Next-Gen DTC: 4 Tips for the New DTC Growth Journey

It's been more than a decade since the direct-to-consumer (DTC) business model forever changed the world of consumer brands. With an iconic cohort of industry disruptors, including Warby Parker, Casper, and Harry's, the model paved the way for an explosion of businesses built upon direct and authentic relationships with their customers and, in some cases, some pretty spectacular exits.

Since these original pioneers took center stage, many DTC brands have pursued a similar playbook and found success. DTC sales are estimated to reach $182.6 billion this year. However, we've seen significant changes over the past three years in the startup ecosystem, the world of digital advertising, and a retail industry that has been forever changed by the pandemic.

The DTC playbook, once seen as a “rinse and repeat” way to swiftly launch a new business, needs an update. While it's still a channel with great growth potential, next-gen DTC will require a new journey and entirely different relationships among the basic building blocks of growth, including unit economics, digital marketing, and mega retailers.

New Challenges Stifling DTC Growth

One of the biggest challenges facing today’s DTC brands is the intense competition among an increasing number of players, fueled by an array of plug-and-play tools that reduce the barriers to entry for founders looking to launch a new business. According to PipeCandy, DTC brands in the U.S. are now somewhere between 110,000 to 120,000, or 13 percent of all e-commerce businesses. And the market is no longer solely composed of digital-native brands like Allbirds and Glossier. Now, more established brands like Nike, Levi’s, and Apple are reaping the benefits of selling DTC. In fact, Insider Intelligence estimates that established brands will account for more than three-quarters of all DTC sales. As competition for customers heats up and funding becomes harder to come by, it’s up to brands to prove they have a real value proposition. Unfortunately, yesterday’s model is no longer going to cut it.

A Different Advertising Environment

Along with the increase in competition, today’s DTC startups are facing a very different digital advertising environment. The efficiency that allowed brands like Warby Parker to scale based on huge arbitrage in affordable customer acquisition no longer exists. It used to be that companies could rely primarily on their investment in digital advertising to reach growth targets and scale. Today, digital-driven customer acquisition is 50 percent more expensive than it was just two years ago. Consumer startups are also seeing diminishing returns on their advertising investments earlier — before they reach the size and scale necessary to unlock the next level of growth. This has resulted in a digital advertising plateau and the need for DTC companies to find other ways to unlock the unit economics required to scale profitably.

Big-Box Retailer Leverage

Yet another challenge centers around the dominant role that top big-box retailers are establishing with DTC players. It used to be that new DTC brands couldn’t break into the traditional retail (or even wholesale) space unless a large retailer was willing to take a gamble. During the pandemic, the battle for physical inventory and shelf space temporarily paused and DTC players gained power in the digital world, where these constraints don't exist.

But today, with more people returning to stores and online acquisition not being as efficient as it once was, the Walmarts and Targets of the retail world are controlling the destiny of brands that are clamoring to be on their physical or virtual shelves. This dynamic is effectively eliminating any incremental power smaller brands had during the pandemic and challenging them to look for new ways to build volume and scale.

The Next-Gen Version of the DTC Playbook 

Right now, we’re seeing the same outdated trends repeated to exhaustion. For DTC brands to thrive in the current retail environment, a few key changes to the old model are necessary:

1. Prove out retail viability earlier.

Now is the time to show your viability in the retail world and to do so as early as possible. While earlier DTC brands were able to rely heavily on the highly efficient customer acquisition abilities of social media platforms, that's no longer the case today. Securing your place in the wholesale and retail landscape is becoming an increasingly important growth lever even earlier in the brand development life cycle.

2. Stay committed to profitable unit economics.

Every boardroom and founder is talking about profitable unit economics — and for good reason. It’s unreasonable to expect to grow a business through multiple funding rounds and continue acquiring customers while operating unprofitably. In the absence of a low interest rate environment and cheap capital, it’s more important than ever for brands to establish a sound and expeditious route to profitability.

3. Secure deals with major e-commerce sites of large retailers.

To become part of the mega-retailer world you need to demonstrate momentum and proof points that show how much your customers love your brand and the viability of channels beyond your website. Major retailers care deeply about indicative signals like your performance on Amazon.com, social presence, and user-generated content. Use these assets to convince them to include your products on their website, even if your product is drop-shipped, like Caraway Cookware’s was with Crate and Barrel early in its journey. From there, you can work toward becoming a consistent supplier or wholesaler, all the way through to becoming part of the retailer’s coveted in-store shelf space.

4. Navigate the digital advertisement plateau. 

Digital advertising remains an essential tool for brand development, but you need to know how to flex this muscle appropriately. To decrease the likelihood of a plateau, look to further your impact through a wealth of performance-boosting technologies like artificial intelligence-powered audiences. These new solutions improve targeting and paid marketing efficiency, and will make your precious marketing dollars go much further in today’s post-iOS14 environment.

We’ve reached a pinnacle moment for DTC brands that are vying for growth and profitability. As the competitive field widens and the once “foolproof” tools for success have shown some major flaws, it’s time for brands to embrace a revamped approach. The DTC of yesterday is over. The next generation of DTC is here, and if they want to flourish, it’s up to brands to execute an evolved DTC playbook.

Alex Song is the CEO and founder of Proxima, the data science company that leverages a proprietary database of anonymized consumer data to help brands better reach the right consumers across all major platforms.