Why are Digitally Native Brands Revolutionizing Retail, and Why No Legacy Brand is Safe
Setting The Table
Over the past 100 years, the Retail and Consumer Brand landscape has been dominated by monolithic giants who’ve leveraged massive scale, powerful distribution networks, and tight control over limited advertising mediums to choke competition and own market share. These factors served as barriers to entry for smaller Brands who could not compete with the resources that the dominant market players wielded at their disposal.
In the last 15 years, the rise of internet connectivity, social media, and technology has all but eroded these barriers to entry, which has given rise to a new set of challenger Brands. Andy Dunn — who co-founded Bonobos in 2007 — first coined the term: “Digitally Native Vertical Brand”, in a 2016 Medium post where he outlined the shared DNA of this new crop of Brands:
- Digital-first Brand platform
- Vertical Integration (they design and produce their own products)
- Obsession with serving their customer's specific needs and preferences, while building a 1:1 Brand:Customer relationship
It is important to the context of this argument that I distinguish Digitally Native Vertical Brands (DNVBs) from Direct to Consumer (DTC) businesses. The use of DNVB and DTC has become widely interchangeable, however, DNVBs are typically both backward (design, manufacturing, supply chain) and forward (distribution, sales channels, customer care) vertically integrated. DTC companies in a general sense focus on forward vertical integration but maintain all other critical elements of Brand development and customer relationships that DNVBs carry.
In addition to establishing WHAT a DNVB/DTC business is, there has been considerable content published with respect to HOW these Brands compete and succeed. Though the knowledge base on this topic is vast, I point to Web Smith’s DTC Playbook as a well-structured argument via 2pm Inc
So that leaves us with WHY do these Brands exists. This is a topic that I have very seldom come across and as such I will make an attempt at articulating why I believe DNVB/DTC Brands exist in the world, why they are proliferating, and what it means for the future of consumer markets.
The Nature of Brands
The term ‘Brand’ has been in our lexicon for quite some time (17th Century Germanic/English), and while it’s a well-worn word, the usage of the term Brand has increased dramatically — particularly in the last 20 years. In this way, Brand — and more specifically the manner in which we assemble Brands to outwardly represent our preferences — has become deeply important in shaping our own individual human identities.
In a fundamental sense, Brand refers to differentiation; whether that is in reference to a product, service, characteristic, image, value or identity. A particular individual or organization’s Brand is the means by which consumers interpret how Brand A is different from Brand B — even if they offer similar utility with respect to product or service.
The alignment of any given in-market customers preference set with the products, services, characteristics, image, values, and identity of a Brand creates a powerful relationship called Affinity
How Consumer Preference (Affinity) is Plotted
The practice of segmentation — the division of a larger market or audience into smaller ‘segments’ — is a tactic that has been leveraged by consumer businesses since the 1920’s. With the advent of computer technology in the 1980s, the granularity of segmentation has increased to the level of ‘Hyper-Segmentation’. More recently, ‘Big Data’ has enabled marketers, researchers and strategists to harness the power of exponentially improved computing cycles, enabling a much deeper view into the multivariable environment of consumer segmentation. The practice of segmentation (and more recently hyper-segmentation) has allowed Brands to tease out the size and distribution of their potential customer base across multiple distinct preferences, the combination of which I will refer to as ‘preference set’.
There are four main ‘bases’ of Customer Segmentation: Geographic, Psychographic, Demographic, and Behavioral. For the purposes of this argument, I will ignore Geographic Segmentation, as DNVBs and DTC companies share a common digital backbone, and therefore are directionally agnostic to geography as it relates to customer preference.
In order to ‘map’ the preference set for any individual consumer back to that individual's Brand Affinity, it is helpful to visualize the customer's preference set on a three-dimensional plane. An individual consumers preference set would be represented by a point in space. Adding data points for all in-market consumers would result in a holistic three-dimensional histogram of all in-market consumers and their relative affinity.
Brands also have a specific preference set. Young brands develop a customer archetype which guides the creative, marketing, and product creation processes and outcomes. For the purposes of this argument, I will refer to this Archetype or “target customer” as the Brand Center.
A Brand’s Center can be mapped as a point on the same three-dimensional plane. The relative distance between the Brand Center and the Customer preference (in space) is a representation of that customer’s relative Affinity to the Brand.
How Brands Monetize Affinity
Every business ever created started with an idea and zero customers. From that origin point, businesses move from idea to reality by establishing a Brand Center (target customer) and product or service, with the goal of providing utility and/or value to the in-market customers or end-users.
The lubricant for on-boarding customers to the Brand’s products or services is Affinity. Customers who have a high affinity for a Brand will be on-boarded (aside: the use of the term “on-board” is intentional relative to the commonly used “acquire”) very easily once they have some level of awareness that the Brand exists. In the DNVB/DTC space, this is often referred to as “Organic” or “Un-Aided”.
In this way, Brands on-board customers in concentric circles which share the same center as the Brand. Affinity — like gravity — is weakened the further a customers preference set sits relative to the core of the brand.
In order to simplify the argument, I will group in-market customers by affinity band (as visualized by concentric circles) starting from the Brand center and moving further out in any direction:
- Core/Evangelists: These are your most passionate customers/users. In the founding period, this band is most likely comprised of the founding team’s direct network — Peers, Colleagues, etc — as their preference set is highly aligned with the Brand. Later, the core group expands but importantly is limited to only users who actively evangelize the Brand to their own network.
- Loyalists: These customers represent the next furthest band from the center. They are highly aligned with the Brand and its product/service. They are satisfied that their job-to-be-done has been solved such that they spend little time or effort on discovering new options. This puts the loyalist into a repeat purchasing pattern. They differ from your core customers in that they spend little/no time or effort evangelizing your Brand
- Passives: These customers have used your product in the past but engage on an opportunistic basis, particularly when your Brand message shifts away from its center and more closely aligned with their own preference set. Though they are users, they are also actively searching for a Brand and product alternatives that more closely aligns to their preference set.
- Agnostics: Agnostics — as you probably can guess — don’t favor one Brand over any other Brand that is in-market (unless of course, the competitive Brand center sits close to their preference set)
Legacy Bands have long employed a rudimentary approach in maximizing their share of all variations of customer preferences and brand affinity. They architected their business to create as many strategic and economic barriers as possible (switching costs, cost advantages, efficient scale, closed distribution networks, owned marketing channels, etc). From these barriers, many multi-billion dollar and multi-national Brands have been born and thrived. The time tested result is marginalized consumer preference (aggregation), massive retail footprints, excessive inventory and markdowns all of which have lead to the cratering of the retail industry and some of the once-dominant players.
Why Digitally Native and DTC Brands Exist?
Bonobos (founded 2007) began as a better-fitting men’s pants Brand that Bryan Spaly originated. He sourced and manufactured the first curved-waist pants himself and began selling them door to door at Stanford Business School. Andy Dunn soon after brought his recent Lands End (Legacy catalog retailer) experience and posited that Great Product and Great Service should be married under a digital Brand umbrella. The notion was that the digital storytelling, direct to consumer fulfillment, and 1:1 customer service interaction would fundamentally change the landscape for consumers (in addition to other principles that have played out to various levels of success and failure).
It largely worked — Bonobos gained traction and began selling pants to students, professionals, and peers. Many of whom were tech-focused, high earners, and cared enough about their own style that a great fit was highly valued. These were niche consumers who exhibited a preference set nearly on-center with the early Bonobos positioning.
These in-market customers that Bonobos acquired had obviously previously purchased men’s pants, but they were part of a large group of Passive or Agnostic customers they were loosely aligned with legacy in-market Brands. Because Bonobos built the center of its Brand directly over the weakest affinity bands of the incumbent Brand's customer base, the business was able to magnetize away customers and build a considerable business.
This type of Brand :: Niche story has repeated itself many times over for various DNVB/DTC founders, their Brands and their customers. Away, Mizzen & Main, Outdoor Voices, Chubbies, Marine Layer, Tesla. All of which exist to deliver 10x Brand & Product utility to a consumer who previously was reasonably satisfied with a 1x solution.
Can Brand Be An Economic “Moat”?
There are many examples of great and enduring Brands across various markets: Nike, Ralph Lauren, Levi’s, Coca-Cola, Ford Motor Company. In each case, the Brand at one time or another captured a massive share of the marketplace and in each case, the Brand lost a portion of its base to challengers. This is because consumers preference sets don’t exist as static points on a chart, but are fluid and can change dynamically over time and under stimulation.
An Economic Moat, which is a term popularized by Warren Buffett, refers to durable competitive advantages levied by a particular business against its competitors.
Referencing the customer affinity segments above, I would argue that Core customers are the only defensible aspect of a Brand, and as the center of the Brand shifts, so does the composition of that core customer base.
Loyal customers are mostly defensible, but this depends on what new challenger Brands pop up, and where their center sits relative to the customer’s preference set.
Passive and Agnostic customers are not defensible without moving the Brand Center to increase affinity, which in doing so alienates customers on the opposite end of the preference set.
In this way, the economic moat that a great Brand creates is limited only to the number of Core customers that identify within its Brand center (which by the way can be massive)
How Can DNVB and DTC Business Scale On Smaller “Cores”?
This is a question often debated amongst the DNVB/DTC intellectuals. Will any DNVB or DTC emerge and deliver $1B+ in Revenue or is this entire crop relegated to become an army of challenger micro-brands nipping at larger incumbents?
My answer: Clustering. Away is a great example of how this concept is taking shape. Away was founded in 2015 by Jennifer Rubio and Steph Korey who released their first product in 2016 — a carry on suitcase. Since that time the business has grown many times over, on a narrow set of products intended for a focused customer base. Over time they’ve built a passionate, albeit relatively small core of customers.
In order to continue to grow rapidly, Away has raised additional capital and has set its sights on developing a host of complementary products and services in parallel ‘job-to-be-done’ markets under the broader Travel Umbrella. In doing so Away is not pivoting away from its core customer, but rather moving in many dimensions across its core customers preferences while isolating for in-Market travelers, which graduates the Brand from a single core to a series of tightly connected clusters.
This is the new way of Brand and Business building and it’s most basic principle is a deep relationship with its customers to ensure that the Brand center and clusters develop together in a way that is most mutually beneficial to both the business and the end consumer.
Legacy Brands and Limitations
Legacy Brands will need to adapt to this approach — though Brands that are not anchored digitally will have difficulty understanding their customer's needs across various touchpoints with the level of detail required for a deep relationship. All Brands that interact both digitally and physical with harmonized data will be best positioned to maximize their relationships and thereby their customer base. If a Legacy Brand is ignorant to these customer signals or they are unable to capture enough preferential data, they will slowly and carefully be picked apart by various challenger DNVB/DTC brands who have identified the weakest of customer affinity and sprouted a Brand, product and/or service to closely service the needs of that disenfranchised consumer.
The data required also need not be transactional in nature. NPS, Event Attendance, Organic Traffic, Customer Reviews, etc all speak to the emotional response elicited by a Brand and it’s products or services. These emotive markers are equally important in protecting the needs of the core customers, and charting the course for pivoting towards cluster development.
There are obvious limitations to how I’ve presented this take on how Brands compete for customers — notably that we are nowhere near able to capture all of the variables at play, and even if we did we are talking about humans that develop, evolve and shift within their own environment and belief set. Customers and their preference set are also highly impressionable, and commonly brands seek to influence their point of view on those consumers that can be coerced into migrating their preference set in a way that strengthens Brand affinity.
Long Lasting Impact
Zooming out, the impact of this type of competition and Brand building is much more human and personal than the past tactic of averaging large customer segments in isolation and steering the Brand towards the middle of those segments. Imagining an individual as a data point in space may seem cold, but the notion that a Brand can (and will) optimize for that degree of specificity is a wonderful step forward in human interaction and consumer quality of life.