September 11, 2019

The following is republished with the permission of the Association of National Advertisers. Find this and similar articles on ANA Newsstand.

By Chuck Kapelke

Hickies promises to make the burden of untied laces a thing of the past. Winc delivers bottles of wine personally customized for a particular palate. Quip sends a quarterly replacement head for an electric toothbrush.

These are just a few of the hundreds of direct-to-consumer (DTC) brands that have emerged in recent years, with a business model based on bypassing traditional retail outlets and reaching consumers primarily through digital sales and marketing channels, including e-commerce and social media.

According to data from CB Insights cited by Digiday, more than 400 DTC marketing startups have collectively raised some $3 billion in venture capital since 2012.

For traditional marketers, the rise of these digitally native "disruptor" brands might seem unsettling, and many DTC brands — such as deodorant-maker Native, clothier Bonobos, and grooming brand Harry's — have already been snapped up by larger competitors. "A lot of major enterprise brands are looking over their shoulders because small emerging brands are nipping at their heels a quarter-share point at a time," says Jim Norton, chief revenue officer at the dtx company, a New York–based company that works with DTC brands. "Individually they're not significant, but collectively it's putting a big dent on market share."

While the overall market remains small, the DTC sector is capturing the loyalty of key demographics. Among adults in the U.S. who have purchased online from a DTC brand in the past 12 months, more than half are 18- to 34-year-olds — generally considered the sweet spot for many consumer-facing advertisers — and nearly a third have a household income of $100,000 or more, according to Forrester Research.

But what makes many DTC brands appealing, industry observers say, is not their direct-sales model, but their focus on delivering a better consumer experience. "DTC companies cut out the middle man and so can provide better prices, and they're very data driven and use some forward-leaning marketing tactics," says Andrew Lipsman, principal analyst at eMarketer. "But a reason a lot of them are succeeding is that they are meeting unmet customer needs. They're executing 'Marketing 101' very well. Any traditional brand can do this, but what we've seen happen is a lot of traditional brands have lost touch with modern consumers."

Against such an ominous backdrop, what can legacy brands learn from the direct-to-consumer phenomenon, and what are DTC firms picking up from legacy brands? ANA magazine reached out to marketers for their insights about the DTC phenomenon.

Meeting Unmet Needs

Most DTC brands were launched by founders who put a new spin on an existing product or service, from Bombas' philosophy of donating socks to those in need, to the Honest Company's focus on safe-ingredient baby, beauty, and home products. "These brands have done a good job of centering their business around a story, whether it's the founder's story or the brand story itself," Norton says.

Consider Margaux, a New York City–based women's footwear brand started by two women who were frustrated by their inability to find shoes that were both comfortable and fashionable. "We launched the brand with the promise to our customers that we were going to offer them sizes they couldn't find anywhere else, and committed to designing and engineering our shoes with comfort at the top of mind," says Alexa Buckley, one of Margaux's founders.

"Your customer really tells you everything you need to know about where you need to take your product and business."
— Sarah Pierson, co-founder of Margaux

Like many DTC brands, Margaux built a following largely through digital channels, including Facebook, Instagram, and retargeted display ads. The company eschews traditional retail outlets, but has set up alternative locations — including pop-up stores and a branded store inside Bloomingdale's flagship store in Manhattan — where customers can find their fit. "By circumventing the wholesale partners, we're able to offer our customers the size offering they need," Buckley says. "Retail isn't dead, it's just a revised model."

Most important, Margaux has grown a loyal community by establishing a close feedback loop with customers and adapting its products to their needs. This is accomplished through digital conversations, net promoter score surveys, as well as regular visits by the company's founders to various store locations.

"Your customer really tells you everything you need to know about where you need to take your product and business," says Sarah Pierson, Margaux's other co-founder. "Direct-to-consumer brands have closer contact with customers than traditional brands, particularly those who sell through wholesale. Keeping close tabs on not just what feedback you're getting on the product through customer service, but also what people are asking for, is so important. If you look at our product line, every style that we've added has come from requests and guidance from our customers."

Key Takeaway: DTC brands think outside the box and are willing to shift products and services in response to what their customers are saying. "Don't think about direct-to-consumer as a direct threat," says Anjali Lai, a senior analyst at Forrester. "Instead, consider a 'direct-to-value strategy.' Where can the larger brands mitigate frustrations in the customer experience, refresh their brand, reinvent their story, and create new value for customers in a way that shows they are delivering against these new standards of convenience, quality, and trust?"

Agile Marketing Writ Large

The lines between DTC and legacy brands continue to blur. DTC companies that make it beyond the early growth stage are turning toward traditional channels, particularly as the costs of search and social increase.

For example, the Dollar Shave Club (a DTC brand acquired by Unilever in 2016) has shifted marketing dollars into television and other traditional channels. "What we are learning from mass marketers is the power of brand," says Sam Kang, VP of media and acquisition at the Dollar Shave Club. "It's establishing that more emotional connection, getting enough frequency so you become the brand that's top of mind when someone makes that next purchase."

Even as it has grown, the Dollar Shave Club has maintained a digital-first strategy that allows for up-to-the-minute tracking of how every dollar invested in marketing translates into customer acquisition and ROI. "It's very real time," Kang says. "One of the great things about being on the DTC side is that we can really control our budgets from day to day, and we have a lot more nimbleness in what we can do."

The company also demands a higher-than-usual degree of flexibility from its media partners, and relies less on agency partners than an in-house digital team. "I have a search specialist, I have a display specialist. They're managing those budgets and the KPIs I give to them," Kang says. "At the end of the day, what it really boils down to is that relationship with the customer. You need different teams, different muscles, different parts of your organization that know how to interact with customers in the right way."

Key Takeaway: DTC brands have high levels of awareness about where their marketing dollars are going, as well as organizational cultures that support continuous evolution. "It's a more nimble, entrepreneurial spirit than laying out a 12-month plan and checking in quarterly and making small changes," says Delia Marshall, COO at Eicoff, a direct response television agency. "Our DTC clients know exactly what happened yesterday, and they expect to hear from us: what was the response volume, what was the conversion rate, what worked, what didn't, and what are we doing about it?"

Bee Line to Consumers

The rise of DTC companies has demonstrated that any brand can (and perhaps should) have a direct sales channel. "Many legacy brands have not yet figured out how to have strong conversion online," Marshall says. "Not having that piece of distribution can be really dangerous for a brand today, because part of what you're seeing with some of these younger shoppers is a willingness to buy a product from a brand they've never heard of, a brand they've seen one single Instagram ad from."

Steve Madden, a fashion retailer launched in the early 1990s, recently overhauled its e-commerce infrastructure to mirror those of DTC start-ups. The company transitioned to Shopify, an e-commerce provider favored by many DTC brands, and tied together its user-generated content, loyalty program, and visual marketing through an integrated platform called Yotpo. Customers buying from Steve Madden can now earn points in the company's loyalty program by leaving a review or sharing on social media, and the same capability is in the process of being rolled out to the rest of Steve Madden brands. As a result, Steve Madden has an engine for content and an ear to the ground for consumer sentiment.

"[Tide]'s a great example of a brand that is adapting to this direct-value strategy by thinking outside the transaction."
— Anjali Lai, senior analyst at Forrester

"Legacy companies are waking up to what the new generation of commerce marketing stack looks like, and making these wholesale changes," says Raj Nijjer, VP of marketing at YotPo. "Social media platforms have given them this voice, and brands are able to redistribute it as customer advocacy."

At the same time, some legacy brands have started to adopt the kinds of customer-focused offerings that set DTC brands apart. For example, the Tide detergent brand has rolled out a chain of dry cleaners with wash-and-fold laundry and other services that targets millennials living in urban areas. "They deploy drop-off boxes, and the tagline for the service is, "Life, not laundry," says Lai of Forrester. "It's a great example of a brand that is adapting to this direct-value strategy by thinking outside the transaction that it typically facilitated before."

Similarly, Goodyear Tires launched "Roll by Goodyear," through which the company offers to meet a driver at a specific location, like a child's soccer game, and install new tires on site. "A car owner's problem is not finding the right tires, it's finding the time to make an appointment," Lai says. "Instead of focusing on the product itself, they put experience at the heart of their service by driving to meet the consumer and installing new tires on site. It's a new mindset, a new framework for approaching how to engage with the consumer. From the consumer perspective, it creates an enormous sense of value. That expression of customer obsession is something the direct-to-consumer brands have really mastered that larger brands haven't."

Key Takeaway: While the sheer number of DTC companies that have emerged in recent years may suggest a bubble burst looming over the horizon, the effect of these brands' customer-first philosophy will endure. "You don't have to be a small, digitally native entrepreneurial brand to feel like one," Lai adds. "You don't have to completely redesign your organizational structure or build something completely new from scratch. You can harness the resources that you have and really focus on creating a more personalized, intimate experience with your customer that delivers value in new ways in order to stay competitive."

 

 

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