The Lesson of the Direct to Consumer Revolution: Strategy 101 still matters

Every so often a new business model, often enabled by technology, takes the world by storm, attracts a lot of hype, eventually proves unable to live up to the headlines and disappears or becomes a shadow of its former self. The latest entries in this category? Direct to consumer companies.

Every era of competition, it seems, has its cutting-edge superstars. You know the kinds of companies I mean – they are heralded as ushering in the Next Big Thing in business, and sometimes they do. Usually, however, in the early phases of an inflection point, these are the hot properties that, once the hype cycle passes through, mostly become irrelevant or disappear.  

The few that survive, however, capture something essential about the change wrought by the inflection point and survive with a vengeance, ushering in the more robust and permanent phase of the inflection, when it becomes taken for granted. To understand which category a business is likely to fall into, strategy 101 still holds.

The pattern in recent history

For context, consider the dot.com revolution that ushered in the world of e-commerce as we know it. A glowing article about Yahoo from the year 2000 proclaimed that "The company provided evidence that it's relatively immune to a dot.com ad spending slowdown." Famed venture capitalist John Doerr, in a year 2000 reflection published by Harvard waxed lyrically about companies such as Excite@Home, Netscape and Drugstore.com. A long list of dot-com companies reads like a boulevard of broken dreams – Altavista, Lycos, Geocities, The Globe and many more. Most of these? No longer with us.  

Nonetheless, the survivors survived with a vengeance. Amazon, Google and eBay would be among them, and they succeeded in changing the paradigms through which we shop, transact and get information.

So, let’s have a look at the direct to consumer revolution. To hear some people talk, it’s a phenomenon that only started in the 2010’s when companies such as Dollar Shave Club, Warby Parker, and AWAY opened up their virtual storefronts. Actually, the business model is an old one – think about itinerant salespeople, the Fuller Brush Man, Avon, or catalog companies such as Sears, Lands’ End or LL Bean. What differentiates the current batch of DTC companies, however, is their direct attacks on entire categories.

Dollar Shave Club was the canonical example. After capturing a chunk of previously dominant Gillette’s business, it made huge waves when Unilever bought the startup for $1 billion in 2016. 

The Business Model that Took the World By Storm

Fuelled by endless supplies of venture capital, the DTC firms sprang up everywhere, offering seemingly everything you could think of (and some that I never did). Those that captured over $100 million in funding each are today household names: Away, Bonobos, Casper, Dollar Shave Club, Glossier, Hims, Rent the Runway, Stitch Fix and Warby Parker, to name a few. By some accounts $3 billion in venture funding flowed into the startups following this business model.

The hype was incredible. Meal kits, surprise boxes, pet food, makeup, belts, socks, conflict free diamonds, watches, accessories, and even hunting gear could be purchased from the startups. The lure was understandable.  

After all, with web-building services such as SquareSpace and Wix, making beautiful ecommerce web sites wasn’t the expensive chore it was in the dot com era. With YouTube, a funny viral video could get you in front of thousands (which it did in the case of Dollar Shave Club). No need for expensive advertising, a mainstay of Gillette’s strategy for decades. You could just get your tech stack from Amazon Web Services or Microsoft’s Azure – no server farms or heavy-duty developers for you. And you could target a poorly-defended niche for an established incumbent whose customers were dissatisfied.  

And yet…

Strategy gravity is not to be trifled with

A fundamental law of strategy is that absent barriers to entry of some kind, others are likely to copy or match whatever you do, if its working. DTC companies are really easy to set up.  Guess what, that applies to their competitors, too. By the time Casper tried for its IPO, there were reportedly something like 175 other mattress-in-a-box companies.  

This massive amount of potential new entry showed up just where it could hurt the DTC firms. Sure, you didn’t have to advertise on television. But hundreds of DTC companies flooded Facebook and other platforms looking to attract eyeballs with paid advertising. The price of said advertising and the availability of said eyeballs got out of whack. 

As Dollar Shave Club founder Mike Dubin observes, "Facebook was flooded with direct-to-consumer businesses all fighting for eyeballs. Given the limited real estate, at some point the law of supply and demand kicks in. The less of something there is, the more expensive it gets. And what ended up happening is it made growth expensive." So getting customers turned out to be more expensive than expected.

Moreover, the whole point of a direct to consumer model is that those consumers need to keep coming back, once you have them. This has turned out to be unexpectedly difficult, a real problem for those DTC companies that operate on a subscription basis. Casper, for instance, seems to have forgotten that mattresses are not a weekly or monthly purchase.  

So now what?

It’s back to strategy reality for many of these brands. Some are trying to amortize their customer acquisition costs over multiple lines of business (abandoning the simple one product/brand approach). Some have gone “omnichannel” – selling in both physical stores and online. Many have been acquired by the same kind of dinosaur incumbents they crowed about disrupting. Bonobos, for instance, got sold to Walmart in 2017, a move that didn’t sit well with many of its customers, who stopped visiting the company’s web sites in droves.  

The lesson? Defensible competitive advantages, even if they are temporary, matter. 

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