By Rachael Jones, Senior Digital Commerce Consultant at Entropy
It has been interesting working with various DTC (Direct To Consumer) focussed clients as they navigate the post-Covid world. We’ve certainly seen some changes.
However, before looking at “what’s next?”, it is worth looking back to understand how the landscape has changed over the last few years and the external factors now at play.
Even before Covid, 2012-19 witnessed a tidal wave of niche brands delivering a new shopping experience to consumers via their own brand websites and marketing channels. This shift, powered by VC funding and a digital acquisition strategy with low barriers to entry, caused quite a shakeout.
Many traditional retailers felt they needed to “adapt or die” in response to both this rapid emergence of a host of digitally-native vertical brands (DNVB’s), that were successfully only selling DTC, and smaller retail players leaning into starting up with a digital-only presence to cater for the changes in shopping mentality. Considered alongside the +300% increase in revenues by Amazon in the same 7-year period, it is obvious why so many brands and retailers began prioritising ecommerce as an untapped sales channel.
The “DTC playbook” inspired others to think the new retail model could work: build or buy products, quickly set up an online store, and use acquisition marketing to grow a loyal base of customers. Many DTC brands rapidly reached global audiences, and even stock market IPOs. Then, with the global pandemic in 2020 and the forced temporary closures of physical retail, ecommerce suddenly become the primary focus for brands and retailers, further accelerating rapid (and unprecedented) DTC growth.
So what’s changed?
The post-Covid expectation of continued growth on the same trajectory, coupled with a cost-of-living crisis, has made growing and maintaining DTC channels a lot more difficult. The increased demand for ecommerce services has, broadly speaking, fallen back in line with the predicted trend graph. That has meant that many brands that scaled 2018-2021 are tied into new manufacturing or logistic contracts with Minimum Order Quantities (MOQs) they can’t afford.
For the UK the consequences of Brexit and the challenges and costs now associated with selling in Europe have also hampered growth. Inventory and warehousing costs have increased and, as more players flooded the digital advertising platforms, costs became significantly higher there too. All this can mean that customer acquisition activities to power growth and meet new MOQs are less or no longer profitable.
Pre-2020, for many brands it was affordable and effective to use Facebook and Instagram as a core channel within their advertising and acquisition campaigns. However, with more demand and competition, CPM costs rose significantly (from $7.8 in 2019 to $14.9 by 2021). This cost increase came alongside increased privacy regulation.
Many DTC brands’ early successes were driven by the ability to data track in detail — detecting and using information about prospective customers’ interests, habits, demographics, and activities to highly target relevant buyers. These “playbook” DTC acquisition tactics are now not only more expensive and less efficient but also harder to replicate than they were before 2020.
Whilst many remember 2020-21 for the impact of Covid, the ATT privacy framework introduced by Apple (enforced from April 2021 as part of iOS 14.5) was a key update that limited the amount of user data that app developers could share with other companies and allowed users to start opting out of ad tracking.
This meant businesses were no longer able to track each user at every touch point in their digital journey. What was once a fairly clear picture of precisely what drove purchase and where to direct budget became muddied alongside a wider industry trend of deprecating cookies. In addition, a significant proportion of people were using desktop ad blockers. Measurement of digital marketing has added to the DTC headache.
And yet, despite all the above, you could argue that DTC ecommerce is thriving.
In Europe alone, it has grown by 23% between 2021-22, with 88% of multinational companies worldwide putting either significant or moderate financial investment into their DTC strategy. In the US, the number of DTC brand consumers is set to increase to 111 million shoppers in 2023, making up 40% of the population.
So the next phase for many DTC brands is moving beyond a singular distribution strategy and expanding into physical retail.
Initially, DTC brands started online because that was easier, faster, and less expensive than opening physical locations. But today, the “rent” DTC brands have to pay Google and Facebook to acquire new customers has become so high that for some, physical locations are starting to make more sense.
DTC kitchenware brand Our Place opened its first bricks-and-mortar location last year, designed to be a place for “gathering and community”. The store boasts a cafe and outdoor space, which will be used to host food-related events, book launches, and film screenings. Plenty of DNVBs are expanding through wholesale relationships and exploring the more traditional retail models they eschewed in their early days.
Further consumer connections have seen brands prioritise retention strategies and explore meaningful, recurring, long-term relationships with consumers. Keeping a customer costs up to five times less than acquiring a new one and increasing customer retention rates by just 5 per cent could help increase profits by 25–95 per cent. This could be done through subscriptions with personalised offerings and flexible pricing, loyalty programmes with a considered benefits offering, and brand communities.
Brands such as Rapha (cycling) and Sephora (beauty) have invested in the latter with great success to build brand affinity and keep customers within their ecosystem and away from competitors. The current climate also presents the perfect opportunity to pivot to profitability. There often needs to be uncomfortable conversations and a reassessment of effort and expectations. Where are the biggest costs in DTC and where can the biggest savings be made?
In terms of what’s next for DTC, a great place to start is an audit of what’s happening right now. Where can profit be maximised? Where has margin historically been sacrificed for growth? With the benefit of hindsight, what post-Covid mistakes were made? The agility of the DTC channel makes it relatively easy to be able to change course and re-strategise to prioritise profitability.
For many brands it is a little harder to see rapid and continued growth through operating purely via a DTC channel. It is, however, still a highly relevant model that presents opportunities for businesses of all types, whether digital disruptors or legacy brands.
It has benefits that enable businesses to grow their proposition and develop more direct relationships with customers by:
- Being able to bring new products to the market faster (whether that’s physical or, e.g., subscriptions)
- Using DTC as a test-and-learn environment
- Having access to request customer data and develop understanding of lifecycles behaviours and needs.
- Engaging directly with consumers for feedback
- Prioritising the customer experience
- Improving margins and maintaining pricing control
To succeed in DTC in this post-Covid, post-cookie, post-DTC heyday, many brands and retailers have felt the need to evolve, re-strategise and manage expectations to prioritise slower, sustainable, and profitable growth.
This often means a new playbook that embraces basic marketing principles and a customer-centric approach: from physical retail locations and a diversified media mix to retention strategies. It perhaps doesn’t sound revolutionary, but to help power the next phase of growth, brands must put consumer needs at the core of their strategy.
Entropy is a hybrid business consultancy and agency specialising in ecommerce and digital media. Our client side, agency and data science experts work in partnership with digital commerce focussed brands to accelerate delivery against their organisations’ KPIs.