👙 What's next for DTC?
To mitigate the many challenges with the traditional DTC model, brands are joining together and embracing new business models that resemble old ones.
Hi Friends,
Thank you for tuning in for this week’s edition of Curious Commerce. I’m so happy to have you here! I’m Melina. I work as a strategist for retail and consumer businesses, and have my own womenswear brand, Keaton.
Curious Commerce is my weekly attempt to decode the future of commerce, inspired by other disciplines and my own experiences. With that, let’s dive in to Issue #2!
I’ve been building Keaton for the past two years. We created the Perfect Pant for women, designed with input from 300 young professionals, and we sell online. We’re what has traditionally been called a “DTC brand.”
I knew that starting a company would be an uphill battle, but I didn’t expect the speed and severity with which the DTC landscape would shift underneath me. When I started thinking about the idea for Keaton, DTC brands were the darlings of the VC world. I described my company as “the Outdoor Voices for workwear” (oops).
So what happened? The demise of DTC has been rigorously cataloged:
From Elizabeth Segran at Fast Company:
“As the DTC space has become more competitive, [digital marketing] costs have gone up. Fueled by venture capital, the battle for eyeballs on social media sparked an advertising arms race—further cutting into margins. This was apparent in Casper’s IPO filing, which revealed the company was losing $157 on each mattress, in part because it spent $305 in marketing to make each sale.”
As the online channels became more expensive, brands started selling in more traditional channels, like department stores (Nordstrom has been an early partner for many DTCs), owned retail stores, and even Amazon. Many of these brands had to rethink their unit economics so that these channels could be viable. Thus, “DTC” has essentially lost its meaning.
From Harvard Business Review:
“[A few years ago], it wasn’t too hard to succeed as a smart person with a mediocre product in a big, sleepy TAM [total addressable market],” says Ben Lehrer, Managing Partner of venture firm Lerer Hippeau and an early investor in Casper and Warby Parker. “A lot of MBA projects turned into real businesses.”
We are now at a place where the standalone digitally-native brand model is rarely viable. Subscription products, brands with a unique supply chain advantage, and brands with large built-in audiences (e.g. influencer-driven brands) are still finding success in some cases. This post is the first of several about how the majority of DTC brands have started to adapt.
Keeping the baby
In this DTC Meltdown era, it’s important not to throw the baby out with the bathwater. There are several benefits to the original DTC model that I believe are worth preserving. I created this chart to summarize the main pros and cons:
I’ve felt these “cons” very clearly as a founder. I’ve spent hours negotiating contracts with manufacturers from a powerless position. I sourced my own photographers and models and styled looks for photoshoots. Well-funded companies hire specialist agencies or consultants in areas like SEO and PR, but even finding and negotiating with each vendor and scoping the necessary projects is very time-consuming. Building my business has been a tremendous learning experience, but it’s also very inefficient.
On the other hand, the pros continue to resonate. I’ve worked for several traditional brands and seen how a wholesale-driven business restricts the ability to understand your customer. Larger organizations tend to move more slowly.
It’s no surprise that new business models have emerged that are attempting to preserve the “pros” of traditional DTC, while mitigating the “cons.” I’ve attempted to group these business models into a MECE list. In future posts, I’ll go deeper into each new model.
Intro to new business models
I’ve identified six business models that evolve the traditional DTC brand model. Many of these are not new. Mature companies have had incubator divisions for years. But only recently have these incubators created and launched new DTC brands (for example, Kindra from P&G and Allswell from Walmart).
Similarly, department stores and marketplace concepts have existed for a long time. But a new crop of solutions have emerged to specifically cater to the needs of DTC brands: lower inventory requirements, brand storytelling opportunities, enhanced customer data gathering, and more.
As a founder myself, I’ve been closely following the developments of the DTC landscape and look forward to taking a more detailed perspective in future editions! Please let me know if you have thoughts on this market map, as I’m sure there are companies or concepts that I’ve missed (many are purposefully under-the-radar).
If you enjoyed this post, be sure to subscribe for weekly takes on the future of retail and consumer!
What I’m Reading
📚 The Overstory - Richard Powers. You’ll want to hug a tree after reading this! It’s a beautiful depiction of the natural world and how we interact within it. Super hyped, but not over-hyped.
📚 Trust Exercise - Susan Choi. I wasn’t sold at first, but the unique narrative structure has left me thinking about this one a few weeks after finishing it.
📰 The Making, Branding, and (Alleged) Copying of a DTC Startup, Daily Harvest - The Fashion Law. This Canadian brand completely ripped off Daily Harvest, raising questions about what makes a brand.
📰 Who is MrBeast - Blake Robbins. In this week’s edition of “I’m feeling old,” I enjoyed this deep dive into how a 21-year-old YouTube creator cracked the code to going viral.
📰 How Issa Rae Became the Modern Mogul - Trapital. I’m obsessed with Insecure, and this is an awesome dive into how Issa Rae links multiple channels and projects to build an engaged audience.
✨ Stay Curious,
Melina