Cracking unit economics in D2C

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?


1

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.


2

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%.


3

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.


4

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.


5

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.

#ThirdWaveCoffeeRoasters & #BlueTokaiCoffeeRoasters – anchor themselves to a daily habit with coffee to home products.


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]


#marketing #retail #markets #brand #sustainable #cosmetics #digitalmarketing #strategy

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