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Lessons from the DTC revolution

Upstart direct-to-consumer brands weren’t supposed to be able to do this.

According to the traditional playbook, these brands, known as DTCs, should struggle to carve out anything more than a niche business with their limited budgets. A decade ago, the notion that there would soon be a tidal wave of DTCs grabbing meaningful marketshare, raising huge amounts of venture capital and even going public—well, it would have sounded not only unlikely, but absurd.

It happened, though. And it continues to happen, as more DTCs learn to translate their direct line to consumers into powerful, personal brand relationships. In a presentation titled “Fire your CMO: Marketing’s future will not resemble its past,” LUMA Partners’ Terry Kawaja notes how DTCs have taken an approach pioneered by software companies and applied it to more traditional goods and services: using first-party data to understand their customers with exceptional clarity and contextual specificity, then tailoring their messaging based on those insights.

It’s proven to be a potent strategy. DTC retail brand revenues, for example, are growing at four times the rate of traditional retail, according to The Winterberry Group. And it’s not just retail: DTC brands have disrupted nearly every category, from fitness to financial services. As choices multiply, many consumers no longer care if a brand is well established. Instead, they want products and services tailored to them and their lifestyle.

The investment app Robinhood, for example, doesn’t charge fees for individuals to trade stocks, funds and options—a departure from the commissions charged by traditional financial service providers. Robinhood, launched in 2015, has 10 million users. E*Trade, which has been around since 1982, has 5.2 million.

After a decade of watching consumers abandon traditional brands in favor of DTCs, traditional marketers have little choice but to acknowledge that DTC marketing has hit on something powerful. Many businesses are now pressed to learn how these brands have built (and kept) a passionate following. In particular, direct-to-consumer marketing has demonstrated an ability to translate an understanding of product and service needs into greater value for the price, which, in turn, forges trust and loyalty with their customers.


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“One-to-one communication—that’s what has been fostered by DTC companies,” says Susan Hogan, senior vice president of research and analytics at the Interactive Advertising Bureau (IAB). “They have a model for storytelling that really puts the brand into an emotional, heart-and-mind place that positions the brand and resonates well.”

But it goes beyond personalization. Direct-to-consumer brands fundamentally understand that it’s a price versus value equation: How do you ensure the perceived value of the product is higher than the price you’re asking for?

“Traditional brands didn’t quite appreciate the value equation at first,” says Greg Shugar, CEO and creative director of Beau Ties of Vermont. “DTC brands created an opportunity in that complacency and new companies popped up—eliminating the retailer—and created new products that offered real value. Eventually, traditional brands got wise to it, but they were too late and the landscape was already crowded with DTC brands.”

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But DTC brands also face serious challenges as they work to retain their appealing, personal touch: They’re dealing with the pressures of growth, scale and competition. Several high-profile, high-growth DTCs— including Casper, Outdoor Voices and Airbnb—have struggled to turn the corner to profitability. Casper, for example, loses $349 on every mattress it sells, according to Scott Galloway, a New York University marketing professor and author of The Four: The Hidden DNA of Amazon, Apple, Facebook and Google.

Nonetheless, top DTCs have figured out how to capture their audiences’ time and attention by bringing to their industries a new approach to developing relationships:

  • They’re digital natives who built their brands using owned and shared media, such as their websites and social channels.
  • They use the first-party data gleaned from those channels to understand and relate to customers with exceptional insight.
  • They employ storytelling strategies that harmonize well with the strengths of their channels and resonate with customers weary of traditional marketing techniques.

DTCs took a perceived weakness—a lack of access to traditional retail and distribution channels—and turned it into a strength by seizing on the potential of their direct, unmediated interactions with customers. In turn, they created a revolution for building consumer relationships—and how to translate it into business success. 

Marketing from the (online) front porch

For many DTCs, creativity was born of necessity. These low-budget startups couldn’t afford to launch their brands with splashy TV campaigns and endcaps at big-box stores, so they turned to cheaper alternatives. They used social media, performance-based ads and their own websites to draw their first customers: Toothbrush-maker Quip, for example, launched in 2015 with only $300,000 in funding and used social media ads to sell 100,000 toothbrushes in its first year. By focusing on brand storytelling, user experience and customer service, DTCs drove loyalty and retention and created their first brand evangelists.

 

Image depicting a drink, a phone and a woman pulling a suitcase, all to showcase the products promoted by DTC marketing by the brands featured in this article.

 

 

It’s not a strategy built for instant scale, but these marketing tactics worked in the early 2010s for DTC brands such as Warby Parker and Dollar Shave Club. Today brands such as the monthly wine club Bright Cellars continue to creatively use owned and shared media, such as their websites, newsletter and social channels, to relate to customers: Bright Cellars, for example, has an interactive tool on its website that it uses to educate customers about wine and also to discern their tastes. It uses that data not only to make smart suggestions but also to build its wine portfolio.

The DTC model has expanded to include services as well, including the investing automation offered by Acorns and Robinhood.

“There’s still plenty of opportunities for a digitally native brand to stay with owned channels and have a successful business,” says Nate Phillips, co-founder and CEO of Nom Nom, a DTC that sells premium pet food.

Take Dirty Lemon, for example, which makes lemonade-style health drinks infused with ingredients such as chromium and charcoal, and sells them in six-packs for $65. The company used Instagram to gain a following after its 2015 launch, but its real innovation is its use of text messages: Once customers are onboarded, they reorder, modify or cancel their orders via text message—a frictionless, closed-loop process that gives the company intimate, personal access to each of its customers.

“Imagine if Coca-Cola had a profile on every person that has purchased Diet Coke over the last 30 years. They would be able to create a new product to sell to the consumers that they’re now losing—the people that used to drink Diet Coke but aren’t drinking it anymore,” Zak Normandin, founder of Dirty Lemon’s parent company, Iris Nova, explained to the Financial Times.

Direct-to-consumer brands have also excelled at using social media to build community, both by engaging with customers and also by highlighting content from brand evangelists. Sometimes these evangelists are well-known influencers, but in other cases, such as the beauty and skincare company Glossier, DTCs have empowered everyday users to expand their audience.

These DTC digital marketing strategies prove that it’s still possible for DTC marketers to concentrate the majority of their energy on owned digital channels—especially for early-stage companies focused on establishing their business model and product before looking to scale up.

A focus on first-party data and personalization

DTCs quickly discovered that relying on owned channels comes with a major benefit: a wealth of first-party data within a marketing database that could be used to market with exceptional specificity. That data gave DTCs a unique, detailed window into the tastes, habits and buying patterns of their customers, and DTCs have used that information to personalize and contextualize their customer communications based on factors such as a consumer’s persona, purchase history and progress along the customer journey. Brands that already had managed to position themselves as relatable could double down on that promise by demonstrating how well they relate to their consumers.

DTCs were hardly the only companies looking to personalize their communications by collecting customer information, but they were able to access the necessary data, while entrenched, traditional brands often found that equivalent data was walled off by retail and distribution partners (or their own organizational silos), leaving them scrambling to catch up. DTCs found that their disconnection with traditional retail infrastructure was actually a strength because of the additional insights from interacting directly with customers.

“For incumbent brands in general, there’s been a rush to first-party data,” Hogan says, either as a continued strategy for DTC e-commerce or emulating ways in which they see disruptor brands succeeding.

Now, traditional brands are racing to get in the game, motivated both by the advantages of richer data and also the COVID-19-related limitations of brick-and-mortar retail. Frito-Lay, for example, is now selling brands such as Tostitos and Ruffles directly to consumers through its new snacks.com website.


Tushy, Blue Apron, Peloton: How DTC brands adapt as people shop from home


 

DTCs’ wealth of data also affords them better performance transparency than traditional brands. Following the example of high-growth tech startups, DTCs often rely on a combination of owned, shared and paid channels. But the key difference is that they can see all transactions with their brand without relying on retail partners—at least at the outset. They use the data from these efforts to create precise models showing customer acquisition costs (CAC) as well as projecting customers’ average lifetime value (LTV)—and use the resulting ratio to gauge the efficiency of their marketing.

Direct-to-consumer acquisitions come from a formulaic approach, Kawaja says. As founder and CEO of LUMA Partners, an investment bank focused on digital media and marketing, he has a specific interest in how DTC brands evolved to their current state. “If DTC brands know lifetime value, they can calculate an appropriate bounty for qualified new customers,” he says. “This is a double-edged sword: While this provides for rapid growth when the economics work, the converse is also true. Should customer acquisition costs exceed the bounty, the DTC brand has nowhere to go or grow.”

“One-to-one communication—that’s what has been fostered by DTC companies. They have a model for storytelling that really puts the brand into an emotional, heart-and-mind place that positions the brand and resonates well.”

—Susan Hogan, Senior Vice President of Research and Measurement, Interactive Advertising Bureau (IAB)

A problem with scaling up

In an investor’s perfect world, the lifetime value to customer acquisition cost, or LTV:CAC, ratio would be perfectly scalable. Companies could grow rapidly first by refining their marketing approach until the ratio was a profitable one, and then by increasing the marketing spend to add more customers. But DTCs have discovered that it doesn’t always work like that. For one thing, the ratios can fluctuate over time thanks to factors such as rising digital ad costs.

“Online marketing was the place where we all used to go to because traditional media was too expensive,” Shugar says. “Now the digital market is so saturated that the cost of getting a customer has skyrocketed.”

 

Image depicting a man shaving, a suitcase and a punching bag to showcase the products promoted through DTC marketing by the brands highlighted in this article.

 

Achieving scale for DTCs often requires branching out beyond owned channels and social advertising. Some DTCs, such as Peloton, the home-fitness cycling brand, have turned to traditional TV spots, while others rely on emerging channels like podcasts and over-the-top (OTT) television streaming services such as Hulu. SimpliSafe, a security company, sponsors several podcasts including Malcolm Gladwell’s Revisionist History.

Another group of DTCs are finding new opportunities to connect with customers with brick-and-mortar stores (Iris Nova is one example, along with DTC trailblazer Bonobos), or exploring limited-scope partnerships with traditional retailers (Casper mattresses are now sold at Target, for example). Those strategies are helpful for building audience, but they complicate DTCs’ database marketing approach because they make attribution more challenging.

“They’re used to working within the confines of the social space, and working in their own world of seeing customer interaction on their own websites,” Hogan says. “There’s frustration once they do go into traditional media like linear TV. How do they create attribution modeling?”

But, as options for TV advertising expand beyond simple demo targeting, options like OTT actually bridge the gap from digital to TV. “OTT combines the best of digital and TV in that premium, well-lit environments are digitally addressable,” says Kawaja. “DTC brands can take advantage in this data-rich channel to reach targeted audiences and track performance.”

Storytelling vs. performance-based CTAs

Direct-to-consumer brands often have gravitated toward two different but complementary approaches to content. On one hand, there’s the disposition toward performance marketing, with its emphasis on calls to action and driving specific results. But, on the other hand, when DTCs are operating on owned and shared channels, they tend to take a different tack.


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“DTC brands often market using content marketing based on the story of the company’s founding,” Kawaja says. “These ring authentic because they are, and that is having a positive effect on the ecosystem.”

That word “ecosystem” refers to the collection of DTCs working with similar models in a particular sector. Those DTCs compete with one another, but all benefit from marketing that builds awareness for the DTC model versus traditional alternatives—a halo effect that applies whether the category is meal kits, natural alternatives to traditional grocery brands, handmade fashion startups or video-assisted home exercise equipment. It’s similar to the way that both Uber and Lyft benefit from increased awareness of ridesharing as an alternative to taxis.

“We don’t think much about our marketshare within the DTC category,” says Nom Nom’s Phillips. “We think much more about the share of that category versus traditional products like kibble. We’re generally supportive of the marketing dollars that go into educating consumers about this new category from all players in the space. And I think that will probably be true for at least a number of years as we look at people shifting and upgrading the food choices they make.”

When DTCs grow and begin to experiment in traditional media, their two signature messaging strategies—content marketing and performance-based calls to action—can be at odds. So far, DTC content has tended to veer toward the call-to-action approach, rather than emphasizing lifestyle marketing and brand storytelling. But that may be changing.

“The pendulum is swinging,” Hogan says. “We see more brand-and mission-based storytelling now; sensitivities due to COVID-19 have, in large part, been a driver of messaging and creative changes. But DTCs storytell well. The way that they’ve been interacting with consumers on their own websites illustrates that.”

"Now the digital market is so saturated that the cost of getting a customer [through social sites] has skyrocketed."

—Greg Shugar, CEO and Creative Director, Beau Ties of Vermont

DTCs at a crossroads

As traditional brands look to borrow from the direct-to-consumer playbook, many DTCs are simply focused on survival. One reason is that there has been exponential growth of DTCs, which are relatively inexpensive to launch. In the wake of the coronavirus-induced economic pullback, a wave of consolidation seems inevitable.

“From the early days, we predicted a lot of carnage in the sector as the plethora of VC-funded startups vie for oxygen,” Kawaja says. “Such a winnowing is normal in any industry, but the difference with DTC is the extent of new company formation, which drove hyper fragmentation. Now we are seeing the reckoning.”

On top of the funding woes, the very marketing platforms that boosted DTC brands to success are now beyond their budgets. “The cost of marketing has gotten so high that brands burn through their money too quickly,” Shugar says. “If you’re able to stick around longer, you start to improve your products in terms of design or quality or shape or comfort. But that takes time.”

So it’s not that they haven’t raised enough capital, he explains. It’s that marketing is so expensive that no matter how much money DTC brands get, they’re destined to spend it too quickly.

Social media, which carried many of these brands on waves of engagement, is no longer a golden ticket. AdStage, a PPC software and reporting company, analyzed Facebook impressions data and found that the median cost per click (CPC) for Facebook News Feed ads increased 15.7% year over year since the fourth quarter of 2018. In addition, the median CPC rose from $0.57 in the third quarter of 2019 to $0.81 in the fourth quarter of 2019.

“Online advertising is saturated with so many direct-to-consumer brands and, of course, bigger players like the department stores and major brands,” Shugar says. “The cost of marketing and the acquisition costs of getting a customer [through social sites] have skyrocketed.”

The takeaway

After a decade spent pioneering a new way of connecting with customers and building strong brands, direct-to-consumer brands must now figure out how to scale and grow profitable while retaining the qualities that have helped them connect with consumers.

The first wave of DTCs made effective use of inexpensive marketing channels, but those strategies have become more difficult to pursue as costs have risen and competition has proliferated. There’s still room for DTCs to thrive, but to do so now requires a strong, differentiated brand and product that resonates with a substantial audience. In other words, DTCs are beginning to face more conventional hurdles to growth and profitability, rather than seeming to play their own game on their own field.

To be successful, they must rely on the same core skill that brought them this far: a knack for getting close to their customers and paying attention to what those customers have to say.

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Illustrations by Caleb Fox; Source imagery courtesy of Acorns, Allbirds, Away, Beau Ties, Casper, Dirty Lemon, Nom Nom Now, Outdoor Voices, Purple, Supply, Unsplash