What most Direct-To-Consumer companies are missing

DTC businesses are flourishing these days, promising to disrupt categories that have been at a standstill for years. Recently I spent some time with Dr. Emmanuel Probst, author of the book “Brand Hacks”, who suggests that DTC companies might be missing a crucial ingredient that will ensure their long-term success.

Q. I know you have doubts about the sustainability of many DTC businesses but surely their track record is pretty good so far?

A. Admittedly, the short-term success of many of these companies is impressive. Online mattress seller Casper is busy opening stores and grown quarterly sales by a factor of 15 over the last five years. Meanwhile, Mattress Firm closed 700 stores and has declared bankruptcy. And, of course, Dollar Shave Club and Harry’s shaving subscriptions have been so successful that they have been acquired by Unilever and Edgewell for $1b and $1.37b respectively. As consumers, the last things we thought we needed were more mattress stores or razors.

Q. Why do you think these businesses have been so successful?

A. Apart from the initial hype, the key to the success of these brands is not so much in their products but in their ability to accumulate and exploit first party data. Thanks to investment in data science and sophisticated algorithms they can model micro-segments and customer journeys to death, to the delight of investors that get blindsided with short-term member acquisition.

Q. Why “blindsided”?

A. Because the obsession with behavioral data is the main weakness of DTC brands: they focus on lower-funnel tactics at the expense of an overall brand building strategy. The result is that many DTC brands are crippled with high attrition rates, forcing them to constantly re-invest millions of dollars in acquiring new members. Further, the initial hype will eventually fade, leaving most of these brands undifferentiated. It is worth noting that while Casper might be the biggest mattress-in-a-box retailer, there are many lookalikes, Purple, Nectar and Saatva, to name just a few, and according to Second Measure growth is slowing for most of them.

Q. So what should DTC brands do to ensure continued success?

A. The problem facing DTC businesses is that they cannot survive on data alone. Even if they are successful in convincing customers to pay a huge premium for convenience, there is still Amazon to contend with. Nobody can compete with Amazon on data analytics, convenience and price, the three key ingredients of DTC. While Stitch Fix might be able to fight off Amazon Wardrobe it is going to take a lot more than just data science to do so. This is why I urge DTC brands to build their brands while they still can. The DTC businesses that will survive will be (as always) the ones that create a meaningfully different and salient brand.

Thanks to Dr. Emmanuel Probst for an interesting and contrarian viewpoint on the future of DTC brands, but what do you think?

 

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