Lesson: Channels & Partners with Steve Blank

Step #2 Distribution: Will you distribute your product directly or indirectly?

If you remember in our last slide, one of the choices was whether you were using physical or virtual distribution channels. Let's take a look at virtual channels which are not only the web but also might include iPhone apps or the cloud as well.

The first choice might be dedicated e-commerce, that is you might have a website that belongs to you and that is one choice. Then another choice is that you might have an app that runs on a mobile device, and mobile devices like Android or an Apple and others, Microsoft, require you to use their platform, App Store, so that might be a choice. Another choice is to use two-step distribution, that is there might be other distributors who have major web preferences, Amazon, Walmart, other local and regional stores and you might actually sell your virtual product for theirs, or physical products.

You might use an aggregator. An aggregator is somebody who takes a vertical marketer approach, insurance, shoes, etcetera. Some examples for insurance, Lending Tree or Zappos. Another might be social commerce. Social commerce sites for distribution might include Facebook, Twitter, etcetera. Zynga which is a video game company uses predominantly Facebook as its platform. And then finally, flash sales. Examples include Groupon and Living Social.

Now, the first instinct of almost any startup founders, when you understand all the choices for distribution channels is to say yes, and the question is, yes to what? You can't afford to pick multiple channels on day one. Most successful startups pick one of these and then may eventually expand into others, so the question for you is, what's going to be your first distribution channel? On the web, the cloud, or from mobile devices? Maybe your product requires a physical distribution channel. Let's take a look at all the choices that you might have when you start your company.

The first one is you might be an OEM. OEM stands for original equipment manufacture. You might have a component, let's say a graphics chip that goes inside of someone else's laptop so you might be a graphic supplier to Apple or Hewlett-Packard. But it's Apple and HPs name and their brand that shows up on the outside of the box. And so while you're making money, it is their marketing and brand. So, for system integrator, you might be selling to a company, let's say you are Cisco but you're selling to somebody who is building an entire telephone switching network, and this system integrator would take your component, your switches and routers and actually build out a system that includes devices from other companies and they add some value-added software and additional hardware and create an entire system for an end user.

A value-added reseller might take a computer system, add other pre-packaged software’s from other third party vendors, add maybe some utilities of their own and sell a turnkey solution to an end user. And so they build a less complex systems with the less value added fit system integrators but they could be great partners. In a physical channel, a direct sales force or sales people that work for you directly and typically sell directly to the end user.

Now if you're delivering a physical product, one of the alternate channels that you might want to consider is the web or online sales as well. So for some industries, distributors play a pivotal role in the distribution of the product. They provide wholesale, warehousing, they provide distribution and accounting, bill collection, etcetera. And distributors might sell to dealers. Most dealers are just simply store front. Some of them might actually add some services or support but they're essentially an extension of the distribution channel. And they talk to the end users. So dealers might now have a physical store front for end user customers, but retailers are all about main street and talking to your customers.

Another form of retailer are mass merchants. So instead of just small store front, they aggregate tens or hundreds of thousands of products under one roof. Retailers and mass merchants often, though not always get their products of supply through distributors.