Selling direct-to-consumer is the dream. Cut out the middle-man and ship directly to customers—reducing overheads, increasing margins, and making products more affordable for consumers.
Brands like Warby Parker were online-only for years—until they realized that a retail presence is a key aspect of marketing and being seen.
When I started Lucid as a 20-year-old university student, I was building websites for a small agency that charged $750 per site and paid me $150. I quickly realized that if I went out on my own, I could charge $750 and keep it all for myself. What I didn’t realize is just how hard it is to find clients and that $600 discrepancy is well worth it if the agency does the sales and marketing in order to bring in a good flow of work.
Most new (and many well-established) direct-to-consumer brands grossly underestimate how challenging and expensive it is to find and acquire good customers.
Without the distribution channels of traditional retail, DTC brands are solely responsible for building their own brand awareness, identifying who their ideal audience is, getting in front of their ideal customers, creating an aesthetic and voice that is attractive enough to click on, maintaining that aesthetic and voice once the visitor is on their site long enough to engage them, and, if they get it all right, getting them to add to the cart, check out, and pay—and then buy again and tell their friends! Each of these steps has unique challenges and almost every step takes time and money and patience to hone and get right.
The myth that DTC has significantly higher margins than more traditional middle-man-driven retail is quickly shattered once brands begin to realize that they have to more or less do everything themselves—and/or pay others to support them.
The costs of people, services, platforms, percentage of ad spend, etc. add up rapidly—eating quickly into the once-healthy-looking DTC profit margins.
What might have originally appeared to be an 80% profit-margin can quickly become 20% or 10% or significantly less depending on how hard you have to work to reach your audience.
If you have a brand with a high cost-of-acquisition and you don’t have the kind of product that customers buy more than once or twice, you need to seriously consider whether you have a viable business. If your cost-of-acquisition is higher than your margins (or, which is so often the case, higher been than your retail prices) and you don’t have a product line that customers buy again and again or that are highly giftable to buy for others, you almost certainly don’t have a viable business at all.
If you have a direct-to-consumer brand selling other brands’ products, your raw margins are likely 50% at best. So, while you are selling direct-to-consumer, you are starting at a disadvantage in that your starting margin is low by DTC standards—so you need to be confident you can achieve the volumes to find your audience and build repeat customers in order to bring down your cost-of-acquisition and increase your lifetime value. You’re also likely competing with other retailers selling the same brands using the same keywords—so your paid media costs will be higher than if you are a niche brand selling something unique.
All this to say, beware of the hidden danger of rapidly-rising costs.
A common approach of marketing agencies is to start small and scale campaigns, ads, keywords that are performing well. With a strong focus on ROAS (return on ad spend), it’s easy to find yourself with an overall ad spend that is disproportionally too high compared to your overall revenue (or so low that you’ll never achieve the sales volumes you need) and, while you might be able to achieve 5 or 6X ROAS (if you work hard at it), you will probably find that that several of your other metrics are being sacrificed to enable this. And, worse, you will probably come to realize you actually need a 7.5X ROAS to be profitable without reducing ad spend.
There’s a tendency to think that direct-to-consumer is the holy-grail of retail but most seemingly successful DTC darlings like Warby Parker, Casper, and Allbirds are propped up by significant investment capital to get them where they are and most are not and will not ever actually be profitable.
If you’re starting or scaling a direct-to-consumer brand, be careful not to lose sight of the hidden costs that will quickly wipe out your initially-healthy-looking margins.
Direct-to-consumer brands generally need to figure most things out themselves through trial-and-error, experimentation, resilience, and patience. Which is why DTC brands need to be lean and nimble and able to adjust and change to adapt to customer behavior, marketing efforts, seasonal changes, and industry trends.
If you’re finding yourself stuck and unsure how to untangle the complexity of your direct-to-consumer business, I might be able to help.