The Evolution of DtC As Told Thru Ad Tech

Darren Herman
Oct 10, 2018 · 5 min read

This was originally posted in my weekly newsletter, The Operating Partner. You can subscribe here.

P&G and Unilever powered the early days of television. With their ad spend (and sponsored content), media companies underwrote and helped produce shows for mass audiences.

Both pricing and measurement were straightforward in those early days. Because TV and radio spots were finite, prices for them rose as TV viewership grew. Meanwhile, measurement could be reduced to two factors: frequency (the number of people who tuned in) and reach (the number of times you reached each person). Pretty easy to quantify, right? (Ha!)

Many years passed — along with a number of wars, presidents, and Yankee dynasties — before the emergence of the Interweb and a new method of addressing audiences. The new medium bears some similarities to static, finite media channels but also differs in some important respects.

Whereas P&G, Unilever, and other advertisers used TV for mass reach, the Internet for the first time enabled targeted reach in an electronic medium. The [correct] theory goes that the more targeted you are, less waste will occur, and your ad spend will thereby be more effective and possibly more efficient. I’ve seen this play out firsthand for brands I looked after prior to BCP, and now in many companies that come to us in diligence or within the portfolio, as well. Targeted reach handily outperforms mass reach.

The key development occurred in the late 1990s when GoTo/Overture emerged and put keyword ad buying directly in the hands of marketers. The early subscribers to Overture and Google were, unsurprisingly, agencies on Madison Avenue. Agencies already managed ad spend on TV, print, radio, and OOH on behalf of their clients and it was natural for digital spend to follow suit and be managed by them, as well. In the beginning, then, the advent of Overture and Google served to further concentrate power within traditional agencies.

However, once agencies started to write big checks to platforms that enabled targeted advertising on search engines, venture capitalists got excited. An entirely new investment category had opened up consisting of advertising and marketing technology companies that sell primarily into agencies. These businesses either sold recurring seats by the year (aka SaaS) or engaged in media arbitrage (where I got to cut my teeth as an entrepreneur — IGA Worldwide and Varick Media Management).

At some point in the late 2000s, roughly around the time of Yahoo’s acquisition of Right Media and the acquisition of Invite Media by Google, we entered into the era of peak venture capital investment into ad/mar tech which IMHO caused a funny ripple on Madison Avenue. These ad tech and marketing tech providers who create simple interfaces to the complex media buying world had to expand their TAM beyond just agencies… as agencies alone wouldn’t create enough revenue to satisfy the demands of the public markets or Venture Capitalists.

The ripple above turned into a large wave… one in which started to cause Chief Revenue Officers to task their sales teams to sell into agencies and directly to brands. Brands, especially smaller, nimble, and digital-first brands started to adopt this marketing and advertising technologies and became a solid sales channel for the marketing and advertising technology world.

The early brands who jumped at this did this because:

1/ They couldn’t afford to hire big agencies so they went directly to the technology

2/ These brands didn’t want a middleman and had the capabilities to pull the media levers themselves

3/ These brands saw the value in owning the data and having carte blanche access to it, not dumped within a data lake at some large agency

Google, Facebook, Yahoo!, AOL, and many others started to take notice and followed the trend.

The same buying tools that were available to agency conglomerates like WPP, Omnicom, Havas, Dentsu, Publicis, IPG, MDC Partners, and others were now available to a small brand with $100,000 in the budget.

Talk about the democratization of an industry. Agencies still exist and they haven’t gone away. They most likely will not because there are good reasons to use agencies for various tasks. But IMHO, the centralization of all media execution within a media agency now and in the coming years is and will be on a decline.

So, with that said, enter the DtC evolution.

An entrepreneur who decides to make carbon fiber pencils can get their product up on an e-commerce platform (Shopify, BigCommerce, WorkArea), advertise it via bottom of funnel tactics like paid search and paid social (Kenshoo, Acquisio), launch a newsletter (MailChimp) and do this all within a weekend — for less than $5,000. And by the way, that $5,000 includes the initial media spend to which the company can test product-market fit and know whether carbon fiber pencils are a good idea.

At the same time, outside the ad and marketing tech world, it became easier to source product for a variety of reasons. Transparency into the sourcing ecosystem has occurred, Alibaba has played a significant role, and 3D printing is now available to put in anyone’s basement. Buying fabric for your new clothing line used to mean a trip to New York City or Milan. Now it means… go online and Google search.

So what happens?

Well, as it turns out, history repeats itself. While all of these modern companies have algorithmically-data-scienced their way to the world of growth, and many have achieved the hockey stick that venture loves… they got and continue to get, stuck. Turns out business is hard. We know that.

But it does not have to be. History will continue to repeat itself (IMHO) and what we used to do will make its way back in some shape or format. Every action has an equal and opposite reaction says, Newton.

With the above stated, I believe — and could be terribly wrong or fashionably right…

1/ Algorithms will get us far, but winning the heart will get us the farthest. Humanity still exists and humans love emotion.

2/. We talk about how important digital is — but frankly, it’s not digital. It’s about Customer Experience. Great experiences know no boundaries.

3/. We will balance the funnel rather than over-index in a media vehicle. Over-reliance on a singular media vehicle is not healthy and we’ll see a re-balance. We’ve proved this has worked with a handful of portfolio companies as well, as, in our prior lives.

4/. A great customer experience driven from data exhaust will enable us to win, similar to how the great sports teams study and optimize to game film and telemetry data. An even greater parallel would be the study of F1 racing, which is basically 85% data…

5/ … which leads me to: data and creativity can co-exist. The *winner* will understand how to make this happen — create a habitat to bring out the best in both and drive the insights into the full product experience.

Why are we getting excited about DtC brands? Content studios (e.g. creativity) and optimization (e.g. data).

I’m sure there are additional items to add but I’ve not fully thought them through.

The takeaway:

1/ We must embrace creativity to break through the algorithmic ceiling.

2/ We must think about the entire experience, not just the physical product itself.

3/ A modern infrastructure to leverage data in ways we cannot even think about yet.

4/ A nimble, agile, and strong to execute upon this.

5/ A ton of DtC companies will peek at the algorithmic ceiling and we’ll have the pick of the litter.

Thank you for reading!

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