8 min read
Published On: 2022-07-19
The direct-to-consumer (DTC) market is on the upswing and has changed the buyer landscape. In one clean swipe, DTC brands cut out the intermediaries and sell their products directly to their end customers.
DTC brands are also called digitally native vertical brands (DNVB), as they originate online and reach customers only digitally. According to eMarketer, the US DTC ecommerce brands grew from $31 billion in 2016 to $129 billion in 2021 and are projected to reach $175 billion in 2023.
DTC brands are not without challenges. As more startups join the DTC industry, competition is increasing and so is the cost of acquiring and retaining customers.
Some of the key challenges faced by DTC brands include investment in brand awareness and customer acquisition, logistics and supply chain, product personalization, severe competition, product differentiation, and customer retention.
For a DTC brand to succeed in a competitive market, just focusing on one aspect such as its rivals isn’t enough. Porter’s Five Forces provides an efficient framework for analyzing the impact of various market forces on a company’s brand and strategy.
Even though originally established for the traditional brick-and-mortar businesses, these five forces are equally applicable for new-age ecommerce and DTC brands. The five forces are:
Let’s look at each of these forces and how they impact a DTC brand and its strategy:
DTC brands entering an already crowded product market need to clearly differentiate their product. They can focus on gaps in the market and position their brand as a solution to those problems. In doing so, they increase brand awareness, recall, and preference.
Misfits Market, a newly anointed unicorn, works with farmers and makers to rescue organic foods that don’t look picture perfect to consumers through a subscription service. Founder Abhi Ramesh saw an opportunity in selling good produce that retail stores were rejecting for not being pretty enough. Misfits Market competes in the $8 billion online grocery market which includes a $1.8 billion ship-to-home market.
Misfits Market works with all stakeholders in the value chain - from the producers to the end customers - to deliver value. Misfits Market helps customers make big gains and reduce food waste by shipping produce that would have otherwise been thrown away for being oddly shaped, for instance. They offer 20-40% cost savings as they source directly from producers.
Misfits Market entered a grocery market dominated by players like Whole Foods and Costco, who offer physical store experiences. In addition, it competes with other DTC grocery subscription services like Imperfect Foods and Hungry Harvest, who compete with them in the ‘ugly produce’ segment.
Misfits Market scores high for offering savings to customers along with the feel-good factor where they are helping reduce food waste. Misfits Market’s closest competitor in its segment is Imperfect Foods. Misfits Market scores over its competitors by delivering produce to more zip codes than their competition. They also offer a big 50% off on introductory offers, encouraging first-time users to try their sustainable produce. Misfits Market continues to add new delivery locations to increase their customer base.
In 2021, Misfits Market was servicing 400,000 customers in more than 37 US states.
DTC brands face competition from different quarters everyday. In addition to brands that adopt the pure DTC model, several established players are also entering the DTC market to reach out to new audiences.
For instance in 2021, Nike earned $4.7 billion in DTC sales alone and is looking at increasing its share in the digital market. The same strategy is being adopted by other brands like Under Armour and Adidas to benefit from selling directly to consumers.
Misfits Market, our earlier example, faces competition from several new players apart from existing ones. Imperfect Foods, PlateJoy, and Farmbox Direct are some of the new threats.
In other industries, such as fashion and home decor, there are new DTC brands that are emerging fast, giving competition to existing players.
Supply chain management can be a competitive advantage or a disaster for a DTC brand. The entire traditional wholesale and retail network is replaced with direct order to delivery of the product to the end customer.
DTC products that incorporate customer needs can source their raw materials in bulk to ensure the product does not exceed customer budgets or put a strain on the company’s profit margin. Other factors such as poor order fulfillment, and improper inventory management by partners can make or break DTC brands.
Misfits Market has helped differentiate its offering by working assiduously with its supply chain partners. It works with California organic farmers like Jacobs Farm del Cabo, Home Organics and others to ensure consistency of quality, helping them resolve operational issues like reduced labor supply, extreme weather, and the pandemic. They invested in their in-house technologies for better inventory management and deliveries.
Customers drive sales and have bargaining power that can affect the brand. If product differentiation is low, customers will switch easily to other products. In some markets, large buyers can drive the brand price up or down.
For instance, the free-to-play (FTP) mobile games market primarily relied on whales or big spenders for in-store purchases. They spent as much as $500 in marketing to acquire a whale. As the whales bring in more players who then spend on in-store purchases, they can determine the rise or fall of the FTP game. These players have higher Average Revenue per User (ARDU) and are more invested in the game.
One brand that understands this and has implemented a robust customer service policy is the beauty subscription Birchbox in collaboration with Zendesk.
They use Zendesk to provide customer support, educate their customers, and to collect customer experience feedback. This feedback comes to them through Facebook Messenger, phone, text messages, and on-site chat. Birchbox responded to their early customers through email. Customers are increasingly using SMS to share customer experiences and Zendesk helped Birchbox make that transition.
Birchbox has a revenue of $192.2 million in the U.S and it credits its success to their customer-obsessed approach.
DTC companies fight not just for the customer dollar in their product category but other categories as well.
Sunbasket, a meal kits subscription service, provides certified organic and gluten-free meal kits and ready packages served in insulated, recyclable boxes. They offer farm-fresh seasonal ingredients to the customer’s doorstep. They offer classic meal kits serving 2 or 4 people that take less than half an hour to prepare. In addition to this, they also have the fresh-and-ready meals you have to simply heat and serve; the pre-prepped meal kits allow you to make meals under 20 minutes.
Though Sunbasket may seem like an entirely new product, it is in fact a good substitute for Misfit Market’s organic grocery subscription. Customers will weigh the pros and cons between buying fresh ingredients and preparing them from scratch and having meal kits delivered to them, particularly small families.
It may seem that DTC companies are at a disadvantage because they do not have traditional retail and distribution channels at their disposal. However, DTC brands have a huge advantage and that is they have direct access to customer data without intermediary noise.
DTC companies use customer data to gather insights about their customers’ habits, buying preferences, and other customer-related data to differentiate and personalize their offerings.
Care/of, a personal nutritional brand is an example of a DTC company that personalizes its products for customers based on data. At the very beginning of their journey, the customers take an in-depth quiz, which is available right on their home page. This quiz gives the company invaluable data about their customers’ body and health and their nutritional requirements.
It helps them understand what their customers’ needs are and based on this data, they customize their offerings and packages. Such data, referred to as zero-party data, combined with first-party and third-party data, can help the brand build its strategy and positioning in the market.
Stitch Fix is an online styling subscription service. They deliver personalized clothing and accessories subscription, which eliminates the need to shop offline or online. How does Stitch Fix get their recommendations so right? Data science and machine learning algorithms enable the Stitch Fix team to combine it with answers from customers.
The questions asked to customers range from basic details like height and weight to preferences and lifestyle to arrive at a customer’s profile. Data is also collected by tagging the merchandise and seeing if it matches the client profile. Customer feedback on receiving the merchandise further adds to existing data. This unique blend of real-time customer feedback with technology results in an output, which can further be refined by human stylists, who pick up customer nuances.
This understanding of customer data and customization of product has resulted in Q1 results of $581.2 million net revenue in 2022, and an increase in net revenue per active customer to $524, a 12% increase year on year.
DTC brands can counter the threat of new and existing competitors by having a brand story. Prospects and customers can be featured as characters in the story. The story needs to connect with why customers want to buy the product. Conflict is introduced in the story which should resonate with customer pain points. The customer is given the option to achieve resolution by providing more product information if the customer is in the awareness or consideration stage. If they are in the decision stage, a call to action button will help initiate resolution.
Quip, the oral care company, has a great brand story. The story begins in the dentist’s office in which the story-tellers (Quip founders) are advised to use a cheap electric toothbrush to counter over-brushing with a regular toothbrush.
The existing electric brushes they find are clunky and complex. They decide to cut the middleman and go straight to the customer, handling the journey from design to delivery.
Below this brand story is a call to action that takes the customer to a page with product listings that includes toothbrushes and other oral products.
DTC brands consciously choose to market straight to the customer. They can leverage on this unique position with well thought out content and promotions to strengthen brand loyalty and trust.
DTC brands can use social media, performance-based ads, podcasts, tie-ins with customers and share user experiences to nurture a community of loyal, repeat users who value the brand experience and will not switch.
Two powerful ways brands build lasting relationships with their customers that are relatively new in marketing are influencer marketing and communities.
Instead of simply having the influencer (Tiktokers, Instagramers, and YouTubers) do product placements, DTC brands can go for an influencer collaboration. Brands need to find a fit with micro-influencers and influencers, who will help in content creation as well.
Birchbox initiated a three-month campaign called “Love, you.”, involving micro influencers from diverse backgrounds (gender, sex, age), who shared their self-care routines. Influencers were selected for their engagement potential and their posts were about being vulnerable and authentic, rather than the products themselves. The campaign was hugely successful with a conversion rate of 61% and generated a positive brand sentiment of 86%.
Modern Fertility, a reproductive health company has built a strong online community to foster brand loyalty. Members discuss fertility and questions are answered by experts through Slack.
This community is private and women discuss health, fertility, careers, and life plans in a safe space with other women. Members of the community (who may or may not be customers) go from being a disparate entity to being a part of something bigger where they feel they can gain from the wisdom of the collective and its support.
Modern Fertility conducts webinars, Q&A sessions, and provides educational material based on the member’s fertility journey. Modern Fertility ensures that their customer does not see the brand simply as a provider of reproductive goods, but as an expert who they can trust.
Marketing through these formats helps in micro segmenting and servicing customers in a more meaningful way. They need to communicate with customers throughout the customer journey and not just at the conversion stage to enable a deep brand relationship.
Asket, the environmentally conscious and minimalistic fashion brand is a good example of clear and effective communication with customers. Their brand story encompasses mindful fashion. The brand journey and its values are elucidated - zero compromise, transparency, and lifecycle responsibility. The look and feel of the website matches the brand message. Each brand value has a page dedicated to it.
A Help button works like a shop assistant. It helps collect contact details and questions from customers. This information is used to analyze what customers seek and at which stage of the buying process they are in. It is also used to develop and introduce new products. This information can be incorporated in the design and development of new products as well.
In DTC businesses, supply chain management and order fulfillment are an integral part of the brand experience.
Despite great brand stories, strong promotion, and content marketing, a brand can falter when it comes to fulfilling orders. It is very important to have strong partnerships to ensure timely delivery.
This would include shipping options, fulfillment options, last mile delivery, warehouse management, and a clear returns & refunds policy.
All these factors when strengthened aid a seamless customer experience from order to delivery. If the customer faces obstacles in these steps, and is met with unsatisfactory customer support, the odds of the customer switching to other brands are very high.
AÏYA candles started off in the founder’s cupboard. Soon, however, with the burgeoning sales book, they looked around for an effective supply chain partner. Candles are fragile and need bubble wrap packaging, with additional packing material like crinkly paper for unboxing.
First, they tried to hire employees for this process but did not achieve much success.
They then partnered with Airhouse, a logistics partner, who took over storage, packing, and overall order fulfillment. Their app provided AÏYA with a dashboard to monitor any exceptions. This helped AÏYA achieve high customer satisfaction and shout outs for service and reduced costs.
The role of technology in today’s DTC business cannot be underplayed. Starting from the collection of data points from customer purchases, automating marketing processes, and using supply chain management software, technology is a key differentiator.
The modern tech stack aids in improving customer experience, inventory management, and order fulfillment.
Moda enables you to use zero-party and first-party data to help your DTC brand measure its performance, capture the interest and activities of the customer’s physical world, lead generation, analytics, fraud prevention, and contextual product recommendations.
Incorporating technology into DTC brands yields greater efficiency and lowers operational costs. Collecting and analyzing consumer data helps incorporate the consumer voice and nurture brand relationships.
VC, Henry McNamara, who invested in DTC brands, such as Allbirds, Rigup, Away, and Acorns advises DTC brands to focus on product differentiation:
“Product differentiation is something that we really need to see. What else concerns me these days in a pitch is when we hear that DTC playbook without much of a strategy on how you’re going to acquire customers beyond paying influencers or pumping money into Instagram or ad words. That’s not a strategy. A lot of people think a brand is just a landing page and a logo. But in our experience, [with] the most successful brands we’ve seen, it’s really a promise, and trust that you build with customers so that they can depend on everything from the interaction they have with a customer service rep, to the product that shows up at their door. That’s what we’re trying to find.”
DTC brands can stay relevant to the customer base by focusing on product/service innovation to reinforce customer loyalty. DTC brands have direct access to the customer voice, which they can incorporate into the brand offering and keep it competitive.