Product vs Distribution Partnerships: What should you prioritize?

In my last post I described why partnerships are likely to be big in 2023. But if you want to dial up your partnerships activity where do you start?

While partnerships are a key growth engine for many firms, forging partnerships is different than making sales. In a sale, the product stays the same; partnerships are more like channels because they often require the product to be adapted based on the partner’s target user, product, experience and where the partner sits in the user journey. As a result, different types of partnerships require different degrees of investment and carry different risks. Success requires all functions – product, marketing, sales and finance - to be aligned on priorities for the partnership and what’s being traded off to achieve them.

Given the broad spectrum of partnerships, a framework can be helpful in determining what type of partnerships are best aligned with your strategy and capabilities. Firms typically partner to achieve two business objectives: enhance product and expand distribution. Plotting these goals on a 2x2 reveals four broad types of partnerships. Each contains different risks and rewards:

Feature: In a Feature partnership, Fintechs contribute capabilities that help partners enhance existing products and processes. When RBC partnered with Personetics the bank leveraged Personetics’ models to extract more actionable insights from RBC’s retail banking transaction data. While the resulting PFM experience helped RBC customers gain a better understanding of their spending that has increased saving rates and customer retention, the partnership didn’t create a new market or materially impact either firm’s unit economics. RBC bore most of the investment and associated risk and thus retained the upside. This is a common partnership structure between a large incumbent and a startup.

Point Solution: In a Point Solution partnership, Fintechs contribute a complete product that complements the partner’s offering. GreenDot partnered with Wealthfront to distribute its checking account and money movement capabilities to Wealthfront's cash account customers. The collaboration provides Green Dot with an efficient distribution mechanism that offers much better unit economics than selling directly to consumers. This structure is common where the fintech has a relatively simple, mature product that the partner wants to leverage to expand their offering. While it enables many variations of the core product, it doesn't typically result in the development of fundamentally new ones.

IaaS Platform: In a Platform partnership, Fintechs contribute a flexible platform upon which partners can build fundamentally new experiences that optimize existing value chains. Doordash partnered with Marqeta to issue a tokenized card to each “Dasher” to pay for food pickups. The program uses data about the merchant, purchase amount, location and time to ensure only legitimate charges are authorized, eliminating friction and greatly reducing fraud. Critically, the flexible APIs of Marqeta’s platform enabled this customized program to be launched quickly and easily and has been a key enabler of Doordash’s model across multiple markets. This optimization of the delivery value chain improves Doordash’s unit economics and enables the scaling of a new business model. This structure is common where the fintech has a highly customizable back-end capability around which the partner wants to build a new proposition.??

Transformational: In a Transformational partnership, Fintechs contribute integrated financial products that power not just the partner’s growth, but the growth of the partner’s users. They’re transformational because they shift demand from traditional providers to new value chains where user needs are both better served and served more efficiently. Stripe Treasury’s partnership with Shopify epitomizes this type of partnership, embedding Stripe’s banking and financing platform into the Shopify platform where it can leverage more borrower data. This not only simplifies the process of applying for financing and distributing funds, but it reduces lending risk because Shopify natively collects so much data with which to assess the health of the borrower. This structure is common where the partners are relatively equally matched – both in technology sophistication and size - and both have substantial, complementary capabilities to bring to the table.

This framework is not intended to impose hard definitions; rather, it merely offers a way to think about the main partnership archetypes. In practice, many alliances will display characteristics of more than one type. Nevertheless, the framework can still be a useful tool to evaluate what types of partnerships your organization should prioritize given its unique capabilities and constraints.