Zero to One is a book by Peter Thiel. But it also represents a business mindset, more typical of tech, where building something wholly new is the default mode, rather than building something incrementally better. The core premise of Zero to One then is that it’s much more valuable to create a whole new market/product rather than starting from existing markets.
Challenging one of the greatest startups’ myths
What is one of the greatest myths startuppers tend to believe?
That is, “If you have a great product, it will sell itself!”
If you hold this kind of belief, you might be doomed to failure. That is not me saying that Peter Thiel, author of Zero to One and one of PayPal’s co-founders, is part of the so-called PayPal mafia.
As Peter Thiel emphasized back in 2015 in a speech at Chicago Ideas Week:
The starting point for my book zero to one is that is this sort of anti formulaic approach to take this a question of singularity and uniqueness very as the central question on and I try to get it through a variety of sort of contrarian questions what great business is nobody building tell me something that’s true that nobody agrees with you on these are often quite hard questions to answer. Because we think it’s hard to come with some new truth or it’s often requires courage because you often have to go against conventional wisdom in one way or another.
Selling is everywhere
Even though sales is everywhere, most people underrate its importance. Silicon Valley underrates it more than most
by Pether Thiel in Zero to One
Many startups live in a sort of duality conflict. The engineers think of sales and marketing as a sort of fraud. If your product is great why would you need to sell it? It will sell itself!
This kind of belief is wrong, as Peter Thiel explains in his book Zero to One.
In fact, although we love to believe that we’re all rational beings.
It is true that anyone, including engineers, is influenced by subtle clues, which salespeople and marketers often manufacture to influence people’s behaviors.
None is immune to that.
However, this duality, of product and distribution is what causes the most troubles to startups that are trying to scale up.
In fact, if you have a great product but no distribution plan, then your startup might be doomed.
The reverse doesn’t seem to be the case, according to Peter Thiel.
How do you create the distribution for your product?
There are a few strategies to undertake.
Make distribution part of your product
What nerds miss is that it takes hard work to make sales look easy
by Pether Thiel in Zero to One
Sometimes, the sales process that works the best is the one hidden from sight. One example that pops into my mind is Google.
As Peter Thiel explains in Zero to One, the companies who win are those who can hide their monopoly. Google is the perfect example.
Even though Google is a monopoly (it controls most of the search market), you will never hear the company admit that.
Quite the opposite. Google will reframe the message in all the possible ways to ensure most people (especially governments and politicians) do not perceive them as a monopoly.
Therefore, capitalism isn’t about competition but about monopoly.
One crucial aspect that might confer a monopoly on a corporation is its business model. Think for a second about Google.
That is the most significant ad network in the world. Even though over four billion queries each day go through it, very few people realize how it works.
Comprised of two main networks, AdWords and AdSense, Google makes it easy for companies to track how much they spend on marketing and for online publishers to monetize their content.
Also, the more websites join the AdSense network, the easier it will be for Google to monetize on the company part of the AdWords network.
The distribution model is perfect. That is why, in 2016, 88% of Google’s revenue came from advertising.
It is undisputable that Google has a robust search algorithm, one of the first able to offer great search results compared to others.
However, what made Google profitable isn’t that; it was the distribution model Brin and Page created!
This is the most important takeaway from the digital revolution.
To build a successful digital company, you need to break down the wall between product and distribution and consider them one thing.
Find the sweet spot between marketing and complex sales
Poor sales rather than bad product is the most common cause of failure.
by Pether Thiel in Zero to One
According to Peter Thiel, there is a place where you want to be regarding distribution and sales.
Source: Medium
In the startupper lingo, I showed a few metrics to focus on if you’re managing a startup.
In fact, Peter Thiel emphasizes the importance of two critical parameters for making your business viable in the long run: CLV, CAC.
CLV, short for Customer Lifetime Value, is the economic value every customer brings to your startup throughout a relationship.
For instance, if you sell software for $100 per month and your customers stay on average six months, your CLV is $600.
Common sense says that if a customer brings an average of $600 to your business, you have to spend way less to make it sustainable.
Therefore, if you’re paying $650 for ads to bring one customer in, then your startup is doomed. That is why you need to look at the CAC, which is short for Customer Acquisition Cost, or how much it costs to bring in revenue from a customer.
According to Peter Thiel, your distribution model needs to be anywhere in the Marketing or Personal Sales range.
In fact, if the distribution falls somewhere in the middle, that is a dead zone. Your CAC might be too high compared to the CLV. In short, you’ll spend too much to bring a customer in the door.
That is how distribution bottlenecks kill startups.
From here, it’s critical to understand the difference between sales and marketing and when to prioritize one, the other, or push both.
Start small and take advantage of the network effect
The most successful companies make the core progression—to first dominate a specific niche and then scale to adjacent markets—a part of their founding narrative.
by Pether Thiel in Zero to One
When you start scaling up a business, it makes sense to be laser focused. For instance, if you’re selling software for SEO, who’s this really for? If that is for web agencies, then you might want to target those few thousand web agencies that can grow your business. Once you start building on that niche, you can expand to the next thanks to the network effect.
In other words, those new customers coming in will also – for instance – find new applications for your product, thus improving its virality and growth. That is how you go from zero to one regarding distribution.
As Reed Hoffman, another member of the so-called PayPal Mafia (the group of people who founded and ran the early PayPal and went on to found many other successful tech companies), highlights in Blitzscaling, network effects play a critical role as one of the growth factors enabling scale.
Distribution isn’t linear; it follows a power law!
We don’t live in a normal world; we live under a power law.
by Peter Thiel in Zero to One
Many startuppers look for that sales number to grow consistently.
They start to experiment in too many ways to make a buck. However, little growth can be deadly.
As Peter Thiel points out, finding your distribution channel might be way more powerful than trying many that work relatively.
Distribution, like many things in our world, follows a power law.
When you find the distribution model that works for you, stick with it until exponential growth starts to pick up!
To grasp this concept it’s important to understand the dynamic of business scaling.
Key Highlights:
- Zero to One Mindset:
- Zero to One, as advocated by Peter Thiel, emphasizes creating entirely new markets or products rather than incremental improvements.
- The core premise is to focus on uniqueness and singularity rather than following a formulaic approach.
- Sales Importance:
- Despite its ubiquity, sales is often underrated, especially in Silicon Valley.
- Thiel highlights that many startups struggle with the perception that great products sell themselves, which is a misconception.
- Product and Distribution Duality:
- Many startups face challenges balancing the importance of product quality with effective distribution.
- Thiel argues that having a great product without a solid distribution plan can lead to failure.
- Integration of Product and Distribution:
- Thiel advocates for integrating product and distribution, considering them as one entity rather than separate components.
- Successful companies break down the barrier between product development and distribution, viewing them holistically.
- Sales Complexity and Monopoly:
- Thiel underscores the importance of understanding sales complexity and the concept of monopoly in capitalism.
- Companies like Google exemplify how successful distribution models contribute significantly to their profitability.
- Customer Lifetime Value (CLV) and Customer Acquisition Cost (CAC):
- CLV and CAC are critical metrics for assessing the viability of a business.
- Startups need to ensure that their distribution model aligns with these metrics to avoid unsustainable costs.
- Sales vs. Marketing:
- Network Effects and Niche Domination:
- Leveraging network effects and dominating specific niches are key strategies for scaling a business.
- Startups should focus on building traction in a niche market before expanding to adjacent markets.
- Power Law Dynamics in Distribution:
- Distribution follows a power law, where finding the right distribution channel is more impactful than experimenting with multiple channels.
- It’s crucial for startups to identify and stick with effective distribution models to achieve exponential growth.
- Business Scaling and Market Validation:
- Business scaling involves validating the product in small market segments and gradually expanding to wider markets.
- Alignment of product, business model, and organizational design is essential for successful scaling.
Read next:
- The Ultimate Guide to Market Segmentation
- Types of Business Models You Need to Know
- The Complete Guide To Business Development
- Business Strategy: Definition, Examples, And Case Studies
- What Is a Business Model Canvas? Business Model Canvas Explained
- Blitzscaling Business Model Innovation Canvas In A Nutshell
- What Is a Value Proposition? Value Proposition Canvas Explained
- What Is a Lean Startup Canvas? Lean Startup Canvas Explained
- Marketing Strategy: Definition, Types, And Examples
- Marketing vs. Sales: How to Use Sales Processes to Grow Your Business
- How To Write A Mission Statement
- What is Growth Hacking?
Handpicked related content:
- How Does PayPal Make Money? The PayPal Mafia Business Model Explained
- How Does Venmo Make Money? the Peer-To-Peer Payment App for Millennials
- How Does Twitter Make Money? Twitter Business Model In A Nutshell
- How Does DuckDuckGo Make Money? DuckDuckGo Business Model Explained
- How Amazon Makes Money: Amazon Business Model in a Nutshell
- How Does Netflix Make Money? Netflix Business Model Explained
- How Does WhatsApp Make Money? WhatsApp Business Model Explained
- The Power of Google Business Model in a Nutshell
Related Business Concepts
Palantir Acquire, Expand, Scale Framework
Read: product development frameworks here.
Read Next: SWOT Analysis, Personal SWOT Analysis, TOWS Matrix, PESTEL Analysis, Porter’s Five Forces, TOWS Matrix, SOAR Analysis.
Main Free Guides: