Reevaluating the DNVB
In 2016, Andy Dunn, the CEO of Bonobos, wrote a Medium post entitled, “The Book of DNVB” in which he defined the DNVB (Digitally Native Vertical Brand) and its benefits over other types of e-commerce. He sums up the DNVB by saying the following:
The DNVB is a brand, and that brand is vertical. 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. VC’s sometimes think these should be valued like technology companies. Some of the valuations still reflect this misguided notion. These are retailers, not tech companies.
To make the above quote more concrete, some examples of DNVBs include Harry’s, Casper, and, of course, Bonobos. These are companies that sell primarily online and not through third-party retailers. They tend to have dressed up websites and pretty brands, and their core customers are millennials.
DNVBs, including Bonobos, have experienced many success stories in recent years, but today, while I was doing work on some companies that operate through a digitally native model, I wondered: what are the limits of this model? When is this model effective, and when is it ineffective?
First, let’s look at some success stories:
- Dollar Shave Club acquired by Unilever for $1b
- Bonobos acquired by Walmart for $310m
- Unilever has been in talks to acquire Honest Company for over $1b
- And a whole lot of companies have raised a lot of venture funding
I may be missing an acquisition or two above, but I think an important point holds: the venture funding being poured into theses DNVB brands (such as Casper, Allbirds, and Glossier) has not necessarily translated to many successful exits. To help us understand why, let’s take a step back and consider the real value that DNVBs can offer customers.
Ultimately, the benefits of any consumer-facing product can break down into the following categories:
- Perception of Quality
Customers should decide which products to buy based on some function of the above three variables. But in what cases do DNVBs enable products to improve on these dimensions?
- Price: Price is likely the most straightforward for DNVBs. Because they sell direct-to-consumer and therefore bypass retailers, there is no middleman to eat away at margins. As a result, if the company wants to, it can take the same margin as larger brands while offering products at a lower price. This is especially true for products that are simple to make. For products that require a lot of R&D or upfront costs, the lack of scale of DNVBs may force them to increase the price of their products.
- Perception of Quality: Notice how I don’t say that only “quality” is important. At the end of the day, a brand may offer quality products, but if people don’t trust the brand enough, product quality isn’t worth a dime. DNVBs struggle to convince customers that quality of a small, online brand compares to a larger, more established incumbent. Therefore, DNVBs work well for goods that people can afford to take a risk on, perhaps because they are inexpensive, or because they are purchased frequently.
- Convenience: DNVBs obviously have large convenience advantages. Purchasing is seamless, sites are friendly, and delivery is usually fast.
Based on the above, in order to be successful, DNVBs need to be on the right side of an equation that looks something like:
Convenience Change + Price Change + Perception of Quality Change > 0, where the above variables are negative if the DNVBs are worse than the status quo, and vice-versa (although we can assume convenience change is pretty much always positive).
The above essentially means that DNVBs with big price or perception of quality disadvantages can’t succeed. Let’s check that logic against some of our use cases. First, Dollar Shave Club is basically the perfect DNVB because (a) it offers a huge price advantage and (b) people are willing to test its quality because razors are purchased frequently. Second, Bonobos, while also successful, exited at less than a third of the valuation Dollar Shave Club received. The same price advantage is not as clear for Bonobos, and purchasing clothing is a much harder sell from a quality assurance perspective than purchasing razors. As a result, the Bonobos application of men’s clothing to the DNVB model is not as seamless as Dollar Shave Club’s application, although it was obviously still successful (I would guess in large part due to its friendly and seamless return policy that makes perception of quality less of a hurdle).
Taking this one step further, what can we say about other spaces that are experimenting with DNVBs? Given that M&A activity is actually lacking, what types of brands might generate the highest valuations in the future? Let’s think about some specifics:
- Shoes (Allbirds): Likely a very similar dynamic to Bonobos, although Allbirds offers “most comfortable shoe in the world” quality advantage that never quite existed for Bonobos, making it arguably a better application.
- Vitamins (Ritual, Elysium): Price is a concern because of R&D costs, but perception of quality is an even larger issue. People may struggle to feel confident in the product quality.
- Luggage (Away): Luggage tends to be expensive, so price shouldn’t be an issue for a DNVB here. Perception of quality may be a hurdle, as luggage is an infrequent purchase that people don’t want to mess up.
- Cosmetics (Glossier): Price once again should not be an issue, given widespread and common cosmetics recipes. Because cosmetics products are varied and purchased frequently, perception in quality should not be a concern. In fact, opportunities likely exist for companies to demonstrate quality advantages through sourcing organic ingredients, etc.
- Mattresses (Casper): Like luggage, price should not be a problem, but perception of quality might. Showrooms (which Casper has long employed) help by enabling prospective customers to try out the products. Importantly, the convenience delta is likely higher in this space than in others (because of how much better having a mattress delivered to your door is than the previous status quo), offering more leeway for this space to be weaker on the perception of quality point.
Obviously, there are many more applications, and this is only a list off the top of my head, but hopefully it accomplishes three things:
- Demonstrates that we have a framework through which we can evaluate DNVBs. We can evaluate (i) price change, (ii) convenience change, and (iii) perception of quality change, and make a rough guess as to how those variables stack up for specific types of products.
- Shows that, following this framework (and as the limited historical information demonstrates), the best DNVBs are the ones where convenience and price advantages are obvious, and prospective customers feel confident taking a chance on purchasing a product with uncertain quality (overcoming an unclear perception of quality). Expensive items tend not to fall in that category, although there are measures companies can take (Bonobos offering easy returns, Casper having mattress showrooms) to counteract that reality.
- Addresses one of the first questions in this piece about why M&A activity has actually been slow with the DNVB companies. This model probably only applies in a sustainable, long-term profit-generating way to specific types of products on the right side of the equation mentioned earlier. Many of the DNVB companies are also early-stage, meaning we should expect to see more acquisitions of companies offering products that fit well with the DNVB model.