Direct-to-consumer (DTC) brands have become increasingly popular in recent years. By selling directly to consumers and cutting out the middleman, DTC companies can offer competitive pricing while still earning strong margins. This makes DTC an attractive model for both new startups and traditional brands looking to build a direct connection with customers. However, the DTC approach also comes with challenges. Brands need to take on marketing, distribution, and other functions typically handled by retailers. Succeeding with DTC requires strategic thinking about product, marketing, and long-term brand building. In this article, we will explore the advantages and disadvantages of the DTC model, as well as factors investors should consider when evaluating DTC investment opportunities.
DTC allows for better control of branding and customer experience
A key advantage of DTC is that brands have more control over the customer journey from end-to-end. They control product design, marketing messages, online/in-store experiences, and post-sales support. This allows DTC brands to create a cohesive, differentiated brand image. Allbirds, for example, has built sustainability into all aspects of its brand identity. DTC also facilitates a direct connection to customers to gather feedback and data. However, DTC brands must have the operational capabilities and capital to handle all these functions in-house.
DTC provides pricing and margin advantages
Selling DTC allows brands to cut out intermediaries like wholesalers and retailers, lowering distribution costs. This lets brands earn higher margins than traditional wholesale, or provides room to undercut competitors on pricing while maintaining margins. Many successful DTC brands like Warby Parker and Glossier have offered competitive pricing and still posted strong gross margins upwards of 60-70%.
Marketing and acquiring customers can be challenging
While DTC can improve margins, brands lose the marketing reach and sales infrastructure of retail partners. Startup brands must pay to acquire customers online through digital ads and influencers. Established brands forgo existing retail distribution. DTC brands often spend heavily on marketing. For example, in 2020 Allbirds spent 25% of revenue on marketing. Profitable customer acquisition and positive ROI require sophisticated digital marketing and data analytics capabilities.
DTC works best for differentiated brand stories
The DTC model shines when paired with compelling brand narratives and innovative products. Brands like Dollar Shave Club, Rothy’s and Harry’s found product and brand positioning hooks that helped them stand out and gain initial traction. However, commodity-type products with minimal differentiation are likely better sold through traditional retailers. Unique brand stories and positioning allow DTC brands to justify premium pricing and excite customers.
Omnichannel is ideal; pureplay DTC faces hurdles
The most successful DTC brands employ an omnichannel sales strategy, combining DTC with select wholesale and retail partners. This amplifies brand reach and reduces risk. Many pureplay ecommerce brands have recognized the benefits of an omnichannel approach and opened physical stores, including Warby Parker, Allbirds, Casper and more. Pureplay DTC brands can face growth ceilings and high customer acquisition costs online. Investors should look for DTC brands demonstrating omnichannel distribution potential.
The DTC model offers opportunities like pricing/margin advantages and closer customer connections. However, brands must have strong branding, differentiation and marketing capabilities to acquire and retain customers directly. Omnichannel strategies are ideal, as pureplay DTC has limitations. For investors, DTC brands with compelling brand equity and products, efficient digital marketing and omnichannel distribution potential offer the most promising opportunities.