Is DTC really on the ropes?
Last week Mark Ritson published a lengthy criticism about the nature of a Direct to Consumer (DTC) business. It was a rant Jeremy Clarkson would have been proud of. Of course some bits of it I agreed with, but on the whole, it seemed to be a lot of angst without asking the question "Why?". I thought it was worth thinking a bit more about why a DTC business exists and why they do things a bit differently.
Please read Mark’s piece here, at the very least it’s entertaining.
https://www.marketingweek.com/ritson-casper-direct-to-consumer/
All guns blazing. Read Mark Riston’s savaging of the DTC industry. Is it fair?
As so many people were riffing off Marks critique, I am putting myself forward to stand on the opposite side of the debate.
In case you are not able to access the article; Mark's, main point was that for DTC business to succeed, they need to stop pretending they are different from traditional brands. They need to park all the new age crap and instead do the same as brands have been doing for decades to get ahead. Is he right? Sort of, but he misses the point about why today's brands do and say things differently, especially at the beginning of their existence. A DTC approach is not merely marketing spin, its a reaction to today's commercial barriers and opportunities. The economic environment is very different from two to three decades ago, and it is this backdrop which means a different approach is needed.
The things which seemed to irk Mark about DTC were:
1) DTC Brands are shunning traditional distribution channels just for the sake of being different.
2) DTC is trying to invent a new way of doing marketing, particularly by focusing on digital but the reality is, it's not working.
3) Trying to pander to today's consumers who need to buy from a company with a purpose. Rather than simply choosing to try and make a better product.
4) An obsession with data but no real clue what to do with it or even why they are bothering.
5) Daring to talk about disruption without being very innovative.
6) Lastly not making any money and being businesses that just don't make sense until they start behaving like their pre-internet predecessors
It is quite a list and on the surface, rings true. It's easy to be cynical about why lots of DTC companies are doing the same things to start but then either die or begin to behave in more conventional ways to grow and/or survive. The main problem with his criticism is a gross misunderstanding of the role of the entrepreneur and a challenger brand.
It takes a bit of effort, but I would encourage Mark to consider the following.
Reasons for Direct Distribution and then why you may look beyond that alone
The reason DTC brands are using DTC rather than selling in bricks and mortar is usually not a matter of choice. The barriers of entry to traditional retail channels are steeper than ever before. Innovation and new brands used to be a key focus for the retailers. Not so much today. Retailers are struggling and demanding simplification and rationalisation. Desperate times mean a short-term outlook, it’s survival first. Tesco's strategy in recent years is an excellent example of this, new suppliers are generally not very welcome. What it means is new and small are locked out. This barrier to innovation would be a disaster for many categories if it were not for DTC. Thankfully, DTC means that new companies and brands still have a way to bring their products to market. Whether these products and companies are any good is a different matter, the good news is that they have a chance.
Secondly, DTC allows a brand to do things which they just could not do easily in traditional retail channels. For example, tails.com offers a tailored dog food service which is continually modified depending on breed, age, level of activity and health complaints. The result is up to 20,000 different types of dog food leave their factory every week. Not even the biggest out of town megastore is going to have room for a fraction of this variety.
The last point on distribution is the criticism that once the brands with the best products start to mature, they then dare to start also selling on the high street. What is wrong with this? They have crossed the chasm and are now increasing their market share by serving to the mass majority. The fact is they would not have been able to do this without being able to first refine their product, build demand and create brand credibility via DTC. As Anthony Fletcher, CEO of Graze told me "Retail is an unforgiving environment, and it helps if you can go in with a bit of a reputation and with a product you can feel confident in." A business may need to widen it’s distribution channels to scale but it does not mean this whole DTC thing is a red herring.
Why going digital for marketing is the smart way to start
Why the fuss about DTC brands first using digital marketing channels then branching out into more old school above the line activities like outdoor, radio and even TV? The reason that DTC brands start with digital is that it’s where they can best find their first true fans, it is also probably all they can afford to do. Using digital channels first is a smart move. By limiting spend and focusing on a smaller group, it allows brands to validate their product and cultivate their first converts without spending a fortune. Only once these companies start to grow, they can think about expanding their reach, and only then can does it make sense to start talking to a broader audience. To use media like TV and Radio at the beginning is likely to be a costly error. It's why everyone starts small, and this typically today means a digital focus.
Having a purpose beyond the bottom line is becoming the norm.
Simon Griffiths, CEO and co-founder of Who Gives a Crap. A business making money and doing good which would not exsist if not for a Direct to Consumer model.
I hope we don't honestly believe that there is a problem with DTC companies having a purpose which sometimes goes beyond traditional commercial metrics? It is not valid for all DTC brands, but yes often a DTC brand has social and environmental ambitions embedded into its proposition. An excellent example of such a business is 'Who Gives a Crap' a company selling recycled toilet rolls which give 50% of their profits to build toilets in the developing world. Before you ask, yes they do make profits and have donated over £1 Million over the last four years. The reason brands like this use DTC is they are doing something radical, and your standard retailer just would not list them (not to start anyway). Simon Griffiths the Founder of Who Gives a Crap told me when they started they did not set out to be a DTC business. Every time he spoke to a buyer the answer was always, come back in 6 months and 6 months later the same response. Fortunately, a DTC model meant they didn't have to endure this retail purgatory. DTC has given them a way to make both money and a difference.
The other thing Mark should remember is we live in a world where most modern entrepreneurs are aware of the downsides of a business which only exists to make shareholders money. Climate change, wealth gaps and abuse of power are just a few examples of how this is working out. We should be applauding today's entrepreneurs who see business as a way of creating value AND being a force for good. Hang your head, if you feel this is not a step in the right direction.
There is a good reason for an obsession with data. It's an unfair advantage.
Data is one of the most amazing things which separates a DTC business from one that serves its customers via third parties. No wonder this data has become a prized commodity. Sure there are some DTC businesses which don't know what to do with all this information, but most realise it’s this data which gives them an unfair advantage over their more traditional competition. Selling directly and having an interaction with your end consumer generates insights which would take years to dawn on brands which sell via wholesalers and retailers. In the old world you just don't get the feedback, by selling direct you do. What’s more this consumer feedback is also pretty much instantaneous.
The other thing you get is direct access to who is buying and using your product. This means as well as interrogating the data, you also have a channel of communication to ask them things. It is much easier for consumers to share their thoughts with the brand on their expereince. This can be done via reviews or through any contact with the company. Even a chat with someone who is not a happy camper represents an opportunity to learn and to turn someone into a loyal customer.
It is this information which gives brands the ability to rapidly refine their propositions to ensure market fit, develop better products and also inform their sales and marketing strategies. This data gives rise to a thing called Performance Marketing. Data led Performance Marketing is using this extra information to optimise communication, i.e. what you say, how you say it and who you say it to. This is not to dismiss the old way of doing sales and marketing like building brands, doing PR, selling in shops and using traditional media which all very much still counts. To quote James Davidson, Co-Founder and CEO of tails.com, "old school marketing coupled with the new school marketing [performance marketing] is an unstoppable force. However, either one on its own is limited".
Breaking category norms is what an entrepreneur is meant to do.
If a DTC business did not do anything differently and is unable to offer services or products which remove some existing pain, Mark is right and the talk about disruption and revolution is entirely unfounded. However, if they do, not only is their existence justified, their efforts mean that market forces will see that their categories and products will continue to evolve and become better. This is entrepreneurship 101. If you aren't doing anything different, there is no justification for your existence. Likewise, if what you are doing is different but what you are doing is not liked or needed, then you can’t expect to appear on the Times Rich List anytime soon. It is only if you do actually make a better mousetrap and at the same time your customers still have a rodent problem, then you may be onto something. The chances are you will also start selling your mousetraps direct rather than in B&Q, as it’s the best way to get going.
Eventually, being acquired by a bigger competitor should not be seen as selling out but the ultimate validation that you have created something of real value. That a more established business is willing to pay, often big bucks, to stay relevant, learn from your innovation and buy the things they did not know how to create is the proof that you have moved the market on.
On market valuations and growth over profit
Lastly, Mark was critical on the valuation and financial strategies of some DTC businesses like Casper. In this regard, it feels like DTC is a proxy for any VC backed high growth businesses. It's why he also mentioned WeWork, a business which is very much not DTC. On this point, Mark and I have common ground. I agree companies need to make more money than they spend to be sustainable. The problem is the crazy bets investors make require insane levels of growth to payback. DTC, technology, pharmaceutical, property businesses, to name a few, all suffer from this problem. Aggressive growth strategies are usually due to the demands of the VC on the business rather than hustling founders. While we might agree on this one, Mark, we ain't going to solve it here, but I do think you are being a bit unfair to try and pin this on a DTC model.
There you have it. Times have changed, and DTC companies and their marketing strategies are a consequence of that. DTC is not just a marketing label; it is a new way of doing things. Hopefully, the above helps explain why DTC chooses to do things in a non-traditional way and why this should be applauded, not scorned.
I would love to hear your comments whether you agree with me or if you remain as cynical as Mark.
About me
After co-founding, scaling and selling my confectionery brand, Peppersmith, I am currently on a mission to capture the strategies and lessons of the best DTC businesses around today. Peppersmith sold about 30% of its product either directly from its website or via Amazon. Direct was a key channel for us. However, I felt like we had to learn everything on the job, and while we had success, there were still plenty of things we could have done a lot better. My motivation is to seek out the answers, from the best in the business, to find out what you need to do to have the best chance of building a successful organisation which sells some if not all its products direct to consumer.