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. More from the series →
This year has been proven to be the year of profitability for many direct-to-consumer brands.
While hitting profitability is an important milestone for any business, this year, it became even more crucial for DTC brands to hit profitability due to venture capital investing becoming harder to come by and interest rate increases making other financing options like debt less palatable.
As such, getting to and maintaining profitability was a key theme that came up in my conversations with many DTC executives with this year. In order to get a better sense of what it takes for companies to get to profitability, I spoke with founders of two brands — IQBar and Prose — about how their respective companies achieved profitability this year.
IQBar and Prose are very different brands in a lot of ways: IQBar sells protein bars, hydration mixes and instant coffees while Prose sells personalized hair care and skin care products. IQ Bar sells its products through roughly 10,000 retail doors, in addition to its own website and Amazon. Prose, meanwhile sells its products entirely through its own website. IQBar has primarily raised money from angel investors, while Prose has raised money from VC heavy hitters like Forerunner and Insight Venture Partners, most recently announcing an $18 million Series B in 2018.
What both companies have in common, however, is that they achieved profitability largely thanks to steps that were taken years earlier. Both have worked to maintain greater control over key parts of the customer experience. IQBar, for example, manages its own warehouse, while Prose has stayed entirely DTC to offer its customers more customization. And, both say that new product launches — which had a better margin structure or better repeat purchase rate — compared to some of their earlier items, were key to helping them finally hit profitability.
Below are some highlights from my conversations with executives at IQBar and Prose about how exactly they were able to achieve profitability.
‘We were always very efficient’
Will Nitze is the founder of IQBar. He launched the business in 2018 because he was ”personally fascinated with the intersection of nutrition and cognition, and how the things we eat and drink impact the way our brain works.”
Nitze said that IQBar has always run lean — the company only has six full-time office employees in addition to four full-time employees who work in the warehouse. He raised his first two rounds of funding from angel investors, but as he was figuring out what the future of the company would look like it became clear to him that becoming profitable — and thus, not having to raise continuous rounds of outside capital — would help the company control its own destiny more.
“This is the first year we’re profitable, but we never lost a ton of money,” Nitze said. He said IQBar is a “close to $30 million topline business and estimated that “we’ve only lost maybe $4 million over the last five years.”
“We were always very efficient,” he added.
With that being said, at the beginning of this year, he said that IQBar wanted to officially get to profitability because “every investor, acquirer, advisor [was all saying] the same thing: get to profitability, valuations are all down, money’s dried up.”
However, he said that his company didn’t have to make too many drastic changes in order to get to profitability this year, because “we were already on the path to profitability.” In August, IQBar, “crossed into meaningful net profitability on the year,” and the company’s goal for 2024 is to hit 10%-15% EBITDA.
In addition to running with a small staff and owning its own warehouse, there were a few other key decisions that Nitze said helped IQBar reach profitability this year. First is what Nitze described as a “a wide variety of average order value increasing initiatives.” This included offering bigger quantities for sale on its DTC website, as large as cases of 72 or 36 protein bars.
“I think we previously had maybe underestimated just how much bulk people consumers are willing to buy,” Nitze said. These were quantities that the company had originally thought were better suited for wholesale, not individual cases.
This year, IQBar also started experimenting with seasonal flavors and limited-time offers for the first time.
“I don’t know what it is about LTOs, people just love scarcity and love seasonal items,” Nitze said. IQBar released a seasonal pumpkin spice favor this year, in addition to a gingerbread protein bar, a chocolate peppermint protein bar, and a peppermint mocha coffee among other seasonal flavors.
What the company is seeing is that its customers are eager to try all of the seasonal flavors, and across multiple product lines — they want to see what pumpkin spice tastes like both in coffee form, and in protein bar form, which drives up average order value.
Nitze also said that IQBar has benefitted this year from increased velocities in retail, which is the result of the company seeing bigger brand awareness as it has expanded into more doors over the years. IQBar is now available for sale in Walmart, Kroger, Costco and Sprouts, among other retailers.
“Going into big-box and club [retail] — the volume is so high that like the absolute dollars of profit — while maybe not super high on a percentage basis is high on an absolute basis,” Nitze said.
Heading into 2024, Nitze said the goal for IQBar is to grow to $50 million in sales and “just continue to grow within the [retail accounts we’re in.”
‘You have to demonstrate that your business is healthy’
Arnaud Plas, co-founder and CEO of custom hair and skin scare brand Prose, said that while there was increased industry chatter going into this year that DTC brands need to become profitable, that wasn’t the driving factor that led his company to prioritize profitability this year.
“We’re going to do around $135 million [in revenue] this year,” Plas said. “That’s the size where anyway, you have to demonstrate that your business is healthy and that you can be profitable.”
According to Plas, Prose achieved profitability in May and hit a mid-single-digit EBITDA in August.
Much of the work to achieve profitability, though, started in 2021, according to Plas. That’s when Prose, which was founded in 2017, hired a COO, a CFO and a CMO.
“Part of their agenda was really to reinforce the foundation of the company from a process perspective, organization perspective and profitability perspective,” he said.
That meant doing RFPs for everything from shipping providers to suppliers to see where Prose was spending money, and to make sure the company had a solid foundation going forward. Another big factor that helped Prose this year, Plas said, is that he feels like the performance of Meta and other digital ad platforms has finally stabilized following Apple’s iOS 14 rollout in 2021. Prose has also invested more incrementality testing, to make sure it is spending its marketing dollars efficiently.
Plas said the launch of skin care products in June was also a big driver in helping the company reach profitability. Plas described the launch of skin care as “a big success beyond our expectations.”
In particular, the skin care products have a high repeat purchase rate so far, with a repeat rate of close to 70%.
“We knew that [skin care] is a category where people tend to be a bit more loyal,” Plas said. “Which makes it harder to acquire customers. But then once you’ve acquired them, they’re actually more loyal.
Right now, Prose sells just three skin care products: a custom cleanser, serum and moisturizer. A big focus for the company will be expanding that assortment in 2024 and in the coming years. Maintaining profitability is also important.
“It’s one thing to break even — but now we want to be profitable in the full year next year,” Plas said.
What I’m reading
- A few months after filing for bankruptcy, Amyris has auctioned off the Jonathan Van Ness hair brand JVN Hair for $1.25 million.
- Online e-commerce platform Zulily is suing Amazon over alleged price fixing with its suppliers.
- Chinese tourists used to be a major focus of luxury brands and retailers. After a three year pause, they’re back — but their spending patterns have evolved.