The DTC Commerce Business' ‘Freaky Friday’ Moment
Over the past few years, venture capitalists (VCs) and pundits have declared the direct-to-consumer (DTC) commerce business model all but dead. This much is true: The party is over for hockey stick growth driven by Instagram ads or the abundance of cheap VC money for retail startups in the ZIRP era. However, as one crop of DTC companies faced customer acquisition challenges and shrinking runway, another rediscovered the value of DTC to their bottom line.
In true “Freaky Friday” fashion, longstanding brands like Nike and Birkenstock have doubled down on DTC channels, while DTC startups like Allbirds and Casper seek customer acquisition via wholesale strategies typically used by established brands. This flip-flop goes to show that DTC isn't dead at all; the next incarnation will focus on how to acquire and make the most of first-party customer data.
What Went Wrong With DTC Startups
The first crop of DTC startups (e.g., Warby Parker) were born out of a desire to disrupt big brands with a monopoly on wholesale distribution (e.g., Luxottica). In cutting out the middleman, DTCs could acquire new customers on the cheap through social media advertising.
Unfortunately for them, digital ad costs spiked and new data privacy rules made customer acquisition unsustainable. With the death of third-party tracking cookies, many struggled to attract new customers and drive sales. These factors together made marketers turn to first-party data — i.e., customer data owned by the company (vs. giving up ownership to a third party). The problem? Most DTC startup failures happened because they didn’t have much (if any) control over their customer data, leaving their fates in the hands of ad platforms or marketplaces like Amazon.com.
Others relied on models like subscriptions to drive recurring revenue. While X-of-the-month-clubs gave startups SaaS-like revenue projections for their VCs, many consumers experienced subscription fatigue. Unable to retain revenue or attract new customers, many DTC startups folded. However, that’s not the end of the story for the DTC business model.
Established Brands Take Up the DTC Torch
Established brands are driving the next wave of DTC, hoping to attract their loyal customer base back to the mothership from marketplaces and resellers that have eaten into their margins. Take, for instance, the Birkenstock story. The decades-old brand has slowly been taking back control of its customer base, with DTC channels experiencing a compound annual growth rate of 42 percent between 2018-2022. In fact, DTC now represents 38 percent of total revenue, with wholesale channels driving traffic back to the main Birkenstock site. Marketplaces and other wholesalers serve as an awareness channel back to Birkenstock’s DTC presence, which offers unique discounts, styles and colors not available anywhere else.
Other retail brands, including sportswear giants, have limited their reliance to longtime wholesale partners, many of which are filing for bankruptcy and shuttering operations themselves. A return to DTC and an aggressive reinvestment in e-commerce technology set these companies up for success. By controlling their own channels, these brands are able to segment their customers more effectively, offering them personalized content, exclusive product drops, and other experiences that drive loyalty.
Yet, while Nike leads the pack with 44 percent of its total brand revenue attributed to DTC channels, it still relies on wholesale for inventory management. DTC is no longer a zero-sum game. Wholesale can drive DTC and a strong consumer brand can drive wholesale channel sales.
Key Takeaways: Diversify Your Channels, But Own Your Data
The key takeaway? Don’t relinquish control of your platform or your customer data. Any brand can invest in a strong DTC commerce presence that allows it to capture and act on customer data. Your main DTC commerce site should always be the hub. Wholesalers, marketplaces, digital ads, brand and influencer collaborations, and other acquisition strategies should always drive customers back to the hub. Rather than overinvesting in a single customer acquisition strategy (like Instagram ads in DTC 1.0), your commerce technology choices should enable you to be more nimble and diversify your acquisition channels. Test and learn to discover which one is best for your brand.
Once customers are on your site, don’t waste the opportunity to engage them. A customer data platform (CDP) can be a major asset to brands that want to get smarter about targeting certain cohorts of customers with relevant offers or exclusive merchandise. Paired with strong creative, like customizable landing pages, merchandisers can personalize who they’re targeting, with what and when. These technologies can also help drive more intelligent omnichannel strategies, where a brand’s presence online and in-store become nearly indistinguishable. In other words, strong brands with equally strong customer relationships sell.
In 2024, don’t underestimate the power of DTC. As the cost of customer acquisition skyrockets, brands will need to experiment with a variety of channels to get customers in the door. Once the customer makes a purchase, retailers will need to create an online presence worth returning to again and again. The more control retail marketers and merchandisers have over their digital presence and first-party customer data, the more exciting and memorable an experience they can create for consumers.
Bryan House is the chief experience officer at Elastic Path, a composable commerce solution.
Bryan House is the chief experience officer at Elastic Path, a composable commerce solution. He leads the UX, Product Management, Enablement, and Customer Success teams. Previously, Bryan was the Chief Commercial Officer at Neural Magic, a deep learning software startup where he ran Product, GTM, and Customer Success. An Acquia founding team member, he helped lead the company to $170+M in revenue. His expertise
spans digital commerce, machine learning, digital experience platforms, and open source technology.