Week 10: The Business of DTC

The Conclusion to Our Series
With the publishing of this week’s article, we’ve reached the final chapter for The Definitive 10 Part Guide to DTC. Before we hop into our final post, we wanted to first thank everyone that has read, shared, saved, and gave feedback on this project. 🙏

The series wouldn’t have been possible without the contribution of so many DTC owners, operators, experts and Pattern team members; all of whom generously shared their time and wisdom. For the Pattern friends and family that helped on the way, thank you as well! For the complete list of articles simply click here, and enjoy. Without further ado, let’s get into Week 10: The Business of DTC.

Know Thyself
Over the past few years, the DTC industry has been re-focusing on profitability and sustainability, versus the growth-at-all-costs narratives of 2010–2018.

This is a good thing.

In 2018 at Gin Lane, we saw this trend emerging (and needing to emerge) , when we conceived Pattern. In the half decade prior to 2018, we saw too many eComm brands being started, modeled, and invested in as if they were a software or tech platform. The expectations to grow like one also followed suit. However, a Silicon Valley growth model approach to consumer goods eCommerce did not prove sustainable.

Slides from Pattern’s initial deck, Summer 2018

We are in the business of selling physical products, whether that is in a store or online, both the margins and the economics are are not ones of software. And that is ok.

Nick Ling, CEO and co-founder of Pattern, explains,

“In our current age of building a brand, we believe you have to be profitable from day one. This means that you have to build your business to 1. optimize for margins earlier, and 2. figure out sustainable ways to grow on the front end.

Margins
This means being laser-focused on your cost-to-manufacture as you go through product development. Make sure you’re developing a product that financially makes sense, ideally aiming for 60–80% gross margins.

Growth
Focus on opening up more channels earlier. You can’t rely solely on DTC given how competitive the Facebook/Google environments are. More and more, we’re seeing folks go into wholesale, partnerships, and Amazon from day one to make that happen.”

Be the Tortoise not the Hare
While the prior decades of tech taught us to ‘move fast and break things,’ we’re seeing our industry today embrace a more thoughtful and considered approach to building eCommerce businesses.

For this chapter of eComm, we see some of the best brand operators creating businesses and team cultures focused on listening, testing, and teaching patience, versus attacking markets and categories with impunity.

Focusing on quality, margins, and customer feedback are hallmarks of good business. It’s what many great consumer goods businesses have prioritized over the past 100 years. What we want to extol in this series is a blend of evergreen principles that have worked for consumer-goods businesses for a long time, blended with a newfound understanding and ability to navigate today’s eCommerce 101 basics.

An inspiration for Pattern was to recreate the customer service, trust, quality and familiarity of the small town general store. Many principles of doing good business have not changed.

In regards to the importance of listening to your customers, Chris Cantino,
the former CMO and Co-Founder (alongside his wife, Jamie Schmidt) of Schmidt’s Naturals, founder of the web3 club Crypto Packaged Goods, and Partner at Color Ventures (with Jamie) explains how to turn lending an ear into a flywheel for your business, and your community,

“Don’t assume what your customers want. Let them tell you, and honor the ones that step up to contribute. Cycle their feedback into your product development and marketing, generating a flywheel and elevating customers into contributors. Now you have the building blocks to create a community where the incentives are aligned and real value can be exchanged.

Chris continues on pacing your business, one step at a time. Here’s how he put it,

“It’s critically important to not get over your skis. The journey is a ladder, with every step giving you permission to safely ascend to the next. If you try to skip all the way to step five — whether it be entering distribution too quickly, launching too many products, lacking the CX to nurture your community — you will fall and have to begin again from step one.”

Wise words.

Sustainable Growth x Profitability = Modern Success

Over the four years, we’ve seen DTC valuation challenges post-IPO and at the private fundraising level. That’s in part because both public and private investors are demanding to see profitability, or true paths to profitability, for brands today. Because of this, a steady-growing business that is profitable can have a significantly higher valuation than a faster-growing or larger revenue business with no profitability.

2021 deals have fallen 14% on average in the six-month post-IPO period, compared to a historical average of a 14% gain, according to Bank of America. Source: CNBC

This is where the sustainability question arises. How can your business continue to produce profits, and grow year-over-year?

The answer lies in the way we manage and drive the businesses. Sustainability is not growth at all costs, super high-overhead, and super high-marketing budgets. It’s not about ‘network effects’ or winner-takes-all mantras. It is not about acting or selling like a high-tech company. Instead, today’s successful DTC business leaders are focused on their eComm-based business growing at a manageable pace with clear financial outlines to profitability.

As Nick alluded to earlier, we believe today’s DTC approach is about focusing on profitability from Day 1; down to the nuts and bolts. Having discipline, making tough decisions, and staying focused are our North Stars.

We asked Éva Goicochea, the CEO and founder of sexual wellness brand Maude on her thoughts for fellow eComm operators. Pattern’s studio in Brooklyn is next-door to hers, and we’ve long admired Maude’s business practices. Here’s what she said,

Éva Goicochea, CEO & Founder of Maude

“Build your business by focusing on strong unit economics across every awareness channel. Most new brands can’t keep up with the varying costs of just being DTC especially if they rely on paid growth so consider your brand, PR, and organic strategies to keep your CAC reasonable.

Beyond that, think omni-channel. If you’re going to disrupt across markets and find deeper visibility, you have to meet customers everywhere.”

Last month Maude, alongside Dame, became the first sexual wellness brands to be carried in Sephora, a true testament to her business practicing what it preaches, while being a trailblazer.

A Rising Tide Raises All Boats
In 2018, we conceived of Pattern’s model to build our own brands in-house (and later, to also acquiring additional great home-goods brands) in part by being disillusioned with the way contemporary DTC brands were being run. It did not feel long-term sustainable. We wanted to own and operate what we were doing versus continuing on as a service provider, but we felt trying to make one high-growth business, in one category, was too risky.

We felt a ‘family of brands’ each focused on slow and steady growth, and brand-level profitability could be a 21st century approach to the traditional CPG hold co’s of the 20th century.

(Left) A slide from our initial 2018 deck shows a model for how a ‘family of brands’ could operate. (Right) This slide shows initial positioning and communication, for how we express a ‘family of brands’ to our community and customers.

Today, Pattern is not alone in seeking to build, and purchase, small to medium-sized eComm brands within both the Shopify ecosystem and the Amazon space. In short, it’s an amazing time to be a profitable DTC business right now. Profitable businesses increasingly have more and more exit opportunities, into multiple types of larger businesses. You can grow your brand to $10M, $5M, even $1M in profitable revenue, and have appealing offers on the table to acquire it.

Pattern is one of an emerging class of hold co’s acquiring profitable DTC brands.

We’re so excited because our industry no longer needs to look at and replicate a handful of billion dollar exits for single-category brands. A favorite phrase of this series at Pattern has been, ‘a rising tide raises all boats.’

A key goal for this series is to help share collective wisdom, insights, and knowledge back to the larger DTC industry. Let’s help each other collectively grow, and operate, our small to medium-sized eComm businesses for sustainable year-over-year, profitable growth. The more we share with each other, the more strong the collective industry is.

Be Flexible
Eva said before, ‘you have to meet customers everywhere,’ and as both Nick and Chris mentioned earlier, thinking thoughtfully about omni-channel is imperative. While slow and steady wins the race, it’s also important to remain flexible and adaptive in your approach. What works today, may not work tomorrow!

Flexibility is crucial to figure how to sustainably, and effectively, meet your customers where they are. You need to adapt with the times, technology, and ever-changing consumer sentiment. This is another reason to make a key part of your business approach to listen to your customers, and talk with your peers. This flow of information will help you stay ahead of the curve. Because we do deal with technology, it’s each of our jobs to dutifully stay abreast of how our landscape continues to evolve.

Eric Feng, former General Partner at KPCB (and Pattern’s first investor), CTO at Flipboard and Hulu, & Head of Commerce Incubations at Facebook, has seen eCommerce’s expansion first hand over the past two+ decades. We asked him for his thoughts on the landscape today, and this is what he had to say,

“It’s been amazing to see the growing sophistication of consumers with eCommerce. From buying through live video, to buying through subscriptions, to buying now and paying later, consumers are truly fluent in online shopping these days. That creates exciting new opportunities for DTC entrepreneurs to build shopping experiences totally customized for their brand — experiences that might have confused consumers just a few years ago, but that today’s shopper will totally understand.”

TalkShopLive is one of the latest live-streaming eCommerce platforms. The channels to meet customers continue to adapt and evolve. It’s important to be thoughtful, and open to new opportunities. src:ModernRetail

In conclusion
It is an exciting time right now to own and operate your own eComm brand! Whether Shopify-based, Amazon-based, or blended, you have more options than ever to not only start a business, but also to either grow it, or sell it.

Remember, slow and steady wins the race, plan for sustainable growth, and be focused on profitability for each decision you make. If you keep those principles in mind, love what you do, and listen to your customers, your business has a bright path ahead.

Lastly, let us know what you think, any questions you have, or additional thoughts you may want to see added here. ✨

Thank you again and good luck!
Pattern 🏡

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