Course lectures "Startup". Peter Thiel. Stanford 2012. Session 9

This spring, Peter Thiel, one of the founders of PayPal and the first Facebook investor, held a course in Stanford - “Startup”. Before starting, Thiel stated: "If I do my job correctly, this will be the last subject you will have to study."

One of the students of the lecture recorded and laid out a transcript . In this habratopic I translate the ninth lesson. Astropilot Editor.

Session 1: Future Challenge
Activity 2: Again, like in 1999?
Session 3: Value Systems
Lesson 4: The Last Turn Advantage
Session 5: Mafia Mechanics
Activity 6: Thiel's Law
Lesson 7: Follow the Money
Session 8: Idea Presentation (Pitch)
Lesson 9: Everything is ready, but will they come?
Lesson 10: After Web 2.0
Session 11: Secrets
Session 12: War and Peace
Lesson 13: You are not a lottery ticket
Session 14: Ecology as a Worldview
Session 15: Back to the Future
Session 16: Understanding
Session 17: Deep Thoughts
Session 18: Founder — Sacrifice or God
Session 19: Stagnation or Singularity?

Everything is ready, but will they come?

I decide on the concepts

Distribution is a rather multifaceted term. Initially, it refers to the way that you distribute your product among consumers. In a broader sense, it can mean the way you spread information about your company. Unlike other components that are considered important, distribution is often given little attention. People understand the importance of team, structure and corporate culture. A lot of energy is spent on thinking about how to improve these elements. Even such much less understandable concepts as the idea of ​​abandoning competition, because it is better than competition as such, can be tested and often implemented in practice.
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For some strange reason, people do not distribute. She is often overlooked. This is probably the only area, the importance of which is recognized in the least. Even if you have an incredible, fantastic product, you still need to bring it to people. An engineering mindset makes people blind to this simple fact. It is generally believed that great products sell themselves: if you create a great product, it will inevitably attract customers. But nothing is further from the truth.

There are two related questions that it makes sense to consider in more detail. The first question is quite simple: how do people even distribute a product? The second question relates to the meta-level: why is the importance of distribution so underestimated? When you delve into these questions, it will become clear that the first question is often misinterpreted and overlooked for the same reasons that people lose out on understanding distribution itself.

The first thing to do is get rid of the belief that the best products always win. Human history is full of cases in which the best products have failed. Nikola Tesla developed an alternating current power supply system, which for many reasons, was better than the same direct current system developed by Thomas Edison. Tesla was the best scientist, but Edison was the best businessman, and it was he who founded General Electric. Interestingly, in the future, Tesla developed the idea of ​​a radio program, and Marconi took advantage of it and won the Nobel Prize. Inspiration is not all. The best product may well lose.

Ii. Distribution Mathematics

Before moving on to more abstract issues, it is important to understand the measurable distribution indicators. In a strict mathematical sense, the following metrics are used:

• CLV - “Customer's lifetime value” - the amount of profit from customer service throughout his life, measured in dollars - approx. trans.
• ARPU - average revenue per user (per month) (Average revenue per user);
• r - customer retention rate (Retention rate, decreasing function, measured monthly);
• The average customer lifetime is 1 / (1-r) - measured in months - approx. trans.
• CPA - cost per customer acquisition - is measured in dollars approx. trans.

CLV = ARPU * gross margin ratio * average customer lifetime

The main question is: Is the CLV greater or less than the CPA? In an ideal world, you can build a big business if CLV> 0. In a world where there are costs and uncertainties, big business is created with CLV> CPA.

Imagine that your company sells additional subscriptions to the tariff plans of cellular operators. With each client, you get $ 40 per month. The average life expectancy of a client is 24 months. The lifetime income from a customer is thus $ 960. If the percentage of gross profit is 40%, then the lifetime customer value is $ 384. Thus, you are fine, if the cost of attracting a new client is less than $ 384.

It is useful, when thinking about distribution, to realize that for different types of customers the cost of attraction can vary greatly. Their actions, their number and focus, must be compared with what kind of products you sell.

Take one extreme, let's say you are trading in small, inexpensive items, such as cheap kitchen knives. Your goal is individual buyers. Each sale brings you a pair of dollars. Your distribution approach is a combination of advertising and viral marketing, in the hope that your knives will become popular.
Everything changes if you trade in goods or services whose value is, say, $ 10,000. Your goal will probably be a small business, and you will position your product accordingly.

Take a friend to the extreme, for example, you are selling to large businesses and government organizations. Each transaction costs from 1 to 50 million dollars. Due to the fact that the cost of each sale is very high, it is necessary to use the sale processes in which the human factor is more involved. Your approach to such sales may be in the use of professional salespeople and business development specialists, who, in fact, are the same salespeople, they can still arrange martini parties and carry out complex deals.

Iii. Distribution oddities

A. Facts and marketing moves

People constantly say: this product is so good that it sells itself. This is rarely true. These people lie: to themselves or to others or to themselves and others immediately. But why are they lying? The first thing that comes to mind is that they are trying to convince others that their product is really good. They will never say: “our product is so bad that you have to attract the best salesmen in the world to get people to buy it”. Therefore, it is necessary to be very attentive. The statement that product X sells itself is an empirical fact, or is it just a marketing ploy?

The truth is that sales — whether we are talking about advertising, selling mass-produced products, selling lawn mowers, or mixed sales — are far from rational. The secret is not just to disseminate complete information when you provide the prospective buyer with all the relevant product information, which he then uses to make an unbiased rational decision. There are many strange mechanisms involved.

Consider the advertising market. About 610,000 people work in this area in the United States. This is a market of 95 billion dollars. Advertising makes sense because it really works. There are many competing products on the market. You have certain preferences largely due to advertising. If you deny this, then you probably already know the "correct" answer. Your preferences are yours. Advertising does not work on you. It only works on others. But if everyone in this world is the same as you, then some kind of nonsense is obtained. Another insurmountable problem arises here, how then did the advertising industry manage to convince the people placing the ad that it really works?



If you buy Levis jeans, your apartment will explode. Or is it the other way around?



Is it a price comparison or computer speed? Not. Something strange is happening.

The sales of goods and services in the United States is even larger than the advertising market. About 3.2 million people work in sales. The market is estimated at $ 450 billion. And people can pay very well. A programmer at Oracle with an experience of 4-6 years receives $ 105,000 per year as the basic salary and $ 8,000 in premium, and a sales manager with the same experience receives $ 115,000 in salary and $ 103,000 in premium, respectively. The situation is very similar in Google, which claims to be an extremely high-tech company. With a salary of $ 96 thousand, commission fees of $ 86 thousand and $ 40 thousand of premiums, Google salesmen earn much more than their fellow developers. This does not mean that everyone has to go to work in sales, just those who do it well, earn quite well.

B. Seller as an actor

In the field of sales, the important question is whether all the sellers are, in one way or another, actors? There is a bias in our culture that sellers are unreliable and unreliable. The seller of used cars is the archetype of the seller. Marc Andreessen (Marc Andreessen) noted that many engineers underestimate the role of sales because they themselves - people who are extremely focused on the truth. In the engineering world, the mechanism is either working or not. Appearance is irrelevant. Thus, engineers tend to view attempts to change the appearance of things — that is, sales — are fundamentally dishonest.

There is one rather slippery moment in sales - although we all know that everything around us is for sale, it is sometimes very difficult to determine who exactly is selling what. Tom Sawyer convinced all the guys in his area to paint the fence for him. None of these guys noticed sales. The rules of the game are the same. That is why this story is relevant to this day.



Look at the pictures above. Which of these people is the seller? President Eisenhower? He does not look like a seller. The seller of used cars in the middle really looks like a seller. What about the guy on the right?

The guy on the right is Bill Gross , the founder of IdeaLab, something like the Y-Combinator of the late 90s. Venture division IdeaLab invested PayPal. At the end of 2001, they had a fantastic dinner for investors in southern California. At the end of the dinner, Gross addressed me and said something like:

“I have to congratulate you, you did a fantastic job creating PayPal. My 14-year-old son is rather indifferent to school and reluctantly does his homework. But recently he just wrote a great email to his friends about how fast PayPal is growing, why they need to register, and how you can benefit from the paid recommendations system you created. ”

In a sense, it was a literary masterpiece. In addition, it was a vivid illustration for discussions at various levels at the table. Some people told others about PayPal, and so on, maybe endlessly. The son of Bill Gross told someone else about these people. Bill Gross himself talked to his son, then told me about it. And further, at the deepest and most important level, Gross told this at the table to other investors, as if showing how far-sighted it was to invest in PayPal. The conclusion is that sales are hidden. Advertising is hidden. They simply work better.

The question arises, how far can you go? Far enough. Usually, all those involved in distribution, be it marketing, sales, or advertising, should occupy positions whose names have nothing to do with what these people do. At best, this is when salespeople are called customer service managers. Even more interesting is when people involved in attracting money do not call themselves investment bankers, but belong to the corporate development department. The titles of posts that have nothing to do with what a person really does are an important element of the game. It touches a difficult topic, we don’t want to admit that we are selling something. All this is just thinking about the process, which is not entirely rational.

To approach the principles of distribution in a company, consider a 2 by 2 matrix. On one axis is the product: does it sell itself, or does it require sales efforts. On the other axis is the team: weak tendencies to sell, or strong.

Take a look at the matrix:

• The product sells itself; the team is not making efforts to sell. This does not happen .
• The product requires sales effort; the team is not making efforts to sell. You do not receive income .
• The product requires sales effort; strong sales. This is a sales driven company .
• The product sells itself; strong sales. Ideal .

C. Development and sales

Development is transparent. And complicated. We can say that it is transparent in its complexity. It's pretty easy to estimate how good a developer is. Is he a good programmer? Superprofi? With sales, everything is wrong. Sales are not at all transparent. We tend to mix all salespeople in one pile, although there is a whole set of shades. There are amateurs, middle peasants, there are specialists, masters and even grandmasters. There are many types of them, they are just very difficult to classify.

There is a good analogy that allows you to better understand the differences between development and sales - these are experts and politicians. If you work in a large company, you have two options. You can become an expert in any field, for example, in international taxation. This is a highly specialized, rather complex area. But it is sufficiently transparent in the sense that it is always easy to say whether a person is an expert or not.

On the other hand, you can become a politician. These people succeed because they are friends with everyone, everyone loves them. Both strategies can be successful. But often people want to become just politicians, because it seems that it is easier. From the side of politics they seem to be ordinary people, therefore it is reasonable for an ordinary person to assume that he can become the same.

The same with development versus sales. The best sellers get just a lot. Average no. And then there are many sellers below average. The story of the unfortunate seller has become even something of a settled plot in American literature. I can not help but wonder about the premises that have become the basis for all these books. Hardly before life was too different from today. In all these stories, people probably thought it was easy to sell, and the sales of one product were not too different from the sales of another. They tried, and on their mistakes felt this difficult path. A really good politician is much better than you think. A really good seller is much better than usually considered. It's just that it is always hidden and not lying on the surface. In a sense, every President in the history of the United States was an outstanding seller, although he did not show it.

Iv. Distribution Methods

To succeed, every business must have a powerful and effective way to distribute its products. Good distribution can make you a monopolist for some time, even if your product is no different from other similar products. The reverse is that product differentiation alone does not give anything. Nikola Tesla was left with nothing, because he ignored distribution. But in itself, understanding the critical importance of distribution is still half the battle; An ideal distribution strategy in a company depends on many factors specific to a particular business. Just like every great high-tech company has a good, unique product, each such company has chosen for itself a unique and extremely effective distribution strategy.

A. Comprehensive sales

The first example is SpaceX, a space rocket company founded by Elon Musk from PayPal. The SpaceX team has been working on its rocket technology in Southern California for the past 8 years. Their main goal is to carry out the first manned flight to Mars. They have come a phenomenal way. Time does not allow me to tell about all the victories of Elon Musk in sales. But if you think that there are no grandmasters in sales, you have not met Elon. He achieved a $ 500 million government grant to build SpiceX missiles, as well as to create electric cars that are made by his other company, Tesla.

This is even cooler than it seems at first glance. For the past 10 years, SpaceX has been catching up on the technological gap in the field of rocket production, which in itself was very difficult. The company employs about 2,000 people. But all in all, the US space industry employs about 500,000 people, evenly distributed across 50 states. It is difficult to overestimate the degree of lobbying in the congress of their interests by other companies in the space industry (probably, this is the rest of the space industry as a whole). Everything speaks for the fact that space is expensive, and SpaceX mission is to reduce the cost of space flight by 90%. In order to be where they are now, and later to land on Mars, SpaceX had to take the entire US House of Representatives and the Senate by storm. And, it seems, they are still winning. Next week they plan to launch another rocket. Usually, if something goes wrong, you will definitely hear about it. If everything goes as it should - the standard reaction is approximately as follows: “pass, pass, there is nothing to watch, it’s not the kind of rocket we need”.

Palantir also has its own unique approach to distribution. They sell high-tech products to the government and large financial institutions. The size of the transaction, as a rule, reaches from $ 1 to $ 100 million. But they do not have sellers, that is, they do not hire "sellers". Instead, they have “forward-based engineers” and a CEO who spends 25 or 26 days a month traveling, building relationships and selling the product first-hand. Someone might say that a model with a traveling CEO-seller cannot be scaled. This is a fair comment, but there is a counter-argument: at this level, people just do not want to talk to anyone except a top manager. For obvious reasons, you cannot simply hire an army of sellers - this sounds bad. Thus, your sales are now doubled by advanced home engineers. Main sellers do not call them.

Knewton is a company from the Founders Fund portfolio that deals with adaptive learning technologies. Their main task in distribution was to find a way to sell to large educational institutions. It seemed that there was no direct way to knock out existing players from this market. There was one obvious way - to go on a destructive sales route: that is, you just had to go to the market and start selling more than existing companies. But it is much more effective to find another, less destructive model. So Knewton has teamed up with Pearson, the largest company for the production of textbooks. Without this partnership, Knewton believed, this would have turned into a fierce competition for every educational institution in which they would eventually lose.

B. Smaller sales

The main difference between conventional sales and large, complex sales in the amount of a transaction is from $ 10 to $ 100 thousand. Sales are massive, undifferentiated. You will have to understand how to create a scalable sales process, recruit a team of salespeople who are able to persuade a large number of people to buy a product. David Sacks was responsible for the product at PayPal, he subsequently left to establish Yammer. At PayPal, it was strongly opposed to sales and business development. His classic quotes were: “Networking does not work! "And" Networking people do nonsense ! " But in Yammer, Sachs realized that he needed to switch to “you” with sales, and create a scalable distribution system. “The situation has changed,” he said, because now salespeople reported directly to him. By focusing on distribution, Yammer managed to lead one of the best salesmen from SalesForce, who led the sales department.

ZocDoc is an advisory service for the selection of doctors. This is a classic internet business; they are trying to subscribe clinics to their service for $ 250 per month. The company's growth is driven primarily by sales, and therefore ZocDoc consistently captures the markets one by one. The company even has a whole team of recruiters, which is engaged only in hiring new salespeople. Due to the fact that the size of the transaction here is less - $ 250 per customer per month, sales become more massive and impersonal.

C. Missing middle

There is one rather serious structural market problem that is worth discussing. On the right side of the distribution spectrum you have a bright, expensive product, for the sale of which it is enough to pick the right person. This, for example, Palantir and SpaceX. On the extreme left side of the spectrum you have massive sales, advertising, etc. It is very likely that in the middle there is a sufficiently large dark area in which there are no good distribution channels through which the product could reach customers . The situation is exactly that for most small businesses. You can not engage in advertising. For ZocDoc, for example, it does not make sense to move through commercial television, since there is no such channel that only doctors watch - the effect is not worth the cost. On the other hand, they, in fact, cannot hire so many vendors to bypass every doctor. Most doctors are not technically advanced enough to use Internet marketing. If you cannot solve the distribution problem, your product will not be sold, even if it is a really good product.

Conversely, if you solve a distribution problem - if you can convince a small business to buy your product, you can achieve a temporary monopoly. When distribution is difficult, the solution of this question can be the main component of success. The classic example is Intuit (American equivalent 1C, approx. Transl.). Small businesses need accounting software and tax calculation. Intuit made it. They solved the problem of distribution, and now it is almost impossible to push them out of the market. Microsoft understood the value of success in Intuit’s distribution method when it tried to buy it. The Ministry of Justice canceled the deal, but the main thing is that it is distribution that largely explains the stability and value of Intuit.

D. Marketing

Another left of the distribution spectrum is marketing. The key issue here is how to advertise the product differentially. Marketing and advertising are very creative areas. But they are also quite saturated with competition. Do you need to do something different from what others are doing to succeed? To get a significant advantage, your marketing strategy must be very difficult to replicate.

Previously, the advertising industry was more iconic and attractive. In the 50s and 60s, advertising was a fashionable and advanced area. Remember the series Mad Men. Or remember Cary Grant, who in the classic North To Northwest movie (North by Northwest) played a typical advertiser who was tough enough to be mistaken for a spy. Advertising and espionage were presented as areas of approximately equal glamor.

Now everything is different. Due to the development of advertising in the 70s and 80s, more and more people began to understand how this is done. There was competition. The market grew, but the number of participants increased faster. Advertising is now not as profitable as it used to be, when this strong, universal desire arose to understand how it all works, so that you can take advantage of it.

Advertising is as cunning and ambiguous as the sales themselves. The main problem is that you can never know for sure whether it worked or not. John Wanamaker, who is considered the father of advertising, once said: “Half the money I spend on advertising is wasted. The problem is that I don’t know exactly which half. ” You can assume that your advertising campaign was a success. But is it? Maybe your advertisers just inspire you? It is very difficult to distinguish facts from "advertising speeches".

In many ways, Priceline.com reflects a certain decline in our society, which looks depressing. He points to some fundamental failure. But Priceline cannot take one away - their strong differentiated marketing, which is difficult to compete with, and which is very difficult to repeat. Once PayPal conducted a PR campaign with James Doohan, Scotty from the Star Track TV series, he had to show the money transfer through the Palm Pilot. It turned out to be a complete failure. It turned out that Captain Kirk, played by William Shatner, is inimitable. He is not like anyone.

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