The idea behind DTC (Direct to Consumer) companies is – by selling to the consumer directly online you can avoid typical retail markups and use these savings to increase quality, service and lower the price. Cutting out the middleman gives you a chance to create more value for the end client.
At the moment, there are about 400 DTC startups. They have raised about 3 billion in venture capital funding. Big WOW. This is a whole new industry.
Pioneers of DTC
The first mover and benchmark here is Warby Parker. The founders of this company realized that the market charges too much for a single pair of glasses. They were rebels with a lofty objective. With the new approach, Warby Parker was able to charge $95 for a $500 designer product. At the same time, they engaged in building social consciousness regarding sight loss.
A similar story was Dollar Shave Club vs Gillette.
One of the most interesting new categories for DTC is fashion jewelry. Tassel earrings and resin necklaces, for as much as $35 – 45, provide high-turnover for sellers like BaubleBar. The brand has created the ultimate playground for fashion lovers, and they offer the perfect product for impulsive purchasing.
Challenges for DTC companies
There is a theory that nearly every product category will be disrupted by at least one DTC challenger. We’ve seen already DTC companies offering lingerie, sofas, toothbrushes, and bras.
Digital native 20 and 30-something consumers with lots of buying power just don’t care about old mall-driven brands. DTC companies use a communication channels which is very natural to them – social media. For DTC companies, marketing is the crucial business success factor.
Large-scale marketing channels
The biggest potential problem for DTC companies is… the new middleman. It is no longer a shopping mall, but Facebook, Instagram, Amazon, and Google; and the cost of their services becoming more and more expensive.
During the first half of 2017, the average cost per 1k ad impressions on Facebook increased by 171%. Still, this is the most effective marketing tool in history and Facebook will take advantage of that to increase prices.
Customer Acquisition Cost
The DTC market is hot, and startups will compete for these same clients, increasing the general customer acquisition cost (CAC) in the process.
Some people from the industry say “CAC is the new rent”. This is also why some startups start offline shops and treat them as an advertising channel. Offline stores have been opened by Everlane, Bonobos, Warby Parker and others.
In general, DTC must balance CAC and customer lifetime value (LTV). If customers aren’t interested in purchasing your products frequently (e.g. mattress, furniture) you must be profitable from the first transaction. In Warby Parker’s case, lowering the price was a trigger for customers to treat glasses like a fashion gadget and increase buying frequency, thereby reducing the need to be profitable from the first purchase, and increasing LTV.
Safe investment for VC
Direct to customer companies are an interesting acquisition target for large retailers. For them, this is a cheap way of adding a new customer database, a new cool brand and new talented people to the organization. This is why venture capital companies treat DTC brands as a safe investment.
Plan A is to become a unicorn, plan B is to sell the company to a retailer.
Published August 2, 2018