Achieving the Next Level in DTC

There may never be a better time for incumbent companies to prioritize DTC, even for just a single product line. Pandemic disruptions to retail channels and supply chains mean people are more open to new ways of buying everything— from potato chips to manufacturing equipment. However, it’s not just about launching a new brand with a sans-serif modern logo using an outdated DTC playbook.

Going direct-to-consumer is hard. It requires a new mindset that embraces a performance-based approach. Many digital natives are experiencing challenges to reach that next level of growth. And the scale and operational rigor that incumbents can bring might be the combination to unlock that next level of DTC magic. Let’s break down how to achieve the next level in the DTC ecosystem.

DTC Through the Lens of the Pandemic

There’s no arguing that these are dark times for many direct-to-consumer businesses, especially for some formerly high-flying digital natives. But while the era of the DTC unicorn and massive acquisitions may have hit some roadblocks, more significant changes to the marketplace are underway. Despite the pandemic-induced decrease in consumer spending, those digital natives with the strongest communities, such as Peloton and thredUp, are thriving and among the top DTC brands. And many legacy companies, especially those in the CPG and B2B arenas, are adding DTC lines. Companies like Pepsi and Ocean Spray are going direct not just to recoup revenues lost to COVID-19 disruptions, but also to gain vital insights that inform the rest of their business strategies.

“These companies are learning that the direct channel is a game-changer that deepens customer relationships.”

These companies are learning that the direct channel is a game-changer that deepens customer relationships. It’s not just about digital channels and sales, but about cultivating meaningful engagement through DTC branding and marketing. By building communities with relevant content, help and services, customers interact with them again and again. And with the data these companies glean from DTC channels and transactions, they’re finding ways to innovate throughout the entire enterprise. The benefits of real-time access to direct consumer data and communications just weren’t achievable before with traditional B2C and B2B models.

Digital Native Growing Pains

But first, it’s worth taking a close look at why so many of the DTC companies are struggling. Even before the pandemic, the DTC market was shaky. The cost of customer acquisition had been increasing at staggering rates. DTC marketing on social media in a diluted digital marketplace was less effective, so brands began leveraging physical and traditional platforms such as billboards and subway stations. And in growth-at-all-costs mode, many rushed into physical retail, either with their own storefronts or pop-ups with retail partners.

For many, the goal wasn’t near-term profits, but a near-term exit. And that worked for some, including Unilever’s $1 billion deal for Dollar Shave Club in 2016 and Amazon’s $1 billion purchase of Ring in 2018. But megadeals in recent times have been scarce.

Others hoped to cash in by going public. But the harsh reality is that Wall Street measures financial health differently than venture capitalists, with well-known DTC brands like Blue Apron and Casper struggling after initial public offerings. Others, including Airbnb, have delayed IPO filings.

And then there’s the bad behavior. Toxic leadership at places like Uber, WeWork and Away was a problem before the pandemic. But the worldwide crisis is shining a bright light on how businesses treat employees. Against the backdrop of illness, layoffs and widespread suffering, that kind of toxicity is especially damaging.

These visible meltdowns of a few call the organizational performance of the entire category into question. Once revered within DTC circles, Brandless’ demise and Outdoor Voices’ shakeup are sending strong reality checks to the venture capital funds supporting them. And the sharp downturn in consumer spending has sparked massive furloughs at top brands like Everlane, ThirdLove and Rent the Runway.

Refining DTC Acquisition Efforts

Some companies will come through this period stronger than ever, and this upheaval is creating many opportunities. Lululemon’s recent $500 million acquisition of Mirror proves that there are still deals to be made when the fit is right. For private equity and investment organizations, this may be an excellent time for acquiring undervalued DTC assets and putting cash behind those that have a differentiated offering and deep customer engagement.

For digital natives, it’s time to hit the “refresh” button. Top DTC brands should focus on optimizing organizational operations for sustainable growth, building with profitability controls. Painful as they are, furloughs can offer breathing room for companies to reset priorities for growth in this recovering market.

And it’s crucial to rethink customer acquisition. Before 2020, the focus had been on getting as many customers as possible at all costs. Now, it’s time to refine acquisition efforts with a retention and profitability filter. There is no standard DTC acquisition playbook. It’s taking a next-generation performance-based mindset of quality over quantity, anchored with a relentless focus and patience on customer value.