The Hedgehog (Hh) signaling pathway controls growth, cell fate decisions, and morphogenesis during development. Damage to Hh transduction machinery can lead to birth defects and cancer. The transmembrane protein Smoothened (Smo) relays the Hh signal and is an important drug target in cancer. Smo enrichment in primary cilia is thought to drive activation of target genes. Using small-molecule agonists and antagonists to dissect Smo function, we find that Smo enrichment in cilia is not sufficient for signaling and a distinct second step is required for full activation. This 2-step mechanism--localization followed by activation--has direct implications for the design and use of anticancer therapeutics targeted against Smo.