Major brands are obsessed with cultivating Direct-to-Consumer (D2C) businesses. Venture capitalists are putting hundreds of millions of dollars into single product companies that only sell online. But meanwhile the cost to acquire an e-commerce customer is only going up, and Amazon is taking an ever-increasing share of online purchases. The landscape for D2C companies is shifting, and now the most successful companies are using D2C as a learning machine that helps power traditional distribution.
Direct-to-Consumer is not a company descriptor, and companies should not think of themselves as “a D2C company.”
D2C is a channel that companies can use to launch and iterate on products in a way that traditional retail doesn’t allow. Companies can test marketing channels, test customer messaging, test audience targeting, test personas, test value propositions, test product features, test related products and services, basically anything you want.
D2C is a strategy that allows a company to maintain full contact with their customers and total control over the experience. You take an order from the customer, send them an order confirmation email, pack and ship the box to them (which you designed), and follow up with additional messaging about usage recommendations, warranties, and customer support. Not only that, but now the company can directly reach out to this person in both the digital and physical worlds with additional messaging.
But D2C is not the final form of a company. That’s not to say a purely D2C company can’t be wildly successful, but the model still has its limits.
For one thing, Amazon makes up nearly 50% of all e-commerce activity in the US as of 2018, and captures over half of all e-commerce related searches. That means that companies are immediately competing against a behemoth with infinite reach and product assortment for any purchase. And that means that to truly scale and be successful you have to grow brand recognition to keep potential customers from defaulting to Amazon.
Marketing
To date, many of the most successful D2C brands have grown by hammering home ads on Facebook, YouTube, and increasingly Instagram. If you’ve opened the Instagram app lately, it’s hard to sum up the experience better than Dan Seifert did.
But because it has been so successful, there are two major downsides to this strategy now.
First, because people have seen it power growth for D2C brands, everyone immediately flocks to it. And now that there are well over 400 startups building D2C companies, these channels get crowded quick, making it harder for you to stand out.
Second, it is getting more expensive to reach large scale audiences on these channels. Part of this is because of what you see in problem one, more competition. But part of this is also due to the diminishing returns you will see on almost all paid channels when doing direct response marketing.
Your best potential customers are going to be the cheapest to acquire. This makes sense because your product should be designed to fit their needs perfectly. The CPCs and CPMs may be higher than you would benchmark, but the increased conversion rate and average order value will likely more than compensate for that. However, as you start to expand your target audience it’s going to be harder to convert those fringe prospects. In short, your 10,000th customer is going to cost more on Facebook than your 1st.
Because of this, you see D2C brands investing more in TV ads. Peloton spent over $140M on TV in 2018; Leesa spent $73M. Each of those brands sell products that will cost hundreds or thousands of dollars to purchase, but it’s not just high-dollar products making this shift. ThirdLove, a women’s underwear brand, spent over $13M on TV in 2018.
A national commercial buy is going to cost somewhere on the order of $1M to $2M for a 6-week run, and that’s not going to put you in prime time by any means. So the smaller companies need to find other ways to pull this off successfully. Lucky for them, and you, there is a growing list of ways to reach customers through “addressable TV” advertising. That article is focused on what is happening in the UK market, but there are options in the US as well. Hulu, for instance, will do marketing buys that start as low as $30,000 and allow much of the same geographic, demographic, and interest targeting that people have come to expect from pure digital platforms.
I don’t want to confuse the point by saying that TV is a strategy every brand should employ, but for D2C companies to truly scale they need to build a brand, not just a product, that will attract and retain customers. Video tends to be uniquely suited to tell that story, but all content options should be on the table.
Distribution
Telling a more engaging story across more channels will absolutely help drive sales through a branded e-commerce channel. However, the benefit of that marketing doesn’t have to end there. Increasing brand awareness and connection also offers companies the chance to drive sales through partner channels, both online and offline. So how do digitally native brands look to extend their distribution?
Well one quick option is expanding into other online marketplaces. The biggest example here is Amazon, but there are numerous others that may be more focused on specific customer types/expectations (Overstock, Etsy) or industry verticals (Newegg, Wayfair). But it’s worth noting that even as the percentage of purchases happening online continues to climb, e-commerce retail sales have yet to pass 10% of total retail sales in the US. And again, 50% of those sales are happening on Amazon.
Meanwhile, total US retail sales were somewhere on the order of $5.4 trillion last year. That’s a lot of zeroes, and a lot of opportunity. Chubbies, UntuckIT, Warby Parker, Nest Bedding, and numerous others have decided to attack this opportunity with branded physical store locations. In fact, it’s become so common for some of these brands that malls are actively recruiting D2C companies to open new locations. On the other end of the spectrum, you have D2C brands working with major physical retailers. Harry’s razors are distributed in Target. Kylie Cosmetics are sold at Ulta.
Casper is one of the most interesting examples. They have focused on growing a number of different distribution channels, and are the leader in an extremely competitive (and honestly heavily commoditized) space accordingly. Casper has their own branded physical locations, a distribution deal with Target, and, in what was one of the most surprising to me, Casper mattresses are for sale on Amazon.
They’ve got a lot of smart people over there, so I’m sure they made the calculation that this is good for business, but here are the factors I would consider when making a similar decision.
- Selling through Amazon means Casper is taking an obvious reduction on margins compared to casper.com. This is a similar scenario to the margin reduction a brand would see by selling at wholesale prices to a retailer.
- The big difference is that now you are competing with a major e-commerce company on their turf. Some customers will be more comfortable buying things in store, so a physical presence will help you convert them. Selling on Amazon may help you convert people who go there to look for a mattress, but you lose the customer relationship for someone who was already predisposed to make a purchase like that online.
Final Points
I’m a big believer in the concept that strategy is what you say “no” to. Launching with D2C is a strategy where you say “no” to the traditional distribution model, and focus on a channel that gives you more control over the customer experience and makes it easier for you to test. Often it also means companies saying “no” to multiple products until they can figure out how to make the perfect version of and marketing message for one product.
As your company matures, strategy changes. Understanding when that means expanding beyond a single owned distribution channel into partner channels, and how your marketing needs to evolve to support that is critical.