This is the latest installment of the DTC Briefing, a weekly Modern Retail column about the biggest challenges and trends facing the volatile direct-to-consumer startup world. To receive it in your inbox every week, sign up here.
Only a few years ago, the direct-to-consumer business concept seemed quite straightforward. Brands sold things online directly to customers. Usually, they’d get their customers thanks to cheap Facebook ads that micro-targeted certain demographics and affinities. Now, it’s much wonkier — and a lot more difficult.
Last week, I had the pleasure of helping host Modern Retail’s DTC Summit. There, I spoke with dozens of founders and brand practitioners about the issues they face constantly and the industry anomalies they’re witnessing. True, every brand is its own unique snowflake of product, price, positioning, supply chain and funding source. But there were a great deal of tying binds discussed during the three-day event. Namely, that the brands successfully building and growing companies were thinking creatively and focused more intently on the resources in their own control.
In some ways, the term DTC has become a glaring misnomer. Hardly any growing brand sells solely through its website nowadays. In fact, much of the conversations revolved around the difficult world of expansion to wholesale and other channels. So, does it make sense to have a summit focused squarely on a now-passé business model? The truth is that DTC may be going out of style as a model, but the mindset is still popular and evolving.
As Pattern Brands’ co-founder Emmett Shine said, “DTC [as a business model] is dead — DTC is digital first.”
With all this in mind, some themes and lessons emerged about the new ways brands are staying afloat in the current landscape. Below are a few that I noted.
Communication and cooperation are more important than ever
According to Shine — who co-founded the design agency Gin Lane, which worked with early DTC names like Hims, Harry’s and Quip — the biggest change has been mindset shift. During the first few years of DTC, he said “we were all too cool for school.”
This is what led him to launch Pattern Brands under the premise that the business could role out its own brands and scale them up. But pandemic-induced supply chain crunches caused Pattern to shift gears of focusing on acquiring healthy brands instead. And this also made Shine realize that the one thing he needed to do was talk to anyone and everyone who knew a thing or two about DTC.
“It’s cathartic and empathetic talking to other people,” he said. And it also clued Shine into the bigger trends emerging. “Everyone is experiencing the same macro-trends,” he said. “Almost everyone’s [sales are] down for 2022.” But, he said, the conversations he’s had with founders — thousands of them, in Shine’s estimation — have shaped the way he thinks about operating a business in the current climate. According to Shine, the ability to be vulnerable and ask questions over the last few years both gave him a better understanding of the DTC industry and also what tactics and strategies were working for other founders. It also helped him ink a few deals along the way too.
“Listening, talking — that kind of stuff is what I think is most valuable,” Shine said.
Think beyond your own biases
Not every brand is doing terribly. For example, lingerie brand Adore Me has been around for over a decade, brings in over $200 million in revenue and has been profitable since 2018. On a balance sheet, Adore Me looks like a shining example of an old DTC brand: most of its revenue is online, it focuses heavily on digital customer acquisition, it has a vibrant influencer marketing program. But there’s one big difference between Adore Me and, say, Warby Parker: Adore Me considers itself firmly a mass-market brand.
“Our revenue distribution almost exactly matches the U.S. population,” said Ranjan Roy, vp of strategy at the brand. That is, Texas represents 8.7% of the U.S. population and about 9% of Adore Me’s total sales. “We really hit the entire country.”
According to Roy, the biggest mantra that he’s constantly repeating is to remember who his customer is. “We always have to tell ourselves that we are not the customer,” he said. “All our biases tend to start with: ‘this is how I shop, this is how I think,” and that can lead a brand down a rough road — especially if they’re trying to reach people outside of the geographies into which they neatly fit.
With that, Adore Me has figured out its messaging to better fit its audience. For example, a coastal millennial customer base might not resonate with an ad that mentions someone’s husband — but Adore Me’s does. Similarly, the company focuses a great deal on sustainable sourcing, but that’s not something it markets heavily to its customers because Roy found that it wasn’t received well.
LTV is the new CAC
The one thing nearly every attendee was thinking about was getting the most bang for their buck. With that, retention and loyalty were top of mind. That’s especially true for Roy. While Adore Me was able to acquire customers during the heyday of Facebook’s ad platform, things have become much more difficult and expensive after iOS 14 rolled out. While the brand has been investing in platforms like TikTok, it’s also been thinking more about how to keep its existing customers.
“We really got into retention and loyalty,” said Roy. “One of the things that gets lost in the CAC [customer acquisition cost] conversation is the LTV [lifetime value] side.” That is, “if you can try and find services or offerings and loyalty [programs] that will increase the LTV side of things, you can afford to stomach a slightly higher CAC.”
That’s translated into two membership models at Adore Me. The company has a home try-on service to let customers test out products and see if they like them. It also offers a monthly membership that gives discounts and other perks. The idea, Roy said, is to give its customers “an excuse to shop.” And the program is working: nearly three-quarters of Adore Me’s revenue comes from either its membership or some other retained revenue program.
Adore Me wasn’t the only brand talking loyalty. Jewelry brand Jane Win, for example, realized that customer service was so important to retention that it moved the entire department to sit underneath marketing, according to founder and president Jane Winchester Paradis.
And handbag brand Caraa is also in the process of retooling its retention offerings. “We’ve always had a loyalty program,” co-founder Aaron Luo said. “This year and next year it’s something we’re really doubling down on.”
For him, this program is a way to diversify away from expensive performance marketing and also to collect better data. “Instead of thinking about cookies or ways to acquire customers, we’re think of, through the loyalty program and through retargeting — like Klaviyo, for example — to really try and target the customer data firsthand.”
It’s an expensive endeavor, he admitted, and not as turnkey as a Facebook ad platform circa 2015 that made targeting so easy. But, “the more we can capture first-party data, it’s going to position us better to retarget.”
Resetting business expectations
Perhaps most importantly, brands are thinking about their bottom lines. Over the last year, said Pattern’s Shine, there’s been a “focus on profit… it’s really hard but more important than ever.” As he put it, “cash is freedom.” That’s especially true now as capital is harder than ever to come by.
According to Luo, Caraa has always been focused on profitability and growing slowly and sustainably. But the big change over the last year is resetting goals. “We quickly realized that if we didn’t adjust our targets, going out and acquiring customers in this current environment can be risky.”
The way to bring in customers is to discount, Luo said, and that’s a tactic Caraa simply did notwant to partake in. “I’d rather reset our expectations in terms of our sales,” he said, than implement sweeping discounts to bring in one-time customers.
Instead, he saw it fit to focus on sustainably growing sales and making sure current customers were still happy with the brand. “Promotions is a hard line we’re always holding on,” Luo said. “I’d rather work closely with the existing relationships with our customers.”
What I’m reading
- Embattled mattress brand Purple hired a new chief marketing officer as it weighs an unsolicited takeover offer.
- Bloomberg has a deep dive into Gopuff‘s recent struggles, and how it is indicative of the allure around instant delivery fading.
- Thingtesting looks at how curation-focused startups like Pop Up Grocer and Raye decide which brands to carry in their stores.
What we’ve covered
- Why retailers and e-commerce companies like Walmart, Shopify and Klarna are racing to create tools that connect influencers with brands.
- A look at how Death & Co and Eleven Madison Park are building out their CPG lines.
- The FTC on Thursday voted to solicit public comment on the potential for new regulations around fake reviews and endorsements that plague e-commerce sites. Here’s what it means for DTC brands.