How To Win In Today’s Highly Competitive D2C Market
How to stand out in a crowded landscape? Design, marketing, or distribution — pick three.
“There are three hypotheses that could be true as to why a product is not successful in the market: It’s either not the right product, it’s under-branded, or it’s under-marketed”
I’ve been watching the consumer space at an arms length. The company I run, Synapse, is deep in the enterprise ecosystem, and as an investor with Graduate Fund most of the companies I’ve helped have been focused on enterprise. In the ever-evolving consumer landscape I’ve had a hard time understanding: what are the ingredients you need to launch a successful consumer brand?
I found out my friend from Dorm Room Fund, Haris, was starting a company focused on building and launching consumer brands, and I knew I had to pick his brain about what D2C startups have to do to succeed.
In founding his most recent company Nameless Ventures, Haris brought together co-founders with expertise in design and supply chain to complement his marketing background. Prior, he focused for several years on marketing as a founder/advisor/consultant and founded a growth marketing agency ScaleUp Labs that was acquired after hitting a 7-figure run rate. He’s also taken on interim CMO stints at brands whose products have been sold worldwide at Apple, Nordstrom, and Target.
Some highlights from our chat:
- “The cost to advertise on FB has risen 9x in 5 years. That was still sustainable and efficient for most companies, for those first 4 years. But today and moving forward, it is damn hard. I know a significant amount of D2C brands who’ve lost their ability to scale profitably or have just outright become unprofitable, in the last year.
- “Perhaps this product is actually branded perfectly for the audience it’s going after, but there’s an entire other audience that is just as large who’d also love this product, if the branding was tailored towards them.”
- “It’s a bloodbath to get the right consumer attention and build profitable brands. There are a lot of great f*ing products out there right now.”
Why do you need all three — supply chain, distribution, and great product/brand?
Everyone knows each of these parts individually plays some sort of critical role in the success of a brand, but the key difference in the last year or two is that you really need to crush all 3 of these in order to win in the next 5 years.
For about 3–5 years you could win off of just one: a great supply chain, great distribution, or a great product & brand.
Factories could win on Amazon through their supply chain, performance marketers could win off of just great distribution via profitable performance marketing, and product-centric founders & designers could win through just building something great.
Those three didn’t really have to overlap as much in order to succeed. That’s not the case anymore.
It’s largely a function of the fact that there are a lot of great f*cking products out there right now, and it’s more costly than ever to reach the right consumers.
It’s more costly than ever to reach the right consumers.
Let’s say you’ve got an okay-product, but stellar distribution. Well, you might profit for a period of time on first-purchase, but if your product isn’t great, you’re not generating repeat purchases & referrals. As you saturate your audiences on media buying and hit a wall after your first $10M or so in revenue, you can’t rely on acquisition anymore as profitably — repeat purchases are the only way you really build a sustainable business that wins in this space long-term.
On the other hand, if you’ve got an incredible product but not much of a distribution advantage, you’ve got 2 issues: a) your product might never really find product/market fit and truly scale (I’ve seen this a million times with great products), b) lesser quality products might out-market you and flood the marketplace, and that competition drives stronger innovation that catches up to your “great product” before you even got a chance to own a piece of the market.
On the supply chain side, this is a fairly under-appreciated segment of D2C. There are incredible advantages you gain from having some sort of larger control or advantage of your supply chain. Your cash flow, your product lead times (which are crucial in demand forecasting and not selling out your best SKU’s too early), your COGS / margins, and your ability to intimately control the production, personalization, and development of new SKU’s could all bring deep, deep advantages relative to your competitors. I’ll dive into this piece a bit later.
How do you scale a great brand without being at the mercy of Facebook?
FB, or media buying in general, shouldn’t be driving 100% of your revenue. You should diversify with other outlets early and build out scalable acquisition funnels across the board — content, community, PR, repeat purchases, word-of-mouth, etc. If 90% of your customers are coming in through paid, that’s going to be really scary. Not just because your business it at the mercy of FB or Instagram…but because that tells me people aren’t buying again or telling their friends, and you also haven’t found any sustainable acquisition channels for the long run. If people aren’t buying again or referring their friends, nor are you able to drive acquisition through other methods, then you should ask yourself: Do I have the wrong brand? Do I have the wrong product? Have I built a product for the wrong audience?
FB, or media buying in general, shouldn’t be driving 100% of your revenue.
The thing that I pay most attention to is the ratio of where our customers are coming from. It’s sort of like a pie chart → what percent are coming through paid, what percent via word-of-mouth/referrals, what percent via repeat purchases, and what percent via organic discovery (PR / google / social). I’ve got certain percent I want each of these buckets to fall into, and since some of these are hard to measure, we’ve got a few hacks to identify and attribute where our customers come from if they weren’t directly driven by our efforts.
Key takeaway: your distribution ties into how healthy your product and your brand will be. The earlier on you diversify your acquisition channels, the more profitable and scalable you’ll be in the long run. I can’t tell you how many friends ended up losing all of their profit and scale because they relied 100% on Facebook for their first few years, and didn’t spend the time diversifying their efforts in other ways and building proper foundations to scale their audience long-term, whether it’s through content, social, or community.
The Nameless strategy is 1) Build what people need, 2) Get it in front of them. How do you figure out what people need?
It breaks down to 3 phases: where to look (in XYZ category / audience / etc), what to compete against, and then what to develop/launch.
Phase 1, Where To Look → What underlying themes within society exist today that will allow certain products to outperform due to an incredible demand or a rising market that has yet to be tapped? For example: Gravity Blanket pioneered the weighted blanket movement. Them and many others ended up finding incredible demand within the next 12–18 months (Gravity Blanket did $15m in Year 1 alone) because there was significant demand for products that reduced anxiety and a lesser stigma around discussing the topic on social.
Phase 2, What To Compete Against → Once we narrow our focus based on the criteria above, we’d spend time identifying key trends and opportunities within that narrowed focus to understand. This is through a mix of:
a) Chatting with friends across DTC / agencies / retail / manufacturing to identify innovative products or under-tapped opportunities that people are seeing.
b) Researching trends across Google keywords + Amazon in order to understand where demand is increasing and what key ingredients / types of solutions are seeing an incredible rise (i.e. is there a “collagen protein“ trend rising).
c) Using our own hunch and personal problems to think through great products that we personally need, then validating this through chatting with friends, and performing research via (b).
Phase 3, What To Develop/Launch → Spend several months talking to consumers/potential customers, build samples of the product and continue to test them with consumers, and further study similar products/brands to better understand the opportunity for that specific product and positioning (branding, price points, etc).
For the last point above, the #1 thing we’re focusing on now is: why does this product/brand have an incredible opportunity to drive repeat purchases and be ingrained within people’s daily lives (if applicable)? My partner Victor has a great understanding of consumer behavior and building products with that as the #1 focus (formerly founded productivity app Everest and built a design agency where he’s designed products & UX for the last 10+ years), so he spends a large chunk of his time on product development and talking to customers.
When you find a product that already exists, how do you decide if it’s worth competing with?
There are three hypotheses that could be true for a given product in the market that’s not succeeding.
- It’s either not the right product (doesn’t solve the consumer’s needs)
- It’s under-branded (branding does not resonate with the target audience)
- It’s under-marketed (distribution strategy is underwhelming)
I think people forget just how massive the CPG market is. The above 3 issues don’t need to be super obvious flaws nor will they be easy to identify for any given product — for example, the “underbranded” piece could be as nuanced as, perhaps this product is actually branded perfectly for the audience it’s going after, but there’s an entire other audience that is just as large who’d also love this product, if the branding was tailored towards them.
Because of that, it gets harder to identify which of the 3 above might be the key opportunity we can tackle relative to the existing products. It could be a mix of all 3, but you’ve got to know which of the 3 is driving the real reason for the lack of success and where the real opportunity is.
How important is a great supply chain?
A great supply chain is a key advantage that isn’t as critical today or the last 5 years, but will be significantly more critical in the coming few years.
The barrier to entry to build a great product and have an efficient supply chain is not nearly as high as it was 10 years ago at the start of the DNVB (Digitally Native Vertical Brand) movement.
Because of that, founders who are able to identify and capitalize off of much more unique supply chain advantages have a strong opportunity to develop a really compelling business. It ties into your cash flow, your product lead times (which are crucial in demand forecasting and not selling out your best SKU’s too early), your COGS / margins, and your ability to intimately control the production, personalization, and development of new SKU’s.
Here are a few anonymous examples of supply chain advantages, which often times relate to very close partnerships with factories or through outright ownership of a factory:
- A friend of mine owns his entire manufacturing process, and the entire operation was built in his HQ with the rest of the team. As a result, he can design, develop, and produce new products / styles / personalized SKUs in just a few hours time, and can also control his cash flow much more easily because he’s not buying out 5 months worth of inventory in advance and hoping that his demand forecasting for each product was accurate. During the holiday season, he literally would ramp up production and which products to produce based on how well his ads were performing for specific SKUs. It was amazing to see.
- A factory-owned D2C brand found significant traction earlier than expected and was looking at 5x growth in a few short months. Any brand in that space would likely be screwed for a few months, selling out of their inventory and spending months producing more. But, since they were factory-owned, they can scale the production capacity for best-selling SKUs as they wish, and they shipped their products straight from factory-to-consumer (China-to-U.S.).
- A factory-owned D2C brand in the bedding space developed one of the most compelling growth strategies I’ve seen in D2C. Since they owned their production and likely have a healthy balance sheet, they decided to fight the super-competitive bedding space by offering a literal free trial for their product. I’ve never seen that in consumer goods, other than free samples of wellness products. This is a $200 item being offered for free trial, allowing you to place an order for $0 and then only get charged if you don’t return it. They placed a bet that people would love their product and not want to return it, and that bet proved worthwhile; I can guarantee you their acquisition costs were several times lower than any competitor. **Note: this is very different from “free home try-ons” a-la-warby parker and similar co’s, with the difference being that Warby tackles the indecision and personalization element of which product to buy, whereas here it’s about convincing buyers who may not have otherwise been okay with the price point or wanted the product to then try it and eventually purchase.
What advice would you give to new D2C entrepreneurs?
For the last few years, there have primarily been two types of D2C founders. The very distribution-focused, and the very product-focused.
A lot of the product-focused founders came from tech backgrounds, and were great at spending a significant amount of time talking to consumers to build the right product. What often happened to founders in this category was that they took a very long time to find traction post-launch and had trouble scaling. The slower you grow and the less customers you can iterate with and speak to, the slower you might also solve other problems with your business — whether branding iterations, messaging shifts, or identifying who your most valuable customers will be. You just don’t generate enough data quickly.
On the other hand, the distribution-focused founders often found really strong levers to easily scale to a few million in revenue in under 12 months, but failed to build a sustainable brand because they didn’t focus much on the product and consumers. These founders often hit scary walls on their business 2–3 years in and may have had strong volatility on profit margin throughout the lifecycle of their business.
For any D2C founder today, both of the above are incredibly crucial. For a time the distribution component was more important (when media buying arbitrage was too damn good), then for a while product was seen as more important (as beautiful branding and easier supply chain came into the mix), and today it’s both. As more competitive products and great brands enter the market, and as distribution further becomes incredibly challenging, it’s more important than ever to build key advantages and expertise in both of these segments if you really want to compete.
How do you start small on the distribution piece, with a thought towards scaling?
Think about the type of product you’re building:
Let’s say you’re building a high-priced good with an intent-focus (i.e. mattresses) that’ll likely generate minimal repeat purchases, but is highly profitable on that one purchase? Then you need to focus early on building key top-line distribution advantages to match intent, content marketing to capture intent, flooding the PR circuit to pile up social proof, and finding ways to more efficiently scale your performance spend so that you can generate consideration within your target audience until they readily have the intent to buy (i.e. have them know about your product early on, then when they do need a new mattress, you are their choice).
Or are you building a daily-use product in the $30/month price point, such as a vitamin? The playbook you’ll have to build out early on is on being able to win on community and retention (i.e. loyalty), and optimize your brand and distribution strategies for that. That means the resources and team you build early on might be more focused on content, community, and lifecycle marketing rather than a much heavier expertise on media buying and acquisition.
The frameworks to scale different types of products and brands will all face different challenges. A $30 product is built on loyalty and retention. A $200+ product wins on awareness & education.
If you want to figure out how best to build your playbook, look for products that have faced similar frameworks of challenges — not similar products, but more-so frameworks (i.e. similar price point, usage habits, intent vs. value prop driven, etc). Study what they’ve been able to do and are doing to scale (their ads, emails, landing pages, content, etc).
Now back to Nameless Ventures — why launch products within the company, instead of spinning out a company for each product?
We don’t intend on having each of these brands spin off into separate teams, offices, resources, and capital. The focus we have is opposite from traditional startup studios: in most studios, the goal is to for the sum of its parts to be greater than the whole (spin off new companies, raise capital for each company, and scale), whereas our focus is on building a parent company in which the whole is greater than the sum of its parts.
We want the parent company to build significant moats around supply chain & distribution that then allow us to develop and scale each new brand with a stronger advantage than the last. The focus is on building partnerships with factories, retailers, and publishers/celebrities at the platform/parent-company level, allowing us to mix and match different partners for new brands.
As each brand scales, it contributes to the growth of the next one — the retailers and publishers that contribute to that brand are potential partners for our next one.
Lastly, keeping all of our operations and execution under one closely tied parent company allows for much more knowledge sharing and better execution than if they were spun off into separate teams. As we face XYZ challenge for one brand (for example, trying to succeed for a subscription-driven product), that allows us to crossover those learnings into a new brand with similar challenges.
Do you see yourselves as the next P&G?
“We’re building the next P&G” is a very cliché thing that everyone says in the industry. We intentionally want this to be owned and operated as a parent company and want the true business to be the top-co itself rather than just a platform to spinoff new companies, and so in some respects we are more similar to P&G than an Expa or Atomic.
We know a lot of parent companies in the space that have been done really, really well. Everyone’s sort of taken their own spin on it. Some are focused heavily on one category (food & beverage for example), others are focused on one key advantage (retail relationships), and others have focused on a mix of these strategies. Some of our friends and peers who have launched similar businesses in the last 1–3 years have seen incredible traction: one experienced 30x growth in one year for just one of their brands, another hit a $100m run rate in less than 2 years for the top-co, and others are now leveraging their balance sheets and team to buy-out other brands.
Our key focus is on building products with powerful distribution advantages. With a strong focus on equity & rev-share partnerships with media publishers, celebrities, and influencers, and a strong pipeline of relationships with wholesalers and big-box retailers, distribution is our #1 focus. Building great products and brands is obviously essential and still core to what we do (we can’t win without that), but the execution focus and advantage that we are operating on is a focus on unique distribution moats.
You write some small angel checks. What do you look for in founders that you personally invest in?
For D2C investments specifically, I look for founders who have a DEEP understanding in one of the 3 key categories: marketing, design, or manufacturing. All 3 is obviously ideal in a founding team, but if it’s just one, that’s sufficient enough because any great D2C founder will focus on key hires in the other 2 categories ASAP.
For any general investment outside of D2C, a “cheat mode” advantage on relationships is key. My operating bias is that I’ve focused on building companies that have a strategic opportunity to win through relationships, and so it’s how I assess founders — my last business was an agency and its growth was entirely driven on relationships, and with Nameless our competitive advantage is our distribution moat that has been built purely through relationships across factories / media publishers / celebrities.
Key relationships in your industry (or the ability to generate them) allow for a “cheat mode” in more ways than one — critical distribution advantages, ability to generate customers/leads/partnerships through your network, ability to generate critical insight and learnings in your industry (i.e. if you know top founders or execs in your industry and can candidly chat with them about the market’s dynamics or challenges they’ve seen), etc.
What’s your “cheat mode” at Nameless?
Our cheat mode at Nameless is our key relationships and partnerships for both supply chain and distribution, driven by our past lives and ventures.
On the supply chain side: One of my co-founders built a $10M / year manufacturing and distribution business. Through this, he’s developed strong relationships with key factory executives around the world in several categories, and has also formed key relationships with big-box retailers like Bed Bath & Beyond, TJ Maxx, etc who are interested in private-label partnerships.
On the distribution side: My previous businesses (agencies) as well as through companies I’ve advised have led to key relationships in media & entertainment, allowing us to build a pipeline of equity & rev-share partnerships with some of the largest media publishers, celebrities, and influencers in the world.
The two things above have already proven to be fruitful in our existing deals and pipeline. We’ve got compelling retail partnerships in the works, are in legal/deal-term phases with some major publishers and celebrities, and have gotten incredible supply chain advantages for the first brand that we’ve already launched.
If you’re building an early-stage company (however early — even idea stage!) reach out to us. At Graduate Fund we back super early founders and help with connecting to angels and other investors, forming the pitch deck, and helping out with all the other challenges and pitfalls that come with building an early-stage company. Email talktous@graduatefund.com, or me directly at bruno@graduatefund.com.
