1. DNVBs are the Next Big Thing. They are growing nearly 3x as fast as the average e-commerce retailer. The top 75 DNVB retailers generated $8 billion total in 2017, which was 44 percent growth compared to the year before. Look out, world!
While it’s still incredibly early in the history of digital, vertically-integrated brands, many are beginning to turn entire industries on their heads. (source)
2. To qualify as a DNVB, you must sell online, directly to consumers (no third parties), and control your product all the way from warehouse to customers (no middlemen). Examples:
- Harry’s Inc (razors)
- Blue Apron (meal kits)
- Casper, Nectar (mattresses)
- Rad Power Bikes (boosted bikes)
- Proper Cloth (custom dress shirts)
- Article (online furniture)
- Brilliant Earth (diamonds)
- Warby Parker
- Casper
- Everlane
- Glossier
- Harry’s
- Dollar Shave Club
- Walker and Company
- Alo Yoga
- Allbirds
- Bonobos
- Soylent
- The Honest Company
3. DNVBs win because of unit economics and branding.
4. Unit economics: Margins can be upwards of double that of e-commerce. E-commerce runs teeny, tiny margins. DNVBs have healthy margins. When you own the full supply chain (the “vertical (V)” of DNVB), you have more control over price and, therefore, margin.
“The product gross margins are at least double that of e-commerce (e.g. 65% versus 30%). The contribution margins can be 4–5x higher (e.g. 40–50% versus 10%). This radically transforms the economics of the vertical commerce compared to e-commerce. Vertical commerce can make money. E-commerce, not so much. (source)
5. Brand is the single biggest differentiator for DNVBs versus competitors. Branding is everything. Branding leads to customer loyalty. Branding extends throughout the customer experience. Branding improves the value of what’s being sold. DNVBs thrive because their customers love the brand. Competitors thrive because customers love the price. Brand is forever, price is fleeting.
6. DNVBs are not e-commerce. In the Venn diagram of DNVB and e-commerce, yes the two circles overlap a little (some brands may be both), but fundamentally the two are different. There is a huge gap between the unit economics and brand experiences of DNVBs vs. e-commerce.
The e-commerce channel serves as an enablement layer for DNVBs, not the core asset. (source)
7. DNVB marketers have incredible amounts of data at their fingertips. And they know how to use it! Data = better marketing. Better marketing = lower costs. Lower costs = higher margins. When you fully control the supply chain the way DNVBs do, you have the luxury of capturing customer data throughout the buying experience. This is a HUGE competitive advantage. DNVBs know what to do with this data (see “strategies” below).
8. To fully understand DNVBs, you must understand their fears. Fear #1: Amazon. How do you compete against the world’s biggest store? Three ways: 1) Invest in your unique brand, 2) Develop a deep expertise of your product and your customers, and 3) Deliver a world-class, end-to-end experience.
Everything revolves around the customer. Yes, the product itself needs to be great, but so too does the whole experience: hearing about you from a friend, following you on social, seeing your ads, visiting your website, ordering a thing, opening a box, then loyalty, loyalty, loyalty.
The inherent promise of the DNVB model is to put back the consumer at the heart of the value proposition by offering a buying experience that is as memorable as the product. (source)
9. Broken record alert! DNVBs care a LOT about branding and community. Brand is the stone that allows David to take on Goliath.
10. The core marketing strategies of DNVBs are:
- Engage with customers on social media
- Run targeted ads based on actionable data
- Leverage micro-influencers and word-of-mouth
- Virality (early-adopters, referrals, direct traffic)
- Community building and brand identity, including pre-launch strategy
- Strong focus on SEO
- Alternative marketing channels include offline events, celebrity endorsements, pop-ups, etc.
11. DNVBs are masters at picking a category ripe for disruption and mastering that category’s product and customer from A to Z.
Additional reading:
The book of DNVB
The article that started it all, written by Bonobos founder Andy Dunn
What is a DNVB? & The Rise of the DNVB
Solid overviews of what makes a DNVB a DNVB.
Why DNVBs will survive the rise of Amazon
The three factors that make the DNVB model defensible.
Digitally Native Resources for the Digitally Native Consumer Economy
Exhaustive and well-researched collection of DNVB articles and resources.
The direct-to-consumer landscape
Famous for its spreadsheet about D2C categories.
The subtle art of (not) understanding DNVBs
How to know which DNVBs are worth investing in.
Diagnosing Direct-to-Consumer Disruption
Discussion of the two main ways that D2C disrupts the incumbents.
How DNVBs grow: We Analyzed 9 Of The Biggest Direct-to-Consumer Success Stories To Figure Out The Secrets to Their Growth — Here’s What We Learned
Downloadable guide, discussing specific tactics that DNVBs use to grow their biz.
Mary Meeker Report E-commerce 2018
Data!
Glossier on my face to Allbirds on my feet — D2C from head to toe
Great explanation of how DNVB and e-commerce differ.
Direct-to-consumer marketing course @ Yotpo
All about the rise of D2C.
Keep scrolling for excerpts from some of these articles.
(If you happen to find another article you’d like to see on this list, please drop me an email. I’d love to hear from you.)
Cliff’s Notes:
What is a DNVB?
by Digital Commerce 360 // April 2018
A digitally-native retailer first started selling online, taking advantage of lower overhead and easy access to consumers across the country to grow their business. Vertically integrated brands control the product from the factory floor to the consumer’s hand.
Retailers can grow beyond selling only online, moving into their own stores or working with individual retailers. Often these physical spaces serve like showrooms that shoppers often don’t walk out of with the product in hand.
Showroom example: Brilliant Earth
Many retailers don’t own the factories, but they do specify exact product details, making what they sell directly to consumers unique or even customizable. This allows retailers to control where and how their product is sold, and also allows them to collect data on who is buying the product to better market and improve their products.
DNVBs’ ability to create unique products and connect with niche audiences insulate them from some competition with Amazon.com Inc. (№1) and other big retailers. And the direct-to-consumer model keeps prices down as well, making their unique wears more affordable to the niche or mass-market audience they want to draw.
The Rise of the DNVB [HuffPo]
by Juliet Carnoy, Pixlee // Feb 2017
Jeff Jones, a managing partner at Andreessen Horowitz, refers to this as ‘e-commerce 2.0.’ However, the brands emerging in the retail sector that are seeing the greatest growth are quite different from their e-commerce predecessors.
Another name for these brands: v-commerce brands.
While v-commerce brands may ultimately expand offline through select partnerships or brick and mortar stores, they control their own distribution tightly.
Advantages of DNVBs
- Direct sourcing of materials
- Enhanced brand experience
- Alternative distribution methods
- Increased engagement on social media
Direct sourcing of materials
Digitally native vertical brands are collapsing inefficient legacy supply chains by cutting out intermediate layers… They facilitate a rapid feedback loop so that they can quickly iterate on product design and demand and use their relationships with factories to better market their materials and to instate price transparency for customers on the true cost of their products.
(example: Everlane)
Enhanced brand experience
The digital vertically integrated brand is Internet enabled, born digitally, and interacts with customers primarily online. It seeks to build a strong brand lifestyle that speaks to people and shapes their choices. To build such a community, v-commerce brands present and design their products in a highly compelling way and in a consistent voice.
DNVBs’ products meticulously represent the brand identity and both their products and their packaging are designed to be shared on social media. These brands rely heavily on visual content displayed across a multitude of marketing channels. To scale content creation and to meet content needs, DNVBs often rely on user-generated content.
(example: Glossier owes 90% of its revenue to its fans on Instagram)
“V-commerce brands place a high emphasis on real customer photos and videos.”
Alternative distribution methods
For digitally-native vertical brands, the e-commerce channel serves as an enablement layer, not the core asset. By selling directly to consumers, these digitally native consumer packaged goods brands are not only able to control their own distribution but are also able to better control their brand stories and relay messages directly to customers. As a result, they collect massive amounts of customer data that allows them to test and develop new products.
Increased engagement on social media
These brands place importance on community-building through one-to-one marketing.
Through strong presences on today’s leading social platforms, v-commerce brands bring their customer service and content to the platforms on which their customer base is active.
They build digital experiences that customers can engage with and share their brand allegiance about. These experiences cater to Millennial and Gen Z customers in particular, who make up the majority of digitally native brands’ customer bases.
The book of DNVB [Medium]
by Andy Dunn, Bonobos // May 2016
Its primary means of interacting, transacting, and story-telling to consumers is via the web.
The name of the brand is on both the physical product and on the website. The DNVB requires the commercialization of an e-commerce channel, but that channel is an enablement layer — it’s not the core asset. VCs sometimes think these should be valued like technology companies. Some of the valuations still reflect this misguided notion. These are retailers, not tech companies. They cannot spend 10% of sales on technology and 30% of sales on marketing forever.
The profit-losing nature and small scale of the DNVBs leads most traditional retailers to ignore or underestimate these little tadpoles. Then Unilever bought Dollar Shave Club for $1 billion. Smart people woke up. The reality is the brand of the future is a DNVB, but the future is not here yet. It’s in the corner. Give it a couple decades to take over the room.
“The product gross margins are at least double that of e-commerce (e.g. 65% versus 30%). The contribution margins can be 4–5x higher (e.g. 40–50% versus 10%). This radically transforms the economics of the vertical commerce compared to e-commerce. Vertical commerce can make money. E-commerce, not so much. Bonobos is now a breakeven business. It took us a decade. I am not proud of that, it takes a fair amount of scale, a wonderful team, and lots of learnings along the way to turn the corner. “Pioneers get the arrows, settlers get the gold.” Turns out it takes ten years to build a brand.”
The digitally-native vertical brand is maniacally focused on the customer experience.
“The difference between e-commerce and DNVB is profound, and it requires an appreciation the role brand plays in inspiring people, speaking to them, shaping their choices, and a sharp understanding of how different the economics and growth trajectories are.”
Differences in the unit economics and the contribution margin cohorts are profound — apples to oranges.
“Brand matters. These brands have a soul that is not easy to quantify at first.”
“The e-commerce company is a channel; the DNVB is a brand. The e-commerce company has low margins; the DNVB has high margins. The e-commerce company can grow unbelievably fast; the DNVB can’t grow as fast, but it’s more valuable in the long run because it’s about more than just price.”
The direct-to-consumer landscape
by Teddy Citrin, VC @ Greycroft // June 2017
Legacy brands which have traditionally sold through third parties are realizing that they don’t know their customers and they are getting undercut by new entrants that can improve the value chain and customer experience by going direct.
Example: Crest sends toothpaste to Costco which sells Crest.
Example: LG sends TVs to Best Buy which sells LG.
Example: You go online to buy a Quip toothbrush from Quip. Quip gets all the data on your conversion experience.
The risk for big companies:
A few large incumbents dominate the market, which means pricing could be inflated and traditionally there may be little incentive to provide excellent customer service.
There hasn’t been much product innovation in the category in the last couple of decades which means building a strong brand is the most important objective.
A world class team and an authentic brand that resonates with consumers can take a seemingly uninteresting market by storm.
Spreadsheet: Market analysis
The subtle art of understanding DNVBs
by Cayetana Hurtado, VC at Balderton // Aug 2018
“DNVBs are a subcategory within e-commerce.”
The main differences between DNVBs and traditional e-commerce businesses are:
- DNVBs are brands that have end-to-end control over the production, marketing, and distribution processes or are fully vertically integrated.
- They benefit from higher margins (c.2x gross margins and c.4x higher contribution margins vs traditional e-commerce companies) although they often have lower top-line growth rates.
- DNVBs have a stronger focus on branding and community building; it’s all about the customer experience.
- These companies are born and mainly operate online (they are digitally native!).
Most of the popular brands people use were born with our parents, not with us. Think of Nike, Topshop, or Estée Lauder; not to mention the older generation of Levi’s, Ray Ban, or Chanel.
I think DNVBs are the brands millennials and mainly Generation Z will end up being loyal to.
DNVBs should improve one or more of the following points:
- Model of access, usually driven by distribution innovation (e.g. Casper, Dollar Shave Club, Harry’s).
- Product innovation, what’s new or improved from a product standpoint (e.g. The Honest Company, Soylent, Simple Feast).
- ‘Democratization’ of a category i.e. better price-point / quality (e.g. Warby Parker, Everlane, Feed).
DNVBs have more targeted marketing thanks to data usage. This should lead to lower costs. DNVBs do most of their sales online, engage in social media with their customers, and have a better understanding of what users are looking for, helping reduce marketing costs by being more targeted and leveraging micro-influencers marketing.
A DNVB is, ultimately, a brand. Understanding the brand identity is key. What does the brand represent? Who are the target customers? What’s the vision? This determines everything, from the product through the packaging and distribution, to the marketing strategy. What does it mean to buy, own, use, or wear that brand?
When it comes to DNVBs, you should also consider habit formation and brand loyalty. For these businesses, branding can ultimately generate customer captivity, and create a ‘psychological switching cost’ for consumers. But branding alone is not enough. You need something else to build it, such as a better technology and know-how that leads to product innovation and / or better distribution and access, all with an outstanding user experience. Then, ‘flawless’ execution completes the secret sauce.
Success has been driven by one or more of the following strategies:
Product
- Product innovation and high quality and / or lower price point
- Design and manufacturing control
- SKUs depth (or not!) and versions evolution
Marketing
- Community building and brand identity, including pre-launch strategy
- Virality (early-adopters, referrals, direct traffic)
- Leverage data and targeted marketing, with strong focus on social media (including micro-influencers), SEO, and alternative marketing channels (offline events, celebrity endorsements, pop-ups, etc.)
Where we will focus: DNVBs
by Joyance Partners
Digitally Native Vertical Brands have these attributes:
1. Sold online primarily; bricks and mortar for marketing only 2. Can be micro-manufactured and shipped straightforwardly; preferably, but not always, using new tech materials or ingredients 3. Allow for a type of product design or economics not feasible in traditional channels (e.g., subscription boxes, customized products) 4. High customer lifetime value (LTV) 5. High margins on the product in part due to new materials, manufacturing and piggyback shipping 6. Propensity to be shared via social media or garner earned media
7. Timelessness of the product (products like household goods, personal care, and over-the-counter medications stay relatively consistent over time; fashion, by contrast, does not)
Originally published at www.kevanlee.com on December 20, 2018.
