DTC comes of age, the first time around
DTC (direct-to-customer) distribution has been around for decades in various forms although for many people it feels like a recent innovation. Brands such as Ikea have built global businesses around it. But DTC really took off in the mid-2010s as digital technology enabled companies to realise the tremendous e-com benefits of selling directly to consumers online and for a while some very successful brands such as Warby Parker prescription glasses, Allbirds leisure shoes, Dollar Shave Club and Peloton exercise machines all established brands and thrived on DTC a decade ago.
DTC’s advantage over traditional retail
The attraction of the DTC model initially lay in cutting costs, particularly retailer margins which can account for 30-40% or more of gross revenue, while adding additional customer value. In addition, DTC brands were able to create a direct relationship with customers giving them greater insight into their preferences and enabling them to respond quickly to changing customer needs. Social media and content creation also allowed them to tell their brand story in a deeper, more personal way and to present their values and beliefs in a richer online environment than they previously could by merchandising their products in store. The cherry on the cake was that it also made it possible for them to focus on specific customer markets and segments that would otherwise be impractical to target and reach in the physical world.
With low barriers to entry, the DTC industry quickly grew to approx. $15 billion in sales by 2019 in the US alone, with thousands of start-up and early stage companies across a wide range of industries using DTC models to reach consumers directly and build sales. This coming of age for DTC’s couldn’t have happened at a better time. With the onset of the Covid pandemic in 2020 it became the lifeline distribution channel for many businesses, as customers increasingly shopped online. It looked like a certainty that DTC would continue to grow rapidly at the expense of traditional brick & mortar retailers. But now things are changing fundamentally again.
Storm clouds are gathering for DTC 1.0
In recent years the DTC marketplace has become increasingly challenging, particularly for early-stage, smaller brands and start-ups. Just in the last few years alone online advertising costs have tripled. Average CPMs on Facebook for example are up over 5,000% since 2012 and increased by 61% YoY in 2022*. Similar levels of media inflation are reflected by Google, Amazon and other online transaction marketplace ad rates.
Spiralling CPM/CPC rates are not the only headwind faced by DTC pure-plays. Many brands are learning that building reliable, SEO-optimised and user-friendly web sites takes significant investments in technology, expertise, content and on-going maintenance, as well as advertising promotion. At the same time the challenges of managing stock, distribution and customer service themselves are becoming more apparent.
Perhaps most significantly, online DTC distribution channels have become a very crowded marketplace. With limited opportunity to truly differentiate themselves, getting noticed and standing out amongst a sea of similar, ‘me-too’ products is challenging, costly and time consuming. And building scalable brands online has proven to be difficult to say the least. Crowded, online DTC market places are a recipe for encouraging aggressive price competition, inevitably leading to semi-commoditisation.
In a nutshell, smaller DTC brands that thrived in the fertile conditions of the mid-2010s are increasingly being squeezed between rising costs and tighter gross margins. At the same time, longer and better established brands have increasingly added DTC channels and sales to complement their social media and brand activities and to build their 360 omni-channel distribution strategies. Both these trends are set to continue or even accelerate.
The emerging new DTC 2.0 channel and its future in the omni-channel
Previous pure-play DTC brands are now finding that they are reaching a ceiling in the growth for their online sales. There is only so much activation that can be done towards the bottom of the online sales funnel. Conversely, DTC channels are ill suited to create durable, distinctive and differentiated brands on their own at the top of the funnel. Increasingly these companies are finding the need for traditional retail, if only pop-ups on occasions, to bring visibility, customer engagement and trial. Other increasingly popular ways of reaching out to the physical world include brand partnerships, influencers, sponsorship, events and PR. Together these activities can animate the brands and give them a higher profile and tangible real world presence that DTC alone cannot do.
For the foreseeable future, larger well-established brands will continue to invest in DTC as they follow their customer wherever they go, across all channels of communication and distribution points. They will continue to be attracted by the improved margins of selling direct and the insights that closer relationships with customers gives them. In many respects DTC is becoming just another, albeit critical omni-channel to reach customers wherever they choose to be. But DTC is no longer a viable stand-alone business model for any company seeking to build a sustainable and scaleable commercial brand.
The legacy pure-play DTC brands must now focus on building their brand equity and establishing their distinctiveness in order to differentiates themselves from competitors in increasingly crowded online markets. Only by making a shift to prioritise brand affinity and engagement with their targeted customer segments can they hope to continue to enjoy commercial and marketing success in the newly emerging omni-channel DTC market-scape.
* Business Insider reported that Meta’s cost per thousand (CPM) in 2022 increased by 61% YoY, reaching an average CPM of USD $17.60. Meanwhile, TikTok’s CPM increased by a huge 185% YoY, peaking at an average CPM of USD $9.40. Google also saw programmatic display CPMs increase by 75% YOY.