From mattresses to eye glasses, and razor blades to tampons, a new type of consumer brand is starting to fill out virtual shelves, and in turn, crowd out the demand for real shelf space in retail. The growth of direct-to-consumer (DTC) brands has been enabled through smart digital marketing, apps, ‘buy’ buttons and subscription services as well as the exponential growth of outsourced manufacturing with shorter productions runs.
The headlines have been grabbed by the sexy new brands such as Unilever-acquired Dollar Shave Club. Legacy brand owners such as Mondelez are also exploring DTC because it “allows us to pursue single-item retailing as an occasion in itself and takes our brands into a new space that we wouldn’t normally have done”, according to its Asia, Middle East and Africas ecommerce director Ganesh Kashyap.
The attractions of DTC brands are pretty clear: brand control through product, packaging, brand message and digital merchandising; proposition control through aligning the brand with the customer experience; insight through having direct access to the consumer; and no messy negotiations with retailer that can cause delays, interruptions and margin reduction.
But aside from the headlines, what is going on behind the scenes?
First, these brands are not built on their brands, paradoxically. Instead, they are built on a deep understanding of technology platforms such as Amazon, Facebook, Instagram and cloud-based services like Amazon Web Services (AWS). They also understand that mobile is central to the DTC experience. They know how to be digitally dominant in Google’s search. They use Kickstarter to fund research and development (R&D) and innovation at low cost.
For example, Crua Outdoors, a maker of high-end camping gear, wanted to see if it could extend its brand into hammocks, targeting the US market for outdoor living. It created the Koala, ‘the hammock you’ll want to stay in forever’. Rather that tie money up in R&D, Crua created an Indiegogo campaign with a humorous video showing the product in action. Almost $750,000 was pledged on the fundraising site: R&D paid for, future demand guaranteed and a viral video produced that could be shareable indefinitely on social media.
The second aspect of these brands is the understanding of the ‘long tail’ and the ‘fat tail’. Retailers are limited in what they can sell by the amount of shelf space they have, and so can only stock fat-tail products popular enough to justify keeping the inventory. Former Wired magazine editor Chris Anderson coined the phrase ‘long tail’ for all the products that don’t get placed in retail locations but which someone, somewhere, will buy. Long-tail thinking means that you don’t have to conserve shelf space or make such decisions about what to stock.
Understanding of the ‘long tail’ has meant that a small tent manufacturer can sell $1,000 tents to the US from Europe. Understanding of the ‘long tail’ basically explains the success of Amazon.
But the fastest-growing D2C brands are going after niches within the ‘fat tail’ and executing their positioning by relentlessly focusing on only a handful of products. Indeed, many started out with just one. For example, shaving brand Harry’s started with one type of razor with five blades, while Casper had just one model of bed.
These brands showed a real understanding of the message within The Paradox of Choice, the book by Barry Schwartz, reducing available options and positioning around the idea that ‘no alternatives will do’. The virtuous circle of one product allows you to make adjustments as you get feedback from early customers, which feeds immediately into product development cycles, which in turn are enriched by first-party data from the same customers. Very different from the ‘one-step-removed’ world of retail.
The third aspect of the successful DTC brands is that they are marketing heretics ignoring what the classic FMCG brands do. Coca-Cola, Procter & Gamble, Unilever and Nestlé are not their role models.
Classic FMCG brands spend millions on brand and image advertising. DTC brands cannot afford to brand-build their way to bankruptcy. None of your brand recognition, awareness and familiarity measures for these folks. DTC brands go for a direct-response strategy taken straight from the old direct marketing methods, and often combined this with a ‘shock-and-awe’ launch that grabs attention, which converts into to Google searches and website traffic. ‘Sales overnight, brand over time’ is their mantra.
Perhaps DTC is not a business model, but a mindset we could all learn from.
The fourth element is the inherent advantage that DTC startups have over their incumbent competitors – a better grasp on the real dynamics of selling online. They have leveraged the visual aspect of Instagram and used highly targeted Facebook ads to grow their audiences. They have worked out how to get SEO to compound over time and to create shareable graphics, visuals and copy. They know how direct response and calls to action work. They know how to create referrals from third-party sites. They leverage trends like customer ‘unboxing’ videos and blog reviews. They know that consumers actually take more time online than when shopping in physical stores.
The final element is logistics and supply chain. In fact, addressing the sheer challenge of logistics is often more difficult than getting the brand right. In another example of ignoring what the big brands do, DTC contact lens brand Hubble is vertically integrated, controlling its own supply chain and working directly with a Taiwan-based factory, making lenses compliant with regulations in fully recyclable branded packaging.
This control over the supply chain means that the brand can control the end-to-end experience of selection, purchase and customer service. Indeed, you could argue that this is the real secret of the DTC model: the ownership of the total customer experience is more important than the product itself. When you’re a DTC brand, shipping, returns and incredible response time are part and parcel of the proposition.
Above all, there’s a tonne of evidence that it is possible to build new, powerful FMCG brands today that ignore what the blue-chip brands do, bypass the retail channel and create new value for customers in terms of product and service. It is the value creation for the customer that I find the most compelling. Perhaps DTC is not a business model, but a mindset we could all learn from.
Colin Lewis is CMO at OpenJaw Technologies.