Week 7: What is DTC, Anyway??

Let’s talk Direct-to-Consumer 101

Introductory note: While this 10 Part Guide is essentially a Direct-to-Consumer playbook, the term ‘DTC’ is often a bit of a misnomer when describing the eComm industry. Most businesses are ‘digitally-native’ in that they are started online but are often more multi-channel businesses — meaning they sell online (direct) but may also do sales through wholesale, affiliate, Amazon, and third-party. More often than not, that is healthy and smart.

A Brief History

The 1990s
It wasn’t until the advent of the internet, and the mainstream introduction of ‘electronic-commerce’ in the mid ‘90s, that a new model for selling direct to a consumer emerged. By the late ‘90s, consumers had web browsers and portals such as Netscape, Microsoft’s Internet Explorer, and AOL connecting millions of Americans at home to the World Wide Web.

Netscape Navigator, (Version 2.01) 1995

Along with the web browsers, came access to thousands of new eComm brands and marketplaces, like eBay and Amazon. Internet users were now able to put in their credit card information, and have everything from pet food to books show up at their home in a few days.

The 2000s
The early 2000s gave rise to specialty online retailers like Zappos and Diapers.com. These category-focused eTailers helped to create a new playbook for online shopping. The convenience of shopping from home on the internet, combined with a new level of customer service, was something special, and highly lucrative.

The success of the Zappos and Diapers.com model opened the floodgates for a new class of entrepreneurs who realized that the eComm boom was just getting started.

Zappos.com in the year 2000

The 2010s
While brands like L.L. Bean and J.Crew had been selling ‘direct to consumer’ via mail order catalogs for decades, the early 2010s introduced a new type of online direct to consumer brands such as Bonobos, Everlane, and Warby Parker. These brands, and their founders, helped kick off the DTC revolution as we know it today. As Andy Dunn from Bonobos put it in his seminal 2016 Medium piece, they saw a new business approach to build ‘digitally-native, vertical built’ brands (DNVB).

warbyparker.com, 2011

These were exciting years, and the team at Gin Lane was fortunate enough to be at the center of this revolution taking place in New York, San Francisco, and online.

Some of the brands we worked with at Gin Lane

Online-first businesses like Bonobos manufactured their own items and sold them exclusively through their site (of note; years later, all three brands currently sell through their owned retail stores). These brands showed that it was possible to find manufacturing partners, identify a market opportunity, spin up a website, and start selling goods directly to potential shoppers. This revelation started one of the greatest periods of entrepreneurship in our history — American eCommerce innovation.

This was the spark that led to many of us here today.

DTC Today: Where are We Now?

2020s: A Matured Landscape
Over a half decade later, we are in a much more mature, and competitive landscape.

2020s: More Platforms, Options, & Customers
Today, there are many, many more customers online, and affordable, safe platforms that merchants can use to access them.

There is also a large and vibrant community to lean on, no matter what marketplace you’ve chosen to focus on, be it Amazon, Shopify, Magento, WooCommerce, etc.

Amazon & Shopify’s growth since 2013

DTC in 2022 is a world full of knowledge, endless services, and constant demand — with an incredibly accessible playing field, via our phones and social platforms.

However, there are some pitfalls; more competition, increasing costs of marketing, and a rapidly changing terrain.

2020s: The Rise and Fall of Facebook Advertising
In the early to mid 2010s, there was a harmonious relationship between DTC businesses, Facebook, and its recent acquisition, Instagram. Brands were able to target specific consumer at a level of detail never before possible, and to do so relatively affordably, as the space was nascent.

That has drastically changed over the last few years; as demand increased, the cost of advertising through Facebook has sharply risen.

Last year, Apple’s iOS 14.5 update defaulted its smartphone users to opt out of being tracked across the web by third-party advertisers. This move to protect consumer privacy, further added complexity to Facebook’s advertising ecosystem by essentially making it less effective for brands seeking to re-targeting to existing and potential customers.

Apple’s iOS 14.5 update

What was once a goldmine for DTC brands a half decade ago, has gotten a lot harder, competitive, and more expensive.

2020s: The Pros
Product/Market Fit
It’s faster and easier than ever to spin up a DTC business. You can ‘test’ communication, pricing, marketing, even product development faster, cheaper, and safer online, versus anywhere else.

Profitable
If you can build a strong direct channel, it can be an incredibly lucrative model because you are not giving 30%+ to a third party for every sale you receive.

DWC
Going digital-first is one of the most powerful, and fast, ways to build a community. By being ‘direct-with-consumer’ (DWC), brands can listen, learn, and grow with that community.

Today, there is no better way to get feedback, buy-in and evangelize a core group of customers than doing it digital-first. Remember Kevin Kelly’s essay ‘1,000 True Fans’ from Week 2 on Community!

Kevin Kelly’s 1,000 True Fans visualized by Jeroen Riemens

2020s: The Cons
Scalability
Selling direct today can be a difficult model to scale. Most small to mid-sized businesses can find a healthy initial audience cost-effectively, but to expand into additional ‘concentric circles’ of customers, these groups are a bit more skeptical, and thus require more coaxing and more marketing, which costs more money.

Lack of Defensibility
While great branding and marketing helps, defensible moats are hard to come by in our industry. There is not a lot of unique IP, patents, or protection on many global goods. If you build something successful, there are sure to be copycats soon after. This drives up the cost of marketing, which is necessary to differentiate yourself and outbid competition, but can cause confusion for your customers.

Distribution & Promotion

“Good companies have great product and are OK at distribution.
Great companies have great product AND are great at distribution.”

“Consumers have more options than ever and that continues to grow. It’s not just about if you build it, they will come. You need to also master how to reach your customer.”

- Ben Sun, co-founder of Primary Ventures, early-stage investors in New York centric startups like Jet, Mirror, Latch, and Pattern.

Ben Sun, Co-Founder of Primary Ventures

As Ben points out, when selling direct, the onus is on you to drive all acquisition and traffic; not your third party retailer, a wholesaler, or physical locations with foot traffic.

It’s a lot of work for entrepreneurs to take on, in addition to maintaining and managing the day-to-day and your P&L.

Advertising & Acquisition Costs
As we detailed above, another challenge today for DTC brands is increasingly expensive advertising and acquisition costs. These channels are vital to drive in qualified traffic, but are challenging and costly.

2022 DTC: Suggestions

Pace yourself
Thinking of selling direct more as a paced marathon, than a blistering sprint.

Today, we’re seeing DTC businesses focusing on profitability, minimizing burn-rates, and taking their time to set up solid products with organic marketing that resonates within core communities.

This is smart. We saw many digital-native brands in the late 2010s raise and spend lots of capital on acquisition and marketing, without finding paths to profitability. That software-centric mindset doesn’t 1:1 play out with consumer goods, and led quite a few businesses astray.

Today, we’re seeing a new crop of entrepreneurs focus more on setting up a more-paced foundation. From a solid base, you can test paid marketing — slow and steady — to see what works. What might have taken 6–12 months a life cycle ago in DTC, can now take 3–4 years. However, this route can save you a lot of money, equity, and future headaches.

AYR, 2022

“Not to sound exactly like an inspirational poster, but, today, anyone with a point of view can connect with an audience. Small means fast, scrappy equals scarcity, DTC creates exclusivity, cash constraints require creativity.

Embrace the challenges, figure out how to use them to your advantage, and know that no marketing budget can approximate authenticity.”
Maggie Winter, co-founder of AYR

Maggie Winter, Co-Founder of AYR

As Maggie illustrates, being scrappy, authentic, and creative are important traits for a modern entrepreneur.

Think Multi-Channel
In aiming for profitability and sustainability, DTC brands are increasingly looking for more diversified ways to generate revenue, online and off. A few years ago, it might have seemed that you could build a growing eCommerce business through just online sales. Today, we’re seeing a more sophisticated, multi-channel approach.

In exploring a multi-channel route, here are some helpful suggestions:

Drop-ship
Drop-shipping means “to deliver a product to a customer without having to physically see, pack or ship the item yourself. Items sold are delivered directly to the customer by the manufacturer rather than by the retailer, with no cash and carry option.” — Michelle Renee

While this model-ship doesn’t cost you anything upfront, it can still require a good amount of integration and logistics. If you can find qualified partners that have audiences you can’t reach yourself, then this can be a solid additional source of revenue for your online brand.

However, if a partnered site is only selling a few items a month for you, the juice may not be worth the squeeze!

Wholesale
Wholesale is great for larger orders, but you get about 30% less on the sales price, and payment terms can be tricky unless you have a factoring lender or partner.

If you have the margins to support this, then wholesale can be great. Additionally, wholesale can be valuable exposure for your nascent brand. Larger national retailers can put your brand in front of thousands of new customers. Niche retailers also can help you target extremely qualified potential shoppers.

Retail
And, finally, you can opt to open your own brick and mortar, which is still direct, but is costly to set up and often a distraction from your core online skills. This unpredictable play is also harder to scale. We are excited to see the rise of services like Leap, that are helping to provide turnkey services for online-first brands looking to explore doing their own retail experiences.

If you do explore retail, creating a little world of your brand can be important. People love unique experiences, and will help spread the word to friends and family if your store has something special to it.

Digital-first as Leverage for Wholesale
Justin Seidenfeld, the co-founder of the DTC humidifier brand Canopy (and co-founder of the product development company for many DTC brands, Doris Dev) aptly describes leveraging multiple channels against each other in a cost and time effective manner:

Canopy, 2022

“Canopy initially established traction in earned media and editorial placements, appealing to our target audience — skin enthusiasts — in the publications and outlets they turned to for beauty advice. The traction and exposure we earned in highly regarded beauty outlets helped open doors and facilitate conversations with retail partners, without our having to deploy huge amounts of capital against paid media.”

Justin Seidenfeld, Co-Founder of Canopy, and Doris Dev

Lastly, Jared Johnson, the Co-Founder at Season Three, had the following words of wisdom to share on a multi-channel approach:

Season Three, 2022

“The most important shift has been operators realizing that DTC is a channel, not a business model. The start of the DTC boom was marked by brands that looked to change how we shop and the lack of availability through retail was sold as a consumer benefit, rather than an inconvenience.

We’ve since learned that it’s incredibly difficult to scale a brand that is only available through a single online store. Blended wholesale and direct business models are more commonplace now and we’re beginning to see the rise of marketplaces, where wider distribution meets curation to create value for consumers.

Today’s successful brands are able to utilize omni-channel distribution strategies, while maintaining a clear and non-commodified brand identity.

Season Three launched as a DTC brand, but we’ve recently begun wholesale relationships with stores like Nordstrom, who help to broaden our availability to customers that would have been expensive or impossible for us to reach through our direct channels.

We’ve also begun to explore curated commerce opportunities with marketplaces that already own an audience that would be expensive for us to replicate. With each of these opportunities, we’ve placed a premium on controlling how our brand and product shows up.”

Amen.

Jared Johnson, Co-Founder of Season Three

In Conclusion

Digital-first
Today, think of DTC more as ‘digital-first.’

Going online first can allow you to find your product/market fit cost-effectively, while garnering valuable initial feedback directly from your first customers.

By listening and responding to your customers, you can build an evangelized and bought-in community of supporters. We called this DWC (Direct With Consumer) because it’s less about one-directional communication, and more about a two-way conversation with your audience. Building a brand in public with your audience is one of the most powerful tools of going digital-first!

Pattern saw this done exceptionally well by Letterfolk, the second brand to join our family of brands. They have a large and engaged audience that actively gives feedback, suggestions, critique, and requests.

Pattern’s fourth brand, Letterfolk

Grow Your Brand Organically
As we discussed in Week 2: Community, starting to focus on organic marketing and positioning early on will help you learn from your early-adopters and what the market is telling you.

Test Paid
Next, start testing acquisition techniques. If you can gain traction online, have a solid product/market fit, and good margins, thoughtfully explore sharing your brand and to a larger audience. To learn more on navigating the world of paid advertising, make sure to read our Week 3 post on Foundational and Performance Marketing.

Test Multi-Channel
If you can handle a more complex supply chain, demand forecasting, and cash flow management — then it’s safe to explore other channels such as wholesale, Amazon, or retail. They can be big boosters to your bottom line if you have the right setup!

This way you’re meeting more customers where they’re at, but you may not take home as much of the pie for each sale. If your margins can handle this, and you have potential customers at these channels, then this is exciting.

Lastly…
Customers today are everywhere and it’s important we meet our customers where they are! However, the best way to build up to selling ‘everywhere’ is to start testing your business online, digital-first. This ‘direct with consumer’ approach will set you on a path to success across all channels.

Good luck!
Pattern 🏡

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