In order to be successful and make a shit ton of money you need two things, an awesome product, and even better sales. Most of the entrepreneurs you hear of today are engineers, others are intelligent enough to hire great engineers, as a result, every product that you see today is amazing (okay! Most of them).
But still, half of those new products won’t be there the next year. They’ll fall head first into the ground.
Search google for “advice for entrepreneurs”, the most clichéd advice you’ll read is, “you have to have a great product.”
That is what the conventional wisdom says. But, tell me, most of the products we come through today are not bad, they’re great, then why do half of them don’t survive the first year?
Poor distribution, not product, is the number one cause of failure. If you can get even a single distribution channel to work, you have great business. If you try for several but don’t nail one, you’re finished…People say it all the time: this product is so good that it sells itself. This is almost never true. These people are lying, either to themselves, to others, or both.
I didn’t speak this gem. In fact, I believed the contrary to be true until I started researching for this article.
These are the lines of Peter Thiel, the founder of PayPal. Probably the best thing he taught in his CS183 class at Stanford.
Shook whole of your perception, didn’t it?
Well, the story we’re going to talk about today supports Peter’s opinion. Actually, it’s Peter’s story we’re going to talk about today.
All of us have heard of PayPal, the payment giant acquired by eBay for $1.5 Billion in 2002. If you’ve ever bought anything online you sure would’ve heard the name. They are one of Silicon Valley’s largest success stories, in fact they were the largest in the early days. Today, they have around 145 million monthly active users and process close to 9 million transactions in a day.
In the early days, (to be exact in the year 1999) no one could have said they’ll end up ruling the payments market. They faced fierce competition from players like X.com (Elon Musk’s company), dotBank, and eBay’s BillPoint. So what did they do that the following happened to the three competitors.
- They acquired one.
- Put one out of business.
- And got acquired by the third for more than a billion.
The only amazing thing they did was, they got their distribution right.
Initially, if you referred one of your friends to PayPal you’d get $10 into your account and your friend will get $10 into his account. This strategy, though gave them a good amount of users, it couldn’t last long. This strategy was a burner, and didn’t quite make up their unit economics in those days. Also, this distribution channel could be easily duplicated by their competitors, which wouldn’t be good. The only option they had left was to think of a cheaper, and a difficult to copy distribution channel from where they could get more customers.
The story gets fun. PayPal figured that the company which will acquire them in the future was their best distribution channel. They had to leverage it. Of course, they didn’t know then that they’d get acquired by eBay, but funny how dots connect.
So, PayPal’s marketing team, came up with a way to leverage eBay to create demand, they made a script. What the robot used to do was, crawl eBay looking for certain types of auctions, bid on them and then ask the seller to pay for the auction using PayPal.
Problem: Not all sellers would be willing to accept PayPal.
Our guys had a solution to that too. Eric Jackson, the author of The PayPal wars, and the man who used to run the marketing team at the company, described the whole solution as follows.
Within a day we figured out the answer – the bot would bid on items for charity. We’d have our charity robot identify itself to sellers before it placed a bid, sending an e-mail that said it was collecting goods that would be donated but it could only pay with PayPal. The e-mail would then tell the seller that if he didn’t mind transacting with a computer program and accepting PayPal he could reply to the e-mail and a bid would automatically be placed. We thought most sellers would accept this offer since it was a win-win for them – bids from the robot would allow them to participate in a charitable cause while also ensuring that their auction price went higher. From our perspective, even if our bot didn’t win the auction, at least the seller would have been exposed to PayPal.
Later, they partnered with Red Cross, a universally respected group and started sending out emails using the address, firstname.lastname@example.org.
There it was. They had a distribution channel which was working. Sellers were happy to be a part of a charitable cause and also increases the price of their auction with one extra bid.
Till date we don’t exactly know what the content of that email was, but it was the one thing that worked for them. It was not the product. Everyone had a great product, it was how they sold it.
And that is one of the lessons to learn from this story, when everyone has a great product in the market, stop fighting over the product. Get the distribution right.
The second lesson they learned, is not actually from PayPal but from eBay. Reid Hoffman, the founder of LinkedIn and the member of the PayPal team (or in popular terms, the PayPal mafia) in those days, spoke the following about eBay’s mistake and how they used it to their advantage.
eBay was the only gold mine that existed. We had to win. One decisive move in the war was focusing on e-mail. The real platform for auctions wasn’t the eBay website, as most people assumed. It was e-mail. People would receive emails when they won auctions. eBay knew this but didn’t understand its importance. PayPal, on the other hand, got it and optimized accordingly. Very often PayPal would notify people that they won the auction before eBay did! People would then use PayPal to pay, which of course was the goal.
Don’t be eBay. Be PayPal.