Chapter 16: Sell Direct to Connect with Your Market

Book: Finance Secrets of Billion-Dollar Entrepreneurs: Venture Finance without Venture Capital
Author: Dileep Rao
ISBN: 978-1-64250-199-5

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Chapter 16 opens with a Schumpeter quote: business without sales is like Hamlet without the prince. Rao spends the whole chapter proving that point with real examples.

Billion-dollar entrepreneurs built sales and marketing strategies that produced positive cash flow, used capital efficiently, and kept long-term control of the market. Most of them sold direct to customers. Selling direct let them control growth rate and cash needs.

Sales do not just happen

Tech founders sometimes assume a great product sells itself. It usually does not. Billion-dollar entrepreneurs know they have to make sales happen fast and cheap.

Some creative sales drivers from the book:

• Mary Kay Ash used diamonds, vacations, and pink Cadillacs to motivate her sales force.
• William Wrigley mailed free gum to people in the phone book when phones were new. If you could afford a phone, you could afford gum.
• Jeff Bezos parked mobile billboards outside Barnes & Noble stores pointing customers to Amazon.
• Roger Penske raced cars at the Indy 500 for advertising he could never afford to buy.
• Steve Ells opened Chipotle next to the University of Denver campus to reach young students who cared about organic food.
• Tilman Fertitta said if you go to the water, people will eat seafood even next to a great steakhouse.
• Michael Dell sold newspapers as a teenager by mailing offers to people applying for marriage licenses.

A sales driver is whatever strategy gets you sales. If you are in a mall, foot traffic is your driver and rent is the cost. If you work from a garage, your driver might be advertising, direct mail, telemarketing, or your own time on the phone.

Startups need sales quickly and in enough volume to profit and show positive cash flow. You need the right driver to maximize sales and margins in the shortest time with the least investment.

The two numbers that are always wrong

In every startup’s financial projections, two numbers are almost always wrong: sales (level and timing) and the cost to get those sales.

You might spend on the wrong driver and get nothing. Or you might have the right driver but need more money than planned, running out of cash before positive cash flow arrives.

Established businesses know their sales driver mix and productivity. New businesses do not. They do not know what will sell, how to sell it, or who will buy immediately at the highest price. That is one reason so many entrepreneurs change business models after launch.

Why sell direct?

Sixty-eight percent of Minnesota’s billion-dollar entrepreneurs chose sales drivers that allowed direct-to-customer sales. Another seven percent built proprietary, exclusive channels.

Sales channels affect costs, revenues, margins, and your connection to the customer. When you sell through retailers, the consumer’s relationship is with the retailer, not you. Building your brand without expensive advertising is hard when you are cash-poor.

Direct selling gives more control over sales, distribution, and the customer relationship. Intermediaries like wholesalers, distributors, and retailers might promise volume but add complexity, require discounts, and own the customer. If consumers will not buy direct from you, you may need intermediaries anyway.

You can sell directly to:

• Businesses (mid-sized companies are often better targets for new ventures than Fortune 1000 firms)
• Local consumer markets (company stores, franchisees, sales force, local ads)
• National niche markets (specialized media and websites)
• National mass markets (difficult and expensive without capital; the internet helped but reaching and convincing consumers still costs a lot)
• Governments (often value price or connections over value)

Indirect channels through reps, distributors, wholesalers, and retailers need big money for channel building, discounts, and consumer marketing to pick your product off the shelf.

Direct selling in practice

Kevin Plank at Under Armour sold directly to football teams. He made cold calls all day and shipped at night. His first sale in 1996 was to Georgia Tech. Today Tom Brady is a supporter and shareholder.

John Paul DeJoria of Paul Mitchell had two weeks to pay a manufacturer for a sample run. He called salons, got orders and payment from twelve customers, and found a distributor. He paid on time.

Jill Blashack Strahan of Tastefully Simple sold gourmet food through home parties. She could reach consumers directly without marketing money or distribution channels she could not access. With a $6,000 investment, she built a company with sales over $140 million.

Rao includes a useful comparison. Sell direct at $10 and you keep the full price minus commissions. Sell through a distributor at $4 and a retailer at $5, and you keep $4 while intermediaries take the rest. Direct means you bear the full cost of finding customers. Indirect means channel inventory, promotions, and media costs, plus you do not own the customer.

Horst Rechelbacher at Aveda realized distributors were selling competing products and not highlighting Aveda’s uniqueness. “I did not want to be number thirty-six, the last one they sold.” He turned his best salespeople into exclusive distributors and grew his share in target salons from 5% to 30% of retail sales.

Owning the relationship

Nearly every billion-dollar entrepreneur selling direct said they preferred it because it kept them close to customers. Direct selling helps you own the relationship, offer better service, get feedback, and keep higher margins without upfront channel costs.

Earl Bakken at Medtronic invented the electronic cardiac pacemaker but realized he had to sell to physicians who controlled the sale, not just rely on medical benefits.

Jeremy Stoppelman at Yelp valued not depending on Google for revenue since Google competes in local advertising.

Gustavo Cisneros continued his father’s vertical integration policy, going into grocery retail and TV so he could promote products in his own stores and media channels.

Tony Hsieh at Zappos eliminated drop-shipment (about 25% of the business) because the company could not distinguish itself or own the market without controlling inventory and the customer. They “had to give up the easy money, manage the inventory, and take the risk.” Zappos later sold to Amazon for a huge sum.

Dan Gilbert at Quicken Loans sold mortgages directly through 1-800 numbers and a call center instead of relying on real-estate brokers. That led naturally to online sales when the internet arrived.

Bottom-up beats top-down

New ventures should forecast sales from the bottom up, not the top down. Top-down means guessing a “reasonable” market share from total market size. Corporations with history can do that. Startups cannot.

Bottom-up starts with actual spending on each sales driver, then forecasts prospects, orders, and sales based on driver productivity. Test your drivers. Track results. Adjust budgets and financing needs based on what actually works.

Guthy-Renker built a billion-dollar infomercial business by knowing which sales drivers worked. They used up to 10,000 different 800 numbers to track orders. Now with mobile phones and the internet, they struggle to know where customers come from.

More reasons to sell direct

Higher margins. Each channel layer wants a discount. Selling direct keeps the full sales dollar. The question is whether that extra margin covers your direct marketing costs.

Differentiation. If your product looks like competitors’ and they are established, customers may not switch. Finding a new way to sell can be your edge. Amazon and Dell both found direct models that destroyed old competitors.

Fewer returns. When products do not sell at retail, dealers return them. You bear the risk, not them. Joel Ronning at Digital River found direct sales had much better cash flow than selling through dealers, who returned unsold goods after a few months.

Conclusion

When possible, pick markets you can reach directly. Use alliances with established companies for harder segments like national consumer markets or customers who will not buy from new businesses.

Focus on customers from “heaven”: reachable directly, buy instantly, pay quickly, value your product highly, are prestigious, growing, and numerous. When possible, sell to customers who prepay.

Picking the right sales strategy might be the most important decision you make.