YOU BUILD IT, WILL THEY COME?
EVEN THOUGH SALES is everywhere, most people underrate its importance. Silicon Valley underrates it more than most. The geek classic The Hitchhiker’s Guide to the Galaxy even explains the founding of our planet as a reaction against salesmen. When an imminent catastrophe requires the evacuation of humanity’s original home, the population escapes on three giant ships. The thinkers, leaders, and achievers take the A Ship; the salespeople and consultants get the B Ship; and the workers and artisans take the C Ship. The B Ship leaves first, and all its passengers rejoice vainly. But the salespeople don’t realize they are caught in a ruse: the A Ship and C Ship people had always thought that the B Ship people were useless, so they conspired to get rid of them. And it was the B Ship that landed on Earth. Distribution may not matter in fictional worlds, but it matters in ours. We underestimate the importance of distribution—a catchall term for everything it takes to sell a product—because we share the same bias the A Ship and C Ship people had: salespeople and other “middlemen” supposedly get in the way, and distribution should flow magically from the creation of a good product. The Field of Dreams conceit is especially popular in Silicon Valley, where engineers are biased toward building cool stuff rather than selling it. But customers will not come just because you build it. You have to make that happen, and it’s harder than it looks.
NERDS VS. SALESMEN
The U.S. advertising industry collects annual revenues of $150 billion and employs more than
600,000 people. At $450 billion annually, the U.S. sales industry is even bigger. When they hear that 3.2 million Americans work in sales, seasoned executives will suspect the number is low, but engineers may sigh in bewilderment. What could that many salespeople possibly be doing? In Silicon Valley, nerds are skeptical of advertising, marketing, and sales because they seem superficial and irrational. But advertising matters because it works. It works on nerds, and it works on you. You may think that you’re an exception; that your preferences are authentic, and advertising only works on other people. It’s easy to resist the most obvious sales pitches, so we entertain a false confidence in our own independence of mind. But advertising doesn’t exist to make you buy a product right away; it exists to embed subtle impressions that will drive sales later. Anyone who can’t acknowledge its likely effect on himself is doubly deceived. Nerds are used to transparency. They add value by becoming expert at a technical skill like computer programming. In engineering disciplines, a solution either works or it fails. You can evaluate someone else’s work with relative ease, as surface appearances don’t matter much. Sales is the opposite: an orchestrated campaign to change surface appearances without changing the underlying reality. This strikes engineers as trivial if not fundamentally dishonest. They know their own jobs are hard, so when they look at salespeople laughing on the phone with a customer or going to two-hour lunches, they suspect that no real work is being done. If anything, people overestimate the relative difficulty of science and engineering, because the challenges of those fields are obvious. What nerds miss is that it takes hard work to make sales look easy.
SALES IS HIDDEN
All salesmen are actors: their priority is persuasion, not sincerity. That’s why the word “salesman” can be a slur and the used car dealer is our archetype of shadiness. But we only react negatively to awkward, obvious salesmen—that is, the bad ones. There’s a wide range of sales ability: there are many gradations between novices, experts, and masters. There are even sales grandmasters. If you don’t know any grandmasters, it’s not because you haven’t encountered them, but rather because their art is hidden in plain sight. Tom Sawyer managed to persuade his neighborhood friends to whitewash the fence for him—a masterful move. But convincing them to actually pay him for the privilege of doing his chores was the move of a grandmaster, and his friends were none the wiser. Not much has changed since Twain wrote in 1876. Like acting, sales works best when hidden. This explains why almost everyone whose job involves distribution—whether they’re in sales, marketing, or advertising—has a job title that has nothing to do with those things. People who sell advertising are called “account executives.” People who sell customers work in “business development.” People who sell companies are “investment bankers.” And people who sell themselves are called “politicians.” There’s a reason for these redescriptions: none of us wants to be reminded when we’re being sold. Whatever the career, sales ability distinguishes superstars from also-rans. On Wall Street, a new hire starts as an “analyst” wielding technical expertise, but his goal is to become a dealmaker. A lawyer prides himself on professional credentials, but law firms are led by the rainmakers who bring in big clients. Even university professors, who claim authority from scholarly achievement, are envious of the self-promoters who define their fields. Academic ideas about history or English don’t just sell themselves on their intellectual merits. Even the agenda of fundamental physics and the future path of cancer research are results of persuasion. The most fundamental reason that even businesspeople underestimate the importance of sales is the systematic effort to hide it at every level of every field in a world secretly driven by it. The engineer’s grail is a product great enough that “it sells itself.” But anyone who would actually say this about a real product must be lying: either he’s delusional (lying to himself) or he’s selling something (and thereby contradicting himself). The polar opposite business cliché warns that “the best product doesn’t always win.” Economists attribute this to “path dependence”: specific historical circumstances independent of objective quality can determine which products enjoy widespread adoption. That’s true, but it doesn’t mean the operating systems we use today and the keyboard layouts on which we type were imposed by mere chance. It’s better to think of distribution as something essential to the design of your product. If you’ve invented something new but you haven’t invented an effective way to sell it, you have a bad business—no matter how good the product.
HOW TO SELL A PRODUCT
Superior sales and distribution by itself can create a monopoly, even with no product differentiation. The converse is not true. No matter how strong your product—even if it easily fits into already established habits and anybody who tries it likes it immediately—you must still support it with a strong distribution plan. Two metrics set the limits for effective distribution. The total net profit that you earn on average over the course of your relationship with a customer (Customer Lifetime Value, or CLV) must exceed the amount you spend on average to acquire a new customer (Customer Acquisition Cost, or CAC). In general, the higher the price of your product, the more you have to spend to make a sale—and the more it makes sense to spend it. Distribution methods can be plotted on a continuum: Complex Sales If your average sale is seven figures or more, every detail of every deal requires close personal attention. It might take months to develop the right relationships. You might make a sale only once every year or two. Then you’ll usually have to follow up during installation and service the product long after the deal is done. It’s hard to do, but this kind of “complex sales” is the only way to sell some of the most valuable products. SpaceX shows that it can be done. Within just a few years of launching his rocket startup, Elon Musk persuaded NASA to sign billion-dollar contracts to replace the decommissioned space shuttle with a newly designed vessel from SpaceX. Politics matters in big deals just as much as technological ingenuity, so this wasn’t easy. SpaceX employs more than 3,000 people, mostly in California. The traditional U.S. aerospace industry employs more than 500,000 people, spread throughout all 50 states. Unsurprisingly, members of Congress don’t want to give up federal funds going to their home districts. But since complex sales requires making just a few deals each year, a sales grandmaster like Elon Musk can use that time to focus on the most crucial people—and even to overcome political inertia. Complex sales works best when you don’t have “salesmen” at all. Palantir, the data analytics company I co-founded with my law school classmate Alex Karp, doesn’t employ anyone separately tasked with selling its product. Instead, Alex, who is Palantir’s CEO, spends 25 days a month on the road, meeting with clients and potential clients. Our deal sizes range from $1 million to $100 million. At that price point, buyers want to talk to the CEO, not the VP of Sales. Businesses with complex sales models succeed if they achieve 50% to 100% year-over-year growth over the course of a decade. This will seem slow to any entrepreneur dreaming of viral growth. You might expect revenue to increase 10x as soon as customers learn about an obviously superior product, but that almost never happens. Good enterprise sales strategy starts small, as it must: a new customer might agree to become your biggest customer, but they’ll rarely be comfortable signing a deal completely out of scale with what you’ve sold before. Once you have a pool of reference customers who are successfully using your product, then you can begin the long and methodical work of hustling toward ever bigger deals. Personal Sales Most sales are not particularly complex: average deal sizes might range between $10,000 and $100,000, and usually the CEO won’t have to do all the selling himself. The challenge here isn’t about how to make any particular sale, but how to establish a process by which a sales team of modest size can move the product to a wide audience. In 2008, Box had a good way for companies to store their data safely and accessibly in the cloud. But people didn’t know they needed such a thing—cloud computing hadn’t caught on yet. That summer, Blake was hired as Box’s third salesperson to help change that. Starting with small groups of users who had the most acute file sharing problems, Box’s sales reps built relationships with more and more users in each client company. In 2009, Blake sold a small Box account to the Stanford Sleep Clinic, where researchers needed an easy, secure way to store experimental data logs. Today the university offers a Stanford-branded Box account to every one of its students and faculty members, and Stanford Hospital runs on Box. If it had started off by trying to sell the president of the university on an enterprise-wide solution, Box would have sold nothing. A complex sales approach would have made Box a forgotten startup failure; instead, personal sales made it a multibillion-dollar business. Sometimes the product itself is a kind of distribution. ZocDoc is a Founders Fund portfolio company that helps people find and book medical appointments online. The company charges doctors a few hundred dollars per month to be included in its network. With an average deal size of just a few thousand dollars, ZocDoc needs lots of salespeople—so many that they have an internal recruiting team to do nothing but hire more. But making personal sales to doctors doesn’t just bring in revenue; by adding doctors to the network, salespeople make the product more valuable to consumers (and more consumer users increases its appeal to doctors). More than 5 million people already use the service each month, and if it can continue to scale its network to include a majority of practitioners, it will become a fundamental utility for the U.S. health care industry. 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 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. Viral Marketing A product is viral if its core functionality encourages users to invite their friends to become users too. This is how Facebook and PayPal both grew quickly: every time someone shares with a friend or makes a payment, they naturally invite more and more people into the network. This isn’t just cheap— it’s fast, too. If every new user leads to more than one additional user, you can achieve a chain reaction of exponential growth. The ideal viral loop should be as quick and frictionless as possible. Funny YouTube videos or internet memes get millions of views very quickly because they have extremely short cycle times: people see the kitten, feel warm inside, and forward it to their friends in a matter of seconds. A t PayPal, our initial user base was 24 people, all of whom worked at PayPal. Acquiring customers through banner advertising proved too expensive. However, by directly paying people to sign up and then paying them more to refer friends, we achieved extraordinary growth. This strategy cost us $20 per customer, but it also led to 7% daily growth, which meant that our user base nearly doubled every 10 days. After four or five months, we had hundreds of thousands of users and a viable opportunity to build a great company by servicing money transfers for small fees that ended up greatly exceeding our customer acquisition cost. Whoever is first to dominate the most important segment of a market with viral potential will be the last mover in the whole market. At PayPal we didn’t want to acquire more users at random; we wanted to get the most valuable users first. The most obvious market segment in email-based payments was the millions of emigrants still using Western Union to wire money to their families back home. Our product made that effortless, but the transactions were too infrequent. We needed a smaller niche market segment with a higher velocity of money—a segment we found in eBay “PowerSellers,” the professional vendors who sold goods online through eBay’s auction marketplace. There were 20,000 of them. Most had multiple auctions ending each day, and they bought almost as much as they sold, which meant a constant stream of payments. And because eBay’s own solution to the payment problem was terrible, these merchants were extremely enthusiastic early adopters. Once PayPal dominated this segment and became the payments platform for eBay, there was no catching up—on eBay or anywhere else. The Power Law of Distribution One of these methods is likely to be far more powerful than every other for any given business: distribution follows a power law of its own. This is counterintuitive for most entrepreneurs, who assume that more is more. But the kitchen sink approach—employ a few salespeople, place some magazine ads, and try to add some kind of viral functionality to the product as an afterthought— doesn’t work. Most businesses get zero distribution channels to work: poor sales rather than bad product is the most common cause of failure. If you can get just one distribution channel to work, you have a great business. If you try for several but don’t nail one, you’re finished. Selling to Non-Customers Your company needs to sell more than its product. You must also sell your company to employees and investors. There is a “human resources” version of the lie that great products sell themselves: “This company is so good that people will be clamoring to join it.” And there’s a fundraising version too: “This company is so great that investors will be banging down our door to invest.” Clamor and frenzy are very real, but they rarely happen without calculated recruiting and pitching beneath the surface. Selling your company to the media is a necessary part of selling it to everyone else. Nerds who instinctively mistrust the media often make the mistake of trying to ignore it. But just as you can never expect people to buy a superior product merely on its obvious merits without any distribution strategy, you should never assume that people will admire your company without a public relations strategy. Even if your particular product doesn’t need media exposure to acquire customers because you have a viral distribution strategy, the press can help attract investors and employees. Any prospective employee worth hiring will do his own diligence; what he finds or doesn’t find when he googles you will be critical to the success of your company. EVERYBODY SELLS Nerds might wish that distribution could be ignored and salesmen banished to another planet. All of us want to believe that we make up our own minds, that sales doesn’t work on us. But it’s not true. Everybody has a product to sell—no matter whether you’re an employee, a founder, or an investor. It’s true even if your company consists of just you and your computer. Look around. If you don’t see any salespeople, you’re the salesperson.
