Building a DTC brand is tougher than it seems. An expert debunks many misconceptions, offers helpful tips and has a couple of suggestions for media companies.
Welcome to People vs Algorithms #35.
I look for patterns in media, business and culture. My POV is informed by 30 years of leadership in media and advertising businesses, most recently as global President of Hearst Magazines, one of the largest publishers in the world.
I’ve spent a bit of time recently with a smart entrepreneur and DTC (direct to consumer) ecommerce expert. Haris Memon is the founder of venture-backed DTC holding company Nameless which owns brands like Miracle, a mid-8-figure profitable DTC home goods brand. He also advises and invests in companies related to content and commerce.
Haris has a lot of interesting things to say about DTC and ecommerce. I asked him if he would answer some questions to share with you. It's a little long, but there is so much good stuff here. It’s worth your time. Enjoy…
What are the biggest myths about DTC ecommerce?
That it's better than retail / brick and mortar. A lot of people believe DTC has stronger profits and scale than retail but in reality it's flipped. The margin you give up in customer acquisition and shipping is often greater than the margin to distributors and retailers, and retail still has far greater scale potential than ecommerce for most products.
With DTC, things get tougher as you scale, while with retail, things get easier as you scale.
That nuance is incredibly important to understand. The first $10m of DTC is easier and higher margin than the first $10m of retail, but at $100m, retail is 10x easier and is higher margin than DTC. The challenge with scaling DTC is that ad costs rise with greater spend and saturation, customers are less niche and therefore lesser LTV (lifetime value), and your business is so dependent on a handful of key pieces (suppliers, ad networks, etc) that you can have 10-30% swings on a month to month basis because of this.
“The margin you give up in customer acquisition and shipping is often greater than the margin to distributors and retailers, and retail still has far greater scale potential than ecommerce for most products.”
Retail is far more predictable and it's fundamentally a game of fixed costs — the retailer takes a fixed margin on each unit, and that number does not swing based on the performance of your ad creatives or the retention of your email list… obviously retail has other factors like trade spend, promotion etc., but the ratio of trade spend to revenue gets substantially better as you scale and prove turnover.
Lastly, to sum up how to think about it, the benefit of DTC is the ability to acquire the perfect customer. This naturally that gets tougher over time, while the benefit of retail is mass-market audience and the ability to not have to pay for each customer's consideration (i.e. 5000 people walking by the shelf does not equate to $10k of costs the same way that 5k visitors to your DTC site results in $10k of costs).
What are the best categories for DTC? Which would you avoid?
It's less so about specific categories and more about products and price points. To back up a second, the best DTC brands are those that have the potential to scale well in offline retail. Most strategic acquirers don't want to buy a DTC-only brand, and the reality is that retail sell-through data is really the strongest indicator of how you will perform relative to legacy products, which is what acquirers care most about. Acquisition multiples are substantially higher if you have retail distribution, and the likelihood of exit is much stronger.
So to me, the "best" brands are based on 3 factors:
Ability for legitimate, large-scale omni-channel distribution i.e. major retail + Amazon + DTC;
Very strong retention profile;
True differentiated innovation or IP (important for capturing retail and M&A interest).
So to bring that back to price points and type of product… let's look at home goods as an example. Theoretically it seems like a category with tons of retail and Amazon potential. But in reality it's all about what product and what price point. How about $200 luxury bed sheets? Have you ever seen Brooklinen or Parachute inside of Target or Walmart? The highest price point of sheets at Walmart are $70, and the only bed sheets more expensive than this at Target are the in-house brands (every bed sheet brand at Target is private label, FYI). But other categories in the home can still be great retail focused brands, like in kitchen or bath for example. So it's less about category and more about price point and product. If you really want to find scale, you have to be very careful about how your strategy will move to retail.
“The best DTC brands are those that have the potential to scale well in offline retail.”
Similarly, you may have created the best tasting wellness drink in the world but if it's coming at $6 a bottle because premium ingredients costs you $3, the margin can simply never work at Target or Walmart because neither of them will sell anything over $3 in your category and therefore need to buy off of you for $1.50. After trade spend, other costs, etc. you're looking at getting $1-1.20 COGS per unit to breakeven? It will be impossible for you starting at $3, and that's just to breakeven.
So I'd avoid brands that don't have omnichannel potential, don't have real product differentiation, and don't inherently lend themselves to high frequency repurchases. Without these 3 factors, retail and M&A just gets super tough. With that in mind, I'd avoid categories like refrigerated food products, beverages, premium wellness ($50+ vitamins), etc.
Is there a formula to making these businesses work?
It's all about figuring out how to really turn anything you're selling into somewhat of an impulse buy. If you can get people to buy on first visit regardless of the price point or product, you'll have a winner. The key is the product needs to have real value proposition and needs to feel like it can dramatically improve the customer's life — the way I like to think about this is what i like to call the "infomercial test.” Could this product have been a 1999 infomercial product? Or a QVC product? If not, why? How can you turn it into that?
“It's all about figuring out how to really turn anything you're selling into somewhat of an impulse buy. If you can get people to buy on first visit regardless of the price point or product, you'll have a winner.”
For example, we sell luxury bed sheets, which don’t naturally feel like an infomercial product. But we've put various fabrics and innovations into them to provide a clearer, sellable value proposition → a fabric for anti-microbial coating, which helps with acne, laundry, and general hygiene; and a fabric for breathability / temperature regulation to keep you cool. We were able to create various angles and pre-sale pages focused on these value props, and we completely revamped this brand into an impulse buy with a close to $200 AOV (average order value).
I firmly believe that all brands — at least the ones that have a real innovative product, not just a "brand" — can do this. I know brands across food, apparel, home, wellness, beauty, etc. that have all done this very well. It's possible across many categories.
What separates winners from losers?
Being truly world-class at one specific thing, and then still being pretty-damn good at all other things. It's similar to the "major and minor" stuff that you talked about with media companies. The problem for DTC co's is most people will have a major and not be good-enough at the minors. That doesn't work. In ecom you need to find a few points of margin from each thing and that's how you cobble up 15% net — re-sourcing with new suppliers, finding cheaper packaging, negotiating shipping rates, price testing on-site, better upsell flows, more affiliate traffic, improved amazon offerings, etc. If you're average at a lot of these and just good at one major, you'll have a business with a lot of top line and no margin, which is what most DTC brands are looking like (with many being outright unprofitable).
So be good at one major — whether world-class performance marketing, or retail sales, or customer engagement/retention — and then be pretty-damn-good at the rest.
Who do you like? Who will build lasting businesses?
There are a few brands that have built great businesses off the back of leading one core category and then diversified very well from a distribution perspective — Nectar Mattress, Ruggable, BlendJet. I’ve heard from mutual contacts that Ruggable is in the $100m EBITDA range. BlendJet has phenomenal performance marketing and retail distribution. Nectar / Resident (parent-co) is a profitable performance marketing innovator.
These brands have all built world-class performance marketing operations as well as other strong distribution in retail, major affiliate deals, diversified traffic sources, etc. On a smaller scale I also really like a few consumable wellness brands like Hiya (kid's sugar-free gummy vitamin), Everyday Dose (MUD/WTR competitor), and Immi (healthy ramen).
Hiya and Everyday Dose have focused on scaling a large subscription base off the back of one core hero product, and so the brand story is inherently just the product story — and Immi has built a great brand from a diversification perspective (nationwide retail rollout, strong DTC revenue, diversified acquisition sources, etc).
“With a strong retention profile and real value proposition that can be sold like a QVC session, you can succeed in DTC. With mass-market pricing and audience appeal along with true differentiation from legacy products, you can succeed in retail. If you have both of these, you can build a lasting business because things just get easier over time.”
Those who will build lasting businesses are the ones that fundamentally have the right product attributes to succeed at scale in both DTC and retail. With strong retention profile and real value proposition that can be sold like a QVC session, you can succeed in DTC. With mass-market pricing and audience appeal along with true differentiation from legacy products, you can succeed in retail. If you have both of these, you can build a lasting business because things just get easier over time. Scaling profitably on DTC becomes easier if you have an incredible retention base as well as diversified direct-response tactics, and scaling retail becomes a lot easier if you can hit major outlets like Walmart and Target and prove sell-through at a strong pace.
What are the scaling challenges? Is there a limit to how big these businesses can be?
The biggest challenge with DTC is so much is out of your control. It's inherently a very unpredictable business with a ton of platform and external dependency. Big swings on Facebook — election seasons, iOS updates, random attribution bugs — can impact your business dramatically. Supply chain challenges can have ripple effects on things like customer satisfaction (delayed shipments), ad costs (having to turn off profitable campaigns because of lack of inventory has major ramifications long-term, in that you might lose a good groove you've been on for 10 weeks and have to re-build and be unprofitable), and cash flow. Whether or not you break into retail is very dependent on merchandise buyers, whether you have a good sales team or broker, and whether your product is differentiated enough from the other DTC competitor that's twice your size with more social proof.
“Most brands are extremely difficult to scale beyond $30-50m in DTC revenue.”
I do believe there are limits to how big the business can be but many will disagree. Sure, if you're the category-leader in mattresses, women's fashion, etc., you can build a billion dollar DTC-only business. But really most brands are extremely difficult to scale beyond $30-50m in DTC revenue. A lot of the best brands with mid 9 figure exits end up being something like 50% retail, 30% DTC, 20% marketplaces/Amazon/other. It's just extremely difficult to scale a $100m+ revenue DTC brand, because like I mentioned, things get harder in DTC as you scale. That doesn't mean it's not possible, but beyond $30-40m it's really about scaling retail, Amazon, and DTC all together and cohesively.
Lastly, to answer your question on dependency with SKU promotion on FB/Google… so much is out of your control, these networks are highly volatile month to month on costs, and naturally these ad marketplaces increase in costs 20%+ per year. So naturally your CPA today is inherently not your CPA in 3 years nor even close. It's just basic math. That doesn't mean these networks aren't great... it's just not great for 90% of your revenue to come from them. Now one key nuance is, it's okay if most of your new acquisition comes from them, so long as your retention profile is so strong that these channels still only technically account for less than half of revenue (intentionally emphasizing new acquisition vs. revenue as two separate things to look at because retention is the differentiator).
“Now one key nuance is, it's okay if most of your new acquisition comes from them (platforms), so long as your retention profile is so strong that these channels still only technically account for less than half of revenue.”
What metrics matter?
I like to look at the revenue pie chart — the % of *new acquisition* revenue from each source and the % of revenue from existing customer base over time. The total % should constantly be increasing because theoretically you're compounding a larger base of recurring customers against new inbound customers over time since the existing customer base stacks... if your LTV profile is strong.
The frequency of repeat purchases. Most people look at repeat purchase rate…but it's more about frequency and speed of re-purchases. It doesn't matter if repeat rate is 45% if the 2nd purchase doesn't happen til month 12 because they don't need it until then, and so repeat rate is high but total LTV is low because they only need it twice ever.
There's also the obvious ones like CAC:LTV etc, but the point of all of these answers is not for me to point out the obvious and instead to discuss the more nuanced elements.
What skill sets are key?
You need to get incredibly good at optimizing cart value, incredibly strong at understanding how to constantly iterate and revamp your supply chain if needed, and incredibly creative at how you think about distribution outlets. Let's dive in a bit further…
1) Optimizing cart value → the extent to which you're good at optimizing AOV determines how much you can spend on acquisition, what channels you can scale with, and how quickly you can grow top-line from a total-orders-per-day perspective. To get creative with this, you need to think through things like post-purchase upsell flows (not the classic upsell apps on Shopify... I’m talking about custom funnels with super-optimized one-click upsells that actually work), price testing constantly (if you have a landing page that also has three post purchase upsells….then across four products, if your price testing can add $1-2 per page, you're talking about some real margin being added to the mix).
2) Re-sourcing and revamping supply chain → it's insane how infrequently people try to re-negotiate or re-source their products elsewhere to drive down costs. You can do this 2-3 times a year and get a few points of margin each time. Our costs by EOY will be half of what they were 2 years ago. That has an insane impact on our bottom line. I told a friend recently to do this, and he just told me yesterday that he's now going to get $1.5M in savings off of $10m a year of purchases…that's $1.5m directly added to his bottom line. There are a ton of factories/suppliers that can develop your same product, and your existing supplier is likely willing to renegotiate as you scale if you are aggressive with them.
“It's insane how infrequently people try to renegotiate or re-source their products elsewhere to drive down costs. You can do this 2-3 times a year and get a few points of margin each time.”
3) Distribution outlets → it's about more than just FB/Google. Think creatively… live shopping channels, affiliate networks, bloggers with real email lists/engaged fans, infomercials, international wholesale, independent locally owned retailers, etc. These are not outlets that drive $500k….these are outlets that can drive $10m+. I can list so many different creative strategies I've seen that brands have leveraged (including us) to find another $10m. I know one brand that sold 1M units through live shopping and infomercial… another that has 4,000 affiliates driving $4m/month through email lists… another that drove $20m a year through interior designer referral partnerships (it was a curtain brand)… etc.
Tell me more about sourcing.
It really all depends on what category you're in and where you source from. Everyone's gotten impacted in some way i.e. speed, costs, etc — but whether or not it's had a real impact on your business and continues to do so, is dependent on your product and country. And my belief is that most people can source from other countries and suppliers at similar costs, but they need to put in the work to find them.
Given all the challenges, we've sourced from a ton of different countries the last few years and have hopped around country to country without much challenge because we move quick. India, Bahrain, Israel, and Pakistan have all at one point in time the last 2.5 years been a supplier for us. Sometimes factories have shut down due to COVID, others were capped on bandwidth due to COVID, and other markets and ports had extremely pricey shipping freights because of the supply chain contraction. The key was to diversify, quickly find other suppliers, and oftentimes order from multiple suppliers at once so long as they can produce your product to your specs. We've gotten really good at this and our costs by EOY are actually 50% of what they were in 2020.
One of the key pieces to doing the above really well is understanding what value your product provides. If your customers love you for a specific value prop like cooling/temperature regulation, do you need to be as luxurious or specifically have "egyptian cotton" or do customers actually not give a shit about that and would be equally as happy with Supima Cotton? The reason that's important is... you might find materials shortages and supply chain challenges with the exact spec of product that you have… but could you manufacture a product in another factory or country with identical value props and perhaps different materials that fully meet all the satisfactions of your customers and won't impact your existing messaging and branding? The key is to really think creatively about sourcing in order to solve these challenges.
How would you advise a media company looking to diversify into ecommerce?
Tons of thoughts here. I've spent time helping senior leaders at almost every well-known publisher think through commerce the last few years. My main thought is 1) go all-in on affiliate and stop trying to figure out your own products and in-house DTC, because you're never going to be great at it; 2) get really creative with affiliate… figure out how you can leverage the power of your brand and editorial to capture more traffic than just your organic audience (i.e. paid strategies that amplify high-margin affiliate activities).
Below I'll provide a gem that I think can unlock a lot of revenue for publishers, and is something I spent a few months advising a very well-known publisher on.
Think outside the bounds of just organic audience, and think through how you can merge paid strategies with affiliate revenue. Here's what I mean…
One thing my team does really well for our bed sheets is pump out advertorials. These are pretty much sales-y articles like "6 reasons why Americans are ditching their traditional sheets" that have CTA's to click-through to our landing page throughout. This acts as a pre-sale page and educates consumers on the product and the pain points of existing products in market... driving traffic to these advertorials actually leads to cheaper acquisition costs than going directly to the landing page, even though there's an extra step in the funnel here. The reason is because of the added context and "better" sales process in the mix. Then you can distribute these advertorials on different ad networks, affiliate networks, etc.
“…driving traffic to these advertorials actually leads to cheaper acquisition costs than going directly to the landing page, even though there's an extra step in the funnel here.”
The reason I bring this up is, we host these advertorials on our own brand's domain. What if that exact advertorial was replicated and housed under a magazine like Cosmo or Buzzfeed? You don't think you can get 20-30% cheaper CPC's on Facebook or Google to those advertorials than to your own DTC brand's advertorial? And maybe a higher CTR in the advertorial as well? That could be the difference between a $90 CPA and a $70 CPA. And these advertorials aren't low scale….we do millions of rev off the back of these. If publishers offered this in a way where they executed the offer pages and UX similar to our advertorials, I would gladly pay a healthy % of that CPA to a publisher and put 6-7 figures of spend behind the winners as they keep working. I have 1 advertorial that has generated $5m+ for us. Imagine that was housed at Buzzfeed and they took 5% of that revenue? That's $250k for 1 advertorial, without ever distributing to their organic audience.
In order to do this well, you have to really understand how to develop direct-response advertorials (not easy), and understand the UX of these advertorials (buy-now buttons, banners, etc). But I bet a strong editorial and affiliate team at a publisher has a way better shot at doing this super well than figuring out how to run its own brands or products.
I'll throw out one more tip here, building off the back of the above…think about affiliate-focused listicles with much better payouts and much stronger paid traffic. Oftentimes publishers will do a gift guide with 15 products, and they may have affiliate links in half or all of them. And oftentimes these are just focused on organic traffic with a bit of boosted paid. But if you really get good with these offers via negotiating direct deals (charging CPA's that are 40%+ of the total sale), build more engaging listicles with much more than just 10-15 products, and distribute these through a ton of paid channels at scale, you can unlock massive revenue if you can get good at buying traffic to these.
I know some affiliates that are not well-known publishers, who use this strategy and make up to $100k+ per day off the back of just a single list pages. The key is optimizing the content and the order of the products based on EPC (earnings per click) and then getting insanely good at buying CPC cheaper than that. And trust me, brands are more than willing to pay 40-50% of the sale…FB is taking more than that from them anyway.
You build a decent DTC business in home goods. What were your most important learnings?
Aa few key observations...
1) How much faster a brand can scale the top line if there's naturally a high AOV. Here's what I mean…let's say you have a $250 AOV. To do $50k per day in revenue you just need 200 orders per day. That's not that many people if it's a mass market category. So when you evaluate scale from a number-of-orders per day perspective, things seem less daunting. I was telling an agency recently that we do about $25k per day in revenue from affiliates. They had suggested that with that level of volume we probably have a lot of affiliates, and affiliate networks are probably re-brokering our offer.
But that's not the case. I told him it's really 3-4 affiliates driving most of that, because that's really just a bit over 100 orders a day, and we have a few affiliates that drive 30+ per day consistently. I know this might seem like a strange observation or somewhat obvious, but it's not. The key really is whether it's a mass market product with impulse potential, because then your $200 product has the same frameworks to acquire customers as a $40 impulse buy, and as a result, it's the same level of difficulty/ease, but with a 5x order value.
2) Are you building a business through awareness and education or are you just capturing intent? Casper and other mattress brands went all-in on building awareness and getting people to know their brand, so that when they're in-market to buy, the first brand they think of is Casper. Nectar flipped that on its head, and instead they focused solely on the people who are ready to buy a mattress right now, and getting them to see Nectar as the best solution. So a lot of their marketing is really about having the best offer, highlighting the best features and social proof, and the strongest urgency — and not a lot of marketing focused on branding and awareness.
“Are you building a business through awareness and education or are you just capturing intent?
3) How much distribution is out there outside of FB/Google/Amazon, that most people just don't talk about and most don't try hard enough to find. For example we will do close to $10m in revenue this year off of affiliate, which comes at a CPA/CAC that's $20 cheaper than FB for us. We're also now scaling into live shopping marketplaces (think QVC, HSN, etc but also in other countries/markets). Those outlets will give you PO's like retailers…and can have a ton of scale if you try to do it across markets and channels globally. Another example is local independent retailers…I know a furniture/home goods group that does $100m EBITDA a year because instead of major retailers, they just focused on direct relationships with 15k+ local independent stores and distribute through them. Another example is a curtain brand who built an 8-figure a year channel through interior designers (they built a referral system for them). So anyway, the point is that there are a lot of various distribution streams that can reach $10m+ scale that have nothing to do with ad networks, and you just have to be creative about it.
Thanks Haris! BTW, if you want to contact Haris, send me a note here.
Have a great weekend…/ Troy
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