The End of an Era in Commerce
The End of an Era in Commerce
The old DTC playbook is dead. Brands are experiencing exploding CPMs, fierce competition, and shifting consumer expectations. And with that, a new era of commerce is starting to take shape. Pt 1 of 2.
The early 2010s was a magical time to be an entrepreneur. Particularly if you were looking to build a direct-to-consumer (DTC) business. The DTC movement arrived quickly. Hungry upstarts rushed to dethrone established incumbents, using the playbooks popularized by Warby Parker (and the like) to tackle every retail category imaginable.
The advent of digital storefronts like Shopify made starting a business much simpler and orders of magnitude cheaper than spending upwards of 6 figures on store build-outs and committing to long-term leases. Targeting profitable incumbents like the Gap, Victoria’s Secret, Dove, and Gillette made for an enticing David vs Goliath narrative that the press, investors, and most importantly consumers, ate up.
Established businesses were still figuring out if and how to use social media. Their strategies were still anchored in the old modality of TV ad buys, mall adjacencies and wholesale distribution. These strategies spoke to Gen X consumers, but not Millennials, who quickly swooned over DTC brands with slicker packaging, smarter copy and cheaper prices.
But the biggest boon for DTC was the cost to acquire customers. The paradigm shifted from spending money on rents to drive foot traffic to expensive stores—a heavy fixed cost—to spending money on ads to drive traffic to your site—a cheap variable cost. At the same time, platforms like MailChimp and Klaviyo were making it easy to drive revenue from email lists with powerful segmentation, sequences and integrations.
Andy Dunn, the co-founder of Bonobos famously penned an article describing the “Digitally Native Vertical Brand” (or DNVB).
The digitally-native vertical brand drives a lot more customer intimacy than its competition. The data is better because every transaction and interaction is captured. You don’t have to combine data across businesses, because it’s all one business. You are not blind to your wholesale business, because you don’t have a big wholesale business. It’s one CRM. It’s one store, where everybody knows your name.
Fast forward a decade, and some of those DTC businesses have gone public. Unfortunately, many are trading for less than the capital they’ve raised. Numerous investors who had developed a DTC thesis now abstain from making similar investments.
So, what happened?
The old playbook of acquiring and engaging customers cheaply and effectively on social media evaporated.
A few years ago, it was widely understood that the cost to engage on social media as a consumer meant giving up your data. It was a tradeoff most of us begrudgingly accepted. Free social tools in exchange for targeted ads following us around the internet. Creepy, but ok. Updates to iOS14, the App Tracking Privacy (ATT) and the cookie apocalypse made it significantly more challenging for brands to track their customers. Gone are the days when data was “default opt-in.” Today brands have to find new ways to collect data from customers.
Over 1 million
new Shopify stores were created in the last two years. The barriers to launching a business have never been lower. However, the barriers to growing a business have never been higher. More competitors, using the same strategies, have made standing out a herculean task. In addition, with so many brands bidding on ads, the CAC for e-commerce companies has nearly doubled over the past 5 years, placing significant strain on margins. DTC businesses’ over-reliance on paid social created channel dependencies. Meta and Google provided a funhouse for marketers to gamify customer acquisition. However, the CPMs across Meta, TikTok and Google increased 61%, 185% and 75% YoY respectively. As you can imagine, this makes marketing a lot less fun.
One of the biggest purported benefits of the DTC movement was to cut wholesale and sell (you guessed it) direct-to-consumer. The margins were better! The experience was better! Brands could control their distribution! However, the reliance simply shifted from wholesale businesses driving order volume to technology businesses driving exposure. DTC brands simply traded one dependency for another.
The biggest shift, however, is cultural. Millennials and Gen Z are looking to foster deeper engagements with brands. They expect to be seen and heard. Thirty years ago, the main reason a customer stopped purchasing was perceived value. Today, it’s the perception that a brand “doesn’t care about me.”
If you were to open up a store today in a nice part of town and a customer walked in and made a purchase, would the next set of interactions be to send them 12 emails from an automated sequence? Of course not. You’d send emails, sure. But you might also organize an event to drive traffic back to the store by celebrating a new launch. Perhaps you’d organize an IRL interview with the designer you just collaborated with. If it was one of your customers’ birthdays, you might reach out to them and wish them well and give them a store credit to treat themselves. If you really want to get your customers engaged, you might even ask for their opinion on a particular collection or event through a survey and use that information to inform future initiatives.
As consumers grow weary of the same old tactics, DTC brands are beginning to shed their skin, revisiting foundational elements of brand development: events, wholesale, retail, etc. And with that, a new era of commerce is starting to take shape.
Part 2 coming soon.
Rockefeller Corporation Report