Direct-to-consumer brands are beginning to act like tech royalty, attracting wild valuations while displaying a cavalier disdain for the bottom line. Reckitt Benckiser's global marketing and innovation director Rakesh Narayana offers a sanity check for the brilliant, creative and disruptive new kids on the block.
Direct-to-consumer (DTC) brands are now a legion, and they deserve all the hype they can get. A handful have even achieved unicorn status this year by proving their mastery of the digital consumer universe. But nearly all DTCs have two, potentially fatal, flaws. They’re losing money like crazy and they don’t know how to grow beyond their niche status without losing the irresistible allure of exclusivity. Here’s how to fix both.
Join the club
DTC brands are making inroads into the traditional fiefdoms of consumer-packaged goods (CPGs) because they really understand today’s digitally connected consumers. They’re experts at turning clicks into sales, but far more relaxed about making returns for investors. Casper, which manages to make mattresses cool, has yet to turn a profit despite $400m in sales last year and a fresh infusion of capital valuing the company at $1.1bn. Rent the Runway, which lends designer outfits to women, declines to disclose its subscriber count, its revenues or its profitability, even after several funding rounds that have buoyed it to unicorn status. There’s a lot of money chasing the new way consumers are buying.
I recently met the head of a DTC-focused company that launches more than 50 new brands each year. His economic model is simple.
Step one: find a major category that is dominated by a traditional mass brand – Dollar Shave Club’s assault on P&G’s formerly impregnable Gillette fortress is the way to go here.
Step two: create a DTC rival that is digitally native and modern and advertising heavily on social media (primarily Facebook and Instagram). A three to one ratio of ad spend to sales is not uncommon.
Step three: sell your company to the highest bidder and let them worry about profits.
It’s a kinda magic
It would, however, be churlish to put the success of DTCs down to unlimited funding. These digital natives are also extremely good at standing out in a crowd – no mean feat when you consider today’s saturated, multi-channel marketing battlefield. You need bold, edgy and memorable ads like the Hell or Habito campaign for the DTC online mortgage broker or Dollar Shave Club’s digital ad mocking over-engineered and over-priced mass brands, which has been viewed 26.2m times on YouTube.
In addition, DTCs know how to sprinkle their brands with the magic of serendipitous discovery. Herein lies the true appeal of DTC brands; it’s their ability to make consumers believe they belong to a select group of people who are being catered to in a special and unique way. The Dollar Shave Club admits you to a brotherhood of cost-conscious men. Grove Collaborative welcomes you into its eco-friendly community. That is why DTC brands appeal much more to the Gen Z and Millennial generations, who identify most with the desire to be unique.
All clicks and no profits. Ever.
But nine out of 10 start-ups end up failing – despite good ideas and ample funding. This shows that while DTCs may be sharp on consumer insights, they are decidedly blunt on economics. Because they reinvest every dollar they earn in marketing – to remain top of mind and to keep driving those sales – DTCs rarely make a profit.
The reality is no different from many gig-economy platforms. Remember this from Lyft’s IPO statement: “We have incurred net losses each year since inception and we may not be able to achieve or maintain profitability in the future”. Too many DTCs are running similar models. Insanity.
In addition, the “uniqueness factor” can eventually be a twin-edged sword. To remain in business, all brands need to win a wider audience to sustain growth. They need to stretch into new categories and maximize value per every consumer instead of just increasing the number of consumers.
But it’s at this point that the exclusive club begins to look very much like a traditional mass brand. Success destroys the very appeal that made the DTC attractive in the first place.
Focus, focus, focus
So if you’re thinking of starting up a DTC, or if you are already running a DTC and wondering how you can scale up successfully, here’s my five-point plan for growing profitably without losing your allure.
Native, make a profit on each product they sell. They focus on three simple questions: is the product selling? Do consumers love them? And are you turning a profit? Forget everything else.
With the online world as your oyster, and easy money at your fingertips, launching a new brand today has never been easier. To avoid the fate of an earlier generation of dotcom start-ups, however, DTCs must start concentrating on the bottom line. The staying power of traditional mass brands is one trick DTCs have yet to learn.
Rakesh Narayana is innovation director for new brands at RB and was previously part of Digital Ventures at the Boston Consulting Group. He tweets on @chaserakesh