It’s all about CAC
(Cost to Acquire a Customer)
Or to put it another way, it’s all about distribution.
A few years back, my brother and a good friend of mine started a business online selling tea blends customized by astrological signs. They’re delicious — and they’re sold direct to consumer.
Direct to consumer (D2C) retail is not new. When Dell computer started in 1984, its strategy was to sell computers directly to the consumer and cut out the computer store. It’s still going D2C and doing well — so is D2C really dead? Or is it just that modern direct to consumer brands are discovering that when you go direct to consumer, you need to own your own distribution channel, including the costs?
The twin forces of rising ad rates plus the rising cost of ads once you saturate your market mean that acquiring a D2C customer through social media ads has you constantly chasing your margin.
As consumers become more privacy conscious and Apple plays up its brand strength on privacy, effective targeting through mobile devices becomes more difficult, meaning your ad spend is less efficient.
From a certain perspective, direct to consumer was never direct — it was always mediated by the internet, which has become so vast that nothing on the internet will ever be found unless you point someone to it. And pointing someone to your product is the intermediary in the chain.
D2C brands were always going to spend a lot on branding, because that is the differentiator. Casper is not a unique mattress, it’s a unique brand.
Most of the hit D2C brands from the past decade have begun to open retail stores. Allbrids, Warby Parker, Peloton, Purple… the list goes on. The cost structure is different, but the idea is the same. It’s the reason newspaper companies in the past set up vast, complicated, expensive systems for delivering newspapers to doorsteps instead of relying on the postal service: control distribution.
So I don’t think D2C is dead. I think it was trendy when social media advertising was both more effective and more competitive, but today the long-term cost structure of distribution on the internet is revealing itself, and it has changed the strategic options.
You can leverage the internet to create a consumer brand more cheaply than opening brick-and-mortar stores, but then you will need to decide if your business is going to benefit from owning the consumer relationship, as does Apple, or if your business cannot support the margins necessary to do so, and you must compete on price inside retailers like Amazon, Target, and Walmart.