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When I buy clothes online from a new brand, I’ll select various sizes and styles in my first order. Every brand fits differently. I expect to send most of the items back. I hope to find one or two pieces I like enough to keep. Great for me. Expensive for the brand.
I love cheeseburgers. But I never order cheeseburgers from a delivery service. Cheeseburgers don’t sit very well. So when I need a cheeseburger, I go down to my favorite burger restaurant and order one.
If I must go through an expensive, complex software implementation, I will run a process that favors the best direct sales team. One that can answer my questions and lay out the path for a successful project. If a company hires mediocre salespeople or hopes my team will download a free trial as a path to converting to a paid customer, they don’t stand a chance.
As a customer, I navigate different sales channels for different needs every day. As a founder, one of the early critical decisions you make when you launch your startup is choosing your first sales channels.
Box, the cloud-based content management company, was founded in 2005, initially focusing on the consumer market for sharing files. In 2007, Box pivoted to the enterprise and started building an enterprise sales team. The company still uses free trials of its product to promote discovery but relies on the enterprise sales team to consolidate usage under corporate-wide licensing agreements. Today the company has nearly $1 billion in sales and counts 99% of the Fortune 500 as its clients.
In issue #2 of this newsletter, we explored the concept of product-market fit. The path to finding and scaling product-market fit runs right through your sales channels.
Understand the trade-offs of each channel
Every sales channel impacts your startup’s margin profile and cash flow in different ways. You need to consider the impact on your cost of sales, return rates, sales & marketing, and even the required expertise of your employees. Cash flow considerations can vary widely, and access to future funding or debt financing for inventory and capital investments can open or close some potential paths.
E-commerce looks deceptively easy. Just spin up a Shopify site, take some product photos, write up the descriptions, and wait for customers to smash that buy button. But the reality of e-commerce has proven to be far more complicated. With no physical presence to support customer discovery, your marketing relies on increasingly expensive and inefficient digital customer acquisition. Logistics costs, particularly for larger products and products with high return rates, can crush your gross margin.
Sales through wholesale relationships deliver lower gross margins than direct sales and can complicate your inventory management efforts. But when used wisely, they serve as marketing platforms, introducing your brand to new customers you may not have otherwise been able to reach.
Operating retail locations can be complicated and expensive. You have the potential for lower return rates, higher customer satisfaction, and increased brand awareness. These positives are offset by expensive leases, capital-intensive buildouts, more complex inventory management, and hiring and managing retail employees who will interact with your customers every day.
Free trials of a SaaS B2B product might generate many downloads but may not convert to paid customers at the scale your business needs. Investing in a direct sales team may be critical to developing a pipeline of potential enterprise sales with higher conversion rates and LTV. However, building a high-quality direct sales team can be expensive and presents unique management and compensation challenges that can be very different from the rest of your organization.
Weigh these considerations carefully. Use the Build-Measure-Learn feedback loop to test different approaches and validate your assumptions. Be prepared for the possibility that your first assumptions were wrong and that you may have to change course.
Warby Parker was founded in 2010 as an online seller of eyewear with an innovative ‘Home-Try-On’ program. But early on, Warby understood the power of physical retail to build brand awareness, better control the customer experience, and manage the logistics costs associated with the online try-on program. So in 2013, they opened their first retail location in New York City. Their retail expansion continues today, with plans to open 40 more retail locations in 2022, bringing their total count to over 200.
Don’t optimize for vanity metrics
It’s easy to fall into the trap of trying to scale the wrong sales channel. Particularly when it’s delivering strong gross sales, growing order volume, and many new customers. But these vanity metrics can be powered by constant discounts, promotions, and unsustainable marketing efforts while hiding high return rates and unbearable logistics costs.
Ignore net sales, gross margin, and unit economics at your peril. This is the fastest way to burn through cash — even as your sales charts look like they are all up and to the right.
You can have the right product for your target market, only to find that your startup cannot scale because you’ve chosen the wrong sales channel.
How to execute a shift in sales channels
When a sales channel isn’t working, don’t let the sunk cost fallacy block your need to make a change. Be prepared to slow growth dramatically. Or even get smaller. It may be the best path to reduce losses and cash burn quickly—short-term pain for long-term gain.
If you’re already running multiple sales channels, hopefully, at least one existing channel has proven to be scalable. In this scenario, shutting down unproductive sales channels can free up resources to lean into more promising efforts. You can minimize the slowdown in sales growth as you accelerate growth elsewhere.
This is a strong case for running multiple sales channels. This approach not only gives you more possible paths to your customer, but gives you levers you can move up and down as the performance of each channel shifts due to macro factors. An extreme example is restaurants with a robust take-out offering and online ordering capability when Covid hit in 2020. Don’t single thread your sales effort through one narrow path that may not scale or can be completely shut down.
When I joined M.M.LaFleur in 2019, the first thing we did was wind down the company’s largest sales channel, Bento. The Bento box, a try-before-you-buy service, was an excellent way to launch a brand but impossible to scale because it was too expensive to support. This decision allowed us to refocus our resources on our higher potential retail and e-commerce channels and dramatically improved the profitability profile of the business. You can read the entire case study here.
If you don’t have multiple sales channels up and running, you have a more difficult challenge ahead of you. You probably can’t simply shut down your existing sales channel while you try to launch something new.
Your goal should be to pull back on growth and spending in your existing sales channel to get to a higher level of efficiency and lower burn rate. As we mentioned in our discussion regarding product-market fit, it’s common to scale into customer segments that aren’t viable and, therefore, can’t profitably scale. You may find you can pull back to higher value cohorts of customers, and although they will generate fewer sales, they will provide higher margins and reduce cash burn. This may buy you the time you need to test new sales channels to reinvigorate growth.
Launching a new sales channel has to be executed using the same product-market fit framework discussed in Issue #2. As mentioned above, use the Build-Measure-Learn feedback loop to ensure that your new sales channel can scale to a level that supports the Viability pillar of product-market fit. You need to give yourself time to carefully test your way into scalable growth to ensure that the target metrics you modeled hold up as you increase spend and volume through that channel.
Shifting your sales channel mix will impact your team. You’ll find that you can reduce headcount in areas that support sales channels you are winding down while requiring you to hire into skills and experience you need to launch and grow new channels. While hiring and firing is difficult work, don’t try to move existing employees into roles where they can’t be successful. This will only reduce the odds of a successful pivot by the rest of your team.
Shifting sales channel strategies is similar to swapping out the engines in an aircraft already in the air. But when you’re burning cash faster than expected, and the end of your runway is rapidly approaching, it can be critical work that saves your startup. You can’t Pivot to Profitability when your startup is powered by an unprofitable sales channel. When you unlock the right path to your customers, it will open up the opportunity to build value and a company that endures.