Direct-to-consumer brands have been raising a whole lot of money.
The premise - Higher GMs by saving on lofty e-commerce or retail margins of traditional brands.
But are they more profitable?
DTC makes a case for a limited set of products – often repeat buying led – ones that online advertising can dominate. They lose efficiencies from higher bargaining power from operating a broader line. Most brands today suffer from higher COGS than their bigger counterparts.
DTC spends extensively on digital advertising only to trigger purchases at the point of decision-making – ones that have a lower shelf life than most other channels. Average A&M spending across the top 20 Indian DTC brands in 2021 was ~18% or 2x higher than the benchmark of 8%.
DTC gains from lower barriers of entry.
But this advantage is also its undoing – as more brands can enter to vie for the same eyeballs keeping the marketing costs constantly escalating.
DTC price mark-ups can be unsustainable which results in a higher ‘discounting’ led approach which users can get habituated to.
1.55x – that’s the median increase in mark-up between the selling prices of products of similar grade.
DTC has a disincentive to create new products or invest in R&D.
The constant focus on products that will sell ‘now’ as against trying to create products of the future that are better – but only on paper or marketing copy.
So the bottom-line according to research -
They make 12% less EBIT despite making 23% more GM
But what do outliers tell us? How to spot one?
Most DTC products are meant to please. Their marketing copy makes them out to be aspirational. Aspirational of a lifestyle or sometimes a hedonistic impulse or sometimes tagged to a fad. But the ones that succeed are barely those.
Here are some ways to luminate the ones that will make the cut
1/ They create diversified product ranges that appeal to the same buyer persona.
#Mamaearth starts a relationship with a toxin-free product range for babies and continues that relationship.
2/ They are the primary seller across all channels.
#Yogabar maintains absolute control over the distribution channel when sold on ecom with subscription discounts.
3/ They appeal to a sense of belonging than to making an impulsive purchase which you may not repeat.
#TheBetterIndia's The Better Home whose brand promise is safe – family – sustainable – chemical free and not on kitschy features alone.
4/ They strive really hard to get you onto their eco-system rather than continuing to buy on marketplaces.
#Wakefit – where they follow-through and build a direct customer touchpoint irrespective of the channel.
5/ Don’t sell impulse purchase products but build longer term relationships.
#Lenskart.com – a lifelong relationship of trust built with no middlemen anywhere in the supply-chain.
6/ Deepen the moats with every sale.
7/ Operate in highly fragmented markets.
20k+ options exist for the category ‘facewash’ on ecom marketplaces.
8/ Operate in categories with a ridiculously low switching cost.
Coffee, Eyewear, Cosmetics, Food – where new associations are easier to build.
9/ Should be sold to a persona with a great marketing copy alone.
Ever wondered why you don’t use a DTC Atta brand yet?
Do you think I missed something?
If you want to read the truth behind the premise that DTC brands are really more profitable, [https://www.linkedin.com/posts/pradyumnanag_advertising-cfo-strategy-activity-6907549733749948416-frJN]