The Brand Revolution is Direct
The evolving D2C playbook and lessons brands can adopt
B y now you’ve probably heard of, learned about, or bought something from a direct to consumer brand, especially if you’re an 18–34 year old living in an urban center. According to RetailDive, 40% of U.S. consumers expect D2C brands to account for at least 40% of their purchases within the next five years. This brand disruption has existed for over a decade — Warby Parker was the first D2C to disrupt an industry en masse, which kickstarted an entirely new set of consumer expectations of how products and services could be purchased — but momentum picked up three years ago. A flood of VC investment fueled this growth — upwards of $4 billion in funding has been invested into 400+ D2C brands since 2012. In true fashion to digital-era disruption, phenomena evolve as quickly as they begin, and we’re already seeing major shifts in how these brands interact with consumers. In fact, the term “direct-to-consumer” is already outdated given how these brands have transformed the way they go to market.
What’s certain is, the brand revolution is direct. It’s here to stay, and it’s impacting how emergent and iconic brands alike do business. Let’s dive into how we got here, what revolutionary tactics they’re employing, and what brands can do to win.
Why Direct, and Why Now?
D2C brands hatched during a unique confluence of cultural, consumer, technological, and market factors that created the right conditions at the right time for their genesis. As evident across industries, mobile and social media disintermediated traditional gatekeepers of consumer attention: influence fragmented away from industry behemoths like Vogue, ESPN, New York Times, and Roger & Ebert to social-driven, niche consumer communities on platforms like Instagram and Reddit. Modern consumers no longer browse monolithic department stores that collect an overabundance of SKUs onto shelves. With more convenient alternatives available via mobile, traditional in-store shopping has simply become too cumbersome (which contributes to why we’re seeing a renaissance of physical retail). Consumer attention has shifted, with discovery and learning happening largely on social. Per Adweek, time spent on social media has risen 39% to 140 minutes per day since 2014 and consumers are six times more likely to purchase a product if it includes social media integration.
The implications of this shift were two-fold: consumers seeking a sense of belonging finally possessed the tools for seamless communication with brands, while brands recalibrated their involvement in co-creating brand experiences and attention in two-way communication. Born of this shift was white-space opportunity for emerging brands to reach consumers. Advertising channels naturally shift with consumer attention and D2C brands were quick to capitalize on cheap CPMs across the channels their target consumers were spending an increased share of time on — trending towards social and digital and away from traditional TV and print — in a way incumbents had a more difficult time navigating. Awareness and sales for these brands soared as a result of spending in the right place, at the right time, to reach the right consumers. Per IAB, in CPGs, small to medium-sized manufacturers rose from 39% to 64% in total sales over the last three years. Also illustrative of this growth are D2C shoe brands Allbirds, Jack Erwin, and M. Gemi, who gained 15% in share over the last five years while U.S. shoe store sales fell by 5.2% over the same period.
The rise of e-commerce, and more specifically the comfort and ease of purchasing via direct channels, offered a place to drive newly-acquired customers. E-commerce significantly lowered traditional barriers to entry associated with starting a business, facilitating nearly infinite online discovery. In bypassing traditional retail models — which often markup the price of goods by more than 50% — brands had the ability to pass on cost savings achieved by selling direct via their own e-store front.
The result? A new class of brands that are not only stealing share, but stealing attention. They’re born on mobile and come to life on social using direct consumer data to initiate a virtuous cycle of research and development, personalization, and two-way communication. Consumers are afforded access not just to products that feel hyper-personalized to their tastes, but to a community of like-minded individuals that share the same aesthetic taste and desire for the ultimate luxury, time back in their busy lives. D2C brands are amassing cultural relevance and market share by disrupting across the brand and retail value chain, making it easier and more fun for consumers to interact with.
What do D2C brands do differently?
Across the value chain of business model, product, go-to-market, media, and experience and service, D2C brands are disrupting each step of the value chain to create breakthrough consumer connections.
Business Model. As mentioned, D2C brands began by bypassing traditional third-party wholesale partnerships in favor of direct sales to consumers, subsequently cutting out the middle-man and enabling efficient digital experiences and transactions. D2Cs were able to do so because of a new crop of backend partners that enable more flexible supply chain management (such as Anvyl and Flexport) which in effect decrease barriers to entry by allowing D2Cs to scale up and down accordingly while holding less inventory. McKinsey notes this supply chain agility decreases operational costs by 30% and inventories by 75%. As a result of selling direct, D2Cs are able to capture rich data on their consumers, such as granular product preferences, why they buy and correlated product purchases. This access to relevant data otherwise unavailable via wholesale distribution has given way to the “built for me” experience D2C brands have traditionally excelled at. Storing, analyzing and ultimately leveraging insightful data at this scale is only possible because of the rise of cloud-based storage like AWS and Google Cloud Storage.
Product. D2Cs’ direct relationship with their consumers traditionally began by developing lighthouse expertise in a niche category. As these brands sought growth, they leveraged their category expertise to expand into adjacent product categories. Hims, dedicated to boosting men’s self esteem through targeting common yet taboo health issues, leveraged its reputation and trust to launch Hers. The sister site focuses on affordable, FDA-approved products alongside educational content for women, including products combating similar common yet taboo female health issues like hair loss, acne, and melasma. In contrast to many incumbent brands’ strategy to offer multiple products within one category (a legacy tactic of fighting for shelf space), D2Cs make shopping easier by having the “best one” in a relative category. They are often positioned as providing luxury for less — the best in category, without the hassle of comparison or a “brand tax” often associated with other luxury products. Typically these products are high quality and simple yet functional, which is often communicated via their (seemingly similar) minimal brand aesthetic. This modern look and feel serves to signal status and differentiate from market incumbents, tailoring a lifestyle that extends beyond the product itself. Wearing Cuyana, drinking Haus, or taking Away luggage on a trip signals to others, “I am in the know and care about quality and image, but I’m smart enough to not pay more for form than function.”
Go-To-Market. One of D2C brands’ most targeted areas of disruption is their ability to involve consumers in the brand, encouraging brand advocacy for life. For example, Hill City invites men to participate through its wear-tester program, where real consumers give feedback on fit and style in exchange for pre-released pairs of pants. When Warby Parker asked consumers to create content promoting their experience with at-home try-on, the brand found those who shared content were 50% more likely to make a purchase. Employing co-creation seeds the product bottoms-up, creates long-lasting brand advocates and gives the brand valuable qualitative insight on products and experiences. D2Cs have started to partner with other D2Cs to create unique, remixed collaborations, which also serve the purpose of data sharing and gaining insights on new customers. Frey, a D2C fabric care brand, works with bedding brands like Buffy, personal care brands like Hawthorne and clothing brands like Everlane to swap Facebook lookalike audiences and cross-promote via email and sampling, using valuable, mutually beneficial data exchanges to reach new consumer segments. D2Cs have also innovated with retail models such as waitlists (The Arrivals and TULA), subscriptions (Quip and Flamingo), and 100-day guarantees (Beltology and MVMT) to generate buzz, forecast demand, appear more consumer friendly and turn shopping into a utility. What’s interesting is that as D2Cs plateau in e-commerce growth, they have increasingly been turning to traditional retail. Examples of this turn to traditional retail methods include Harry’s selling their razors at Target, Boodles Gin rotating through Showfields’ pop-up space, or Glossier opening permanent storefronts themselves.
Media. D2Cs began by spending the majority of their advertising budgets on digital and social, which comprised 75% of their marketing budgets historically. Doing so allowed D2Cs to cost effectively reach high value audiences in places where they spend the most media time, while consistently reinforcing brand aesthetic and lifestyle in visual mediums like Instagram. Advertising across these channels allowed D2Cs to be surgical about performance efforts, and track every dollar spent to an outcome. With so many D2Cs increasing marketing budgets (78% did so in 2018) and trying to reach the same urban, Millennial consumers in the same channels, advertising and acquisition costs ceased being cost effective, and user growth slowed, necessitating advertising on other more mass channels like OOH and television. For example, D2Cs boosted TV spend by 60% to $3.8 billion in 2018 as they pursued broader growth. The next challenge for D2Cs will be to assess how media spend in above the line channels translates to sales by using full funnel modeling to connect to performance efforts. But media isn’t just about driving sales for D2Cs — media also serves to create a lifestyle and provide education that reinforces the product story. For example, organic meal delivery service Sakara has invested in building out an entire editorial staff to support its holistic magazine, S-Life Magazine. Similarly, Airbnb launched Airbnb Magazine, with content ranging from spotlight articles or guides to travel-worthy cities, cultural pieces on communities around the world and op-eds on experience opportunities for the wanderlust-driven.
Experience & Service. D2Cs have differentiated in the way they service customers and build experience pre-, during and post-purchase. They use digital-native, emergent tools like chatbots and voice and channels like Facebook Messenger, WhatsApp and Twitter to provide customer service in real-time. Bonobos is widely celebrated for its ultra-responsive support team, responding to customer calls within 30 minutes and delivering a consistent sub-24 hour average email response time. Rarecat, a DTC jeweler, uses an AI-powered chatbot to educate customers about diamonds and other jewels to assist in finding exactly the right piece. D2Cs are also pioneers in loyalty programs. Dollar Shave Club has built a community of more than 3 million consumers over the last five years by ensuring its members feel like they’re a valued part of something unique, with access to benefits like an on-call grooming concierge. Consumer engagement often expands beyond the product itself with value-add services. For example, Hims provides access to telehealth and comprehensive education integrated at point of purchase, and Bonobos offers free tailoring and personal shopping to increase customer engagement at physical retail locations.
What can brands learn from D2Cs?
Clients and industry partners alike aspire to act more like these emerging D2C brands — from cultural relevance to simplicity of experience and beyond — but the reality is, as D2C brands continue to seek growth, they’re searching for the same iconic status that many incumbents already have (and often under-value). While this may be the case, there are lessons that iconic incumbent brands can learn to create modern connections with consumers.
Brands should start by thinking about what “direct to consumer” means to their brand. Is it transforming a sales model? A brand aesthetic? A new approach to partnerships? Adopting a more consumer-centric service model? All? None? Brands can assess opportunities across the D2C value chain, in combination with their audience propensities and current capabilities, to determine where opportunities to innovate exist within the value chain. From there, brands can start to examine their right to win including tactical activations to move more nimbly and better meet the expectations of their consumers.
One of the many ways D2C brands have been able to achieve success so quickly is their tolerance for risk and comfort with failing fast. Every decision is accompanied by a set of hypotheses and a learning agenda, which D2C brands are able to achieve by virtue of smaller teams who are empowered to make decisions (albeit partly due to resource constraints). This is no easy feat for incumbent brands — there’s more at stake, and team structure and operating models often aren’t constructed to accommodate the agility required to get to market fast. Brands can look for ways to inject this “fail fast” mentality where they can, whether that’s through championing cross-discipline teams to tackle new innovation projects, setting up innovation funds to test and learn or rethinking incentive structures to encourage risk-taking.
D2C brands, in addition to being flexible with risk, are flexible in the way they ideate and collaborate. Many look outside of their core discipline for creativity and inspiration, knowing that expectations travel across categories and their consumers don’t shop in silos. This outside-in thinking inspires many modern data co-ops we observe in the space, as well as non-traditional collaborations of brands using partnerships to create culturally resonant new products. Incumbent brands have an opportunity to inject this type of cross-discipline, non-traditional inspiration into their own innovation process and can do so by bringing in diverse perspectives, such as leaders from D2Cs and startups, or subject matter experts with their finger on the pulse. Through this lens, new partnerships can be viewed as a way to test into new spaces before launching into more committed investment efforts. Doing so allows brands to connect with consumers in new ways and signals to consumers a willingness to think differently.
Written by Rhea Manwani (Strategy Resident), Ryan Miller (Manager, Partnerships), and Christina Adranly (Director, Strategy)
