Is there a formula for DTC Success?

Continuing on last week’s theme, the deep dive into Solo Brands made me think about the DTC space as a whole.  Was there something so different about these businesses that made the DTC badge something to be worn with pride?  Or, were these businesses just that, a business, but with a shift in the business model where they skip the distribution channels to sell direct?  And if so, how big is that shift really?

Over the last decade or so, the DTC business model has reshaped retail, allowing brands to bypass traditional wholesale and distributions channels and engage directly with their customers at a never before seen level.  The boom of digital marketing, social media, and scalable e-commerce platforms, allowed a tidal wave of DTC brands to emerge.

How has that worked out?

Despite some very interesting brands and early successes, not every DTC business has had enduring growth.  Some have crashed and burned.  Others, have contended with ups and downs, almost like a seesaw, especially when taking into account their performance on Wall Street.

Today’s newsletter is going to examine why some DTC brands have flourished, while others have faltered, and see if there is a formula for success in the DTC space that other entrepreneurs can model.

Business Winners

Let’s first take a look at DTC winners from a business viewpoint (this differes from a Wall Street perpective, which we will disucss later).

Warby Parker disrupted the eyewear market by offering stylish, affordable glasses through a convenient online model. Their home try-on program proved to be a hit with customers. Combine that with really great storytelling, and this differentiated consumer experience drove both customer loyalty and brand advocacy.

A friend of mine introduced me to Allbirds a few years ago and raved about their products.  I thought the tee-shirts were expensive, but he insisted that the shoes – their core product – were great.  The company found success by prioritizing sustainability, comfort, and minimalist design..I mean really minimalist. Their eco-friendly shoes appealed strongly to environmentally-conscious consumers, differentiating them within a crowded footwear market.

As someone who swears by Gillette, I was somewhat surprised that Dollar Shave Club became a major player so quickly.  They introduced a subscription model and a viral marketing campaign that humorously highlighted consumer pain points. They emphasized affordability, convenience, and memorable branding.

While I’m not their target customer by any stretch, Glossier distinguished itself through community-building and customer obsession.  They focus on gathering real-time feedback from customers. This approach allowed them to create products deeply aligned with customer desires, fostering brand loyalty.

Solo Stove – I wrote about last week and you can see that here

Who isn’t familiar with Peloton these days?  They achieved phenomenal growth by offering compelling at-home fitness experiences, creating a deeply engaged user community.  A poster child for the boom-to-bust pandemic brands, you can’t deny that they have workout obsessed fans and great content.

Casper improved mattress buying with its user-friendly model, simplifying a historically car buying like process through easy online purchasing, delivery, and a generous return program.

Struggling DTC Brands

I was always rooting for Brandless.  It launched by offering generic products at a low price.  However, low margins will kill you.  So will high customer acquisition costs.  Toss in a lack of differentiation and Brandless ceased operations temporarily before being acquired and relaunched.

Outdoor Voices became a real mess.  It faced internal turmoil and management instability. Rapid growth without sustainable financial structures didn’t help it. This resulted in operational inefficiencies, inventory issues, and declining brand momentum.

Another company where some within my network swore by the product, Blue Apron struggled with customer retention due to high churn rates and fierce competition from other meal-kit providers. Remember all the coupons?  It didn’t create long-term customers.  Coupled with thin profit margins and costly customer acquisition, the business faced persistent financial challenges despite initial success.

Wall Street Challenges

Let’s go back to some of “Winners” listed above.  Almost all of these brands ending up going public on Wall Street.  Successful companies equal successful public companies? 

Not so fast:

Allbirds went public in late 2021 (when all of the pandemic-juiced DTC businesses did the same) with a valuation of $2.1 Billion.  Today, the stock is worth just over $40M – down 98%

Solo Stove, which – if you haven’t heard – I wrote about last week, is also down 98%.

Peloton - Oh boy! Down over 95% from its December 2020 peak. It’s still publicly traded, and still struggling to find growth despite a fantastic product and lots of content.

Casper, despite all the positives listed above, it went public at $12 - the underwriters wanted $19 - and went private at just under $7.

Brand strength does not translate into Wall Street success. In fact, poor stock market performance can hurt the brand more than the capital raised at the outset of the IPO. Peloton is a perfect example. It’s a great product, great brand and has a loyal following (not to mention a content library that will save the company, in my opinion). Yet it’s struggling as a business and doing so in the public markets, meaning everyone gets to watch and see.

Compare this to private brands, who get the advantage of struggling in private, and who can fix problems behind closed doors, without tainting the brand.

So what’s the formula?

Previously I’ve written about the leadership formula, that there is a simple combination of traits that define who a leader is. Can there be another, simple, formula for future DTC brands to follow for success? I think so, and these generally apply to all business, not just those in the DTC space.

• Prioritize product-market fit:  I’m a product-guy, so will start here. New brands must continuously validate their offerings. Being direct-to-consumer means you are customer obsessed, and all new products need to meet, and ideally exceed the product-market fit. This includes adaptability in terms of product, and direction, such as working with wholesale channels to strategically market the brand.

• Establish solid financial fundamentals early: Most of the fast growers did so at the sake of profits. Customer acquisition spend was not questioned. Going public was not the fix. As I noted last week, Solo Brands spends $1 in overhead to generate $1 in sales. Peloton has shrunk operating expenses by 50% over the past 2 years, and still has not found annual profitability.

• Invest in community and brand authenticity: Glossier’s success demonstrates the long-term value of building genuine consumer connections. Consumers want to be feel loved, and have a relationship with the brands they covet. Building a community of obsessed fans can propel the brand to great heights.

• Frictionless transactions: The points above apply to all brands, really. What separates this channel is the “D”, in DTC. These brands are also the retailer, and the best brands sell their products with ease. I often think about how easy it is to book an Uber, see who my driver is, when they will show up, and when I will get to my destination. DTC brands need to have the same seamless transactional system with their websites, apps, and customer service. Otherwise, customers will drift away and purchase competing items at Target or on the Amazon app.

So what does this mean? New entrants should approach the DTC space with a clear understanding of both its potential rewards and significant risks it holds. Yet to find success and profits, these businesses need to execute above everything else.

Isn’t this the goal of all businesses? Yes!

The DTC journey is challenging and full of landmines, but the keys to success are the same as any business. Have a great product, loyal customers, watch your costs, and make it easy to do business with. Regardless of the channel, these are the features of businesses that succeed.