The distribution problem

In Peter Thiel's Zero to One, there's a chapter called "If you build it, will they come?" The idea is that sales and distribution is as important - if not more important - than the product itself.

Sales, according to Mr. Thiel, is "an orchestrated campaign to change surface appearances without changing the underlying reality." It's distasteful to engineers, who may think that no value is being created by salespeople and marketers who take long lunches with clients and talk on the phone all day.

The evidence says otherwise. History is littered with enterprises that met their demise due to bad distribution, and perhaps with just as many that survive or even thrive with a mediocre product but superior distribution. Anytime we have a burger and Coke at McDonald's, we are adding to the success of companies that have built their existence on an effective distribution strategy.

Coca Cola made $8.92 billion in 2019 selling carbonated sugar water. In the same year, it spent $4.24 billion on advertising. Certain products such as life insurance and cars have little to no price differentiation, so these industries employ a great number of salespeople as their primary distribution strategy and have found success with it.

Distribution matters, and Mr. Thiel's key insight is that the type of distribution strategy that's the most effective differs according to the price point of the product.

Distribution can be subdivided into five categories:

• Complex sales. For deals above $1 million in size, the sales effort generally targets governments or major corporations and involve high level relationship building and possibly rounds of bidding. Professional services such as investment banking and strategy consulting are common examples of organizations that employ complex sales.
• Personal sales. At a price point between $10,000 and $100,000, individual salespeople can be hired to distribute the product. Real estate, life insurance, and cars are some products that can utilize personal sales effectively.
• The "dead zone". Between a mass market product and products priced over $10,000, we have a space occupied by small businesses because their market is too limited to take advantage of advertising and the price point makes it too costly to employ salespeople. Local services such as independent restaurants, hair salons and computer repair shops fall into this category. They sometimes survive due to a combination of superior location, service, and operations. Good word of mouth (see viral marketing below) could also play a role in their (limited) success.
• Marketing/advertising. For mass produced products that cost a few hundred dollars or less, or fast moving consumer goods that can generate high customer lifetime value through repeated sales, advertisements targeting a wide audience is likely the right strategy. Examples include companies such as Procter and Gamble, Coca-Cola, and Nike, which employ huge marketing/advertising budgets to maintain their market positioning and brand recognition.
• Viral marketing. If we make just a few dollars from each customer, then the most feasible distribution strategy is likely to mobilize our customers to share our product or service with their friends. This is traditionally known as "word of mouth", but its efficacy has been accelerated with the advent of the Internet and platforms such as YouTube and Twitter. In recent years, Hollywood has made good use of this distribution channel through trailers for blockbuster movies. In the startup space, service apps such as Hotmail, Airbnb, and Meituan all grew in this way.

Mr. Thiel stresses that each business likely benefits by far the most from one of the above strategies, so successful businesses schould focus on just one distribution strategy. Another implication is that businesses in the "dead zone" are extremely difficult - if not impossible - to scale.

In the context of the bookstore, which is the type of business I care about, I'm concerned about its traditional positioning as a small business in the distribution dead zone. This is the primary reason why in my previous post, I stressed the need to involve technology and a path to scalability. Ultimately, the only way to save the bookstore may be to change it.