Discover more from All things finance!
The power of distribution
Bill.com's current valuation is ~$26.4 Bn i.e. ~16x its IPO valuation in 2019. Khatabook raised in August at ~$600 Mn valuation. Square's valuation is ~$120.7 Bn. Melio became a unicorn in January by raising $110 Mn.
I promise there is a pattern to what I am saying and I am not just obsessing over-valuations.
In the last few years, 'product' has gained a lot of importance in a company's success. With terms like product-led growth getting traction, the idea has become to build distribution in the product itself either in the form of network effects or a great product itself.
All the companies mentioned above have taken a distribution-first approach(the former one) with simple products. It's mostly a factor of the kind of segment they are dealing with and the network effects the product carries. The companies' entire customer strategy & GTM is designed around virality. A16Z's article- when distribution trumps product talks about how Bill.com, a 13-year-old company had a network-driven growth despite an average product.
But why focus on distribution at this age when I can make a great product. If people like it, they will adopt it. However, this is not true in a lot of cases.
Digital adoption and trust factor are low: If you look at Indian SMEs, the best way to reach them still is sales-led. If you expect such SMEs to adopt your product through ads because it is so good, you are living in a bubble. Thus, Khatabook used a sales-led approach to capture the first few SMEs and then built virality in the product. They used two tactics:
Every time an SME used Khatabook, the business on the other side would also get a notification and thus, will most likely register. They thus created strong network effects.
They started with a very simple product which people were already using in some way. People used another software called Bahi Khata before this and thus, the name 'Khatabook' helped them. This reduced the friction to adopt their product.
Now that they have reduced their CAC, they can go on to more complex products which these SMEs need.
The same is for Melio: It focuses on Account Payables and Account Receivables for small businesses, each of whom has dozens or even hundreds of vendors. When a Melio customer wants to pay a vendor, they add bill details, connect their bank account or enter their credit card, and send a payment request to the vendor. The vendor doesn’t need a Melio account to receive a payment. Melio will send a paper check or ask them to enter their bank details but if they do sign up, they get paid faster.
People don't know if they need it
Square's product was unique in its offering. When Jack Dorsey and Jim McKelvey started offering the product to make it easier for small businesses to accept credit cards, there was very low awareness of what can be done. They did limited market research and started offering it to the people they thought needed it. They thus started selling in certain pockets and did a lot of content marketing to educate people. Till then, people realized the challenges but didn't know what exactly they needed to solve them. Another problem that happens in these segments sometimes is the 'chalta hai' attitude. Because people get used to working inefficiently, it is very difficult for them to think about what they need which will make their lives better.
In the B2B segment, where the transaction sizes are large and where the entire industry has been working in a particular way for the last x years, it becomes difficult to make people try out new complex products because the switching cost is high.
Tally which has ~2 Mn SMEs today, captured this share by not selling the product but selling 'the person who knows how to use Tally'. They taught all the accountants how to use Tally and thus, the accountant carried it with them wherever they went.
The main problem today with some of the segments which are not that tech-savvy and late adopters like SMEs is to find a cost-efficient way to reach them. There are a lot of financial products for them today but the concept of CAC and LTV metric becomes crucial here. Because the products are not that differentiated, the one who can get lower CAC builds a more efficient business.
This also means a lot of times that the product you are offering is not the product that is giving you revenue. Khatabook and Bharatpe got into lending to make money after starting with the digitization of ledger and payments respectively. The bet is that now that they have the customer data and own the customer in some way, they are in a better position to offer them credit and reduce the CAC. We still need to see how this bet plays out.
Thus, distribution becomes the key in a lot of these businesses. The playbook here is thus, to find a category and a pain point that you can solve in the simplest way possible and/or has network effects and then move on to more complex products.
Now that more and more startups are moving towards 'Bharat' or small businesses, they cannot ignore building distribution within the product if they want to succeed.