As a “classically trained” marketing person who believes passionately that the best products solve a real unmet need in a better way than anything on the market, watching the direct to consumer (DTC) revolution has been fascinating. As much as I love Dollar Shave Club’s viral video and Warby Parker’s fab glasses, I couldn’t help but wonder if the trend was sustainable as I’ve seen company after company pile on.
Two things make me think that DTC is jumping the shark.
The first was the compelling article in Inc. magazine: How Wharton Launched Warby Parker and Dozens of Other Companies Just Like It. The writer, Tom Foster, explores the hundreds of DTC launches that are connected back to an informal Wharton incubator, and he traces some of the companies’ trajectories as they’ve matured. These are the key points he makes that have stayed with me:
- Whether a DTC startup can actually deliver better value than its predecessors…depends on how broken the existing market is.
- When they work, guerrilla tactics [like Dollar Shave Club’s viral video] can jump-start a company’s growth, but at some point, digital-first brands have no choice but to turn to paid search and social-media advertising.
- Online ad platforms are becoming more expensive and, in some ways, they’re now the middlemen to digital brands in the same way that retailers are to traditional consumer packaged goods brands.
- According to a study by marketing-analytics company AdStage, during the first six months of 2017 alone, the average cost per 1,000 ad impressions on Facebook increased 171 percent, and the average cost per click increased 136 percent.
- Companies that sell inexpensive items need to lock customers in for a long time to recoup their CAC, and Lifetime Value can be especially tricky for startups to calculate
Ultimately Foster found that as these businesses mature, they’re turning to traditional marketing tactics like billboards, TV, direct mail and selling through brick & mortar stores. Jesse Derris, described as a DTC PR maven, observes that:
DTC companies are realizing they “are not digital only–they’re digital first.” That’s a major clarification: They can use the internet to get around the traditional barriers of entry, but once they’ve arrived, it’s more like business as usual.
Second, shortly after reading the Inc. article, I had a conversation with a startup founder that echoed many of Foster’s key points. The company sells a consumer product – let’s call it Zesto. Zesto is in a category that you’ll find in every household in America. As the Zesto team pitches the company to potential investors, their key selling point is that Zesto is an online brand focused on selling to millennials, and its key point of difference is its superior digital marketing. This sounded eerily similar to something David Bell, a marketing professor at Wharton, said in the Inc. article:
DTC companies exploit: “Millennialization.” Twenty- and 30-something consumers are digital natives with lots of buying power who have no attachment to mall brands and big-box stores. Since these founders are usually Millennials themselves, DTC companies speak the mother tongue–Instagram, experiential marketing, brands as lifestyles. [For example] Away’s suitcase, says Bell, “is a decent-enough product”–he describes it as a 7 or 8 out of 10–“but the marketing is 10 out of 10. The way it’s priced, the way it’s distributed, the way it’s promoted, the way it’s targeted, the way it’s positioned–that’s really the secret sauce that makes the thing go.”
Not surprisingly, there are two key problems Zesto is running into: They have no marketing expertise on their team, nor the funds, to deliver this “superior marketing” and, more importantly, the product itself has no real point of difference. It’s manufactured using similar formulas to the existing products on the market. In fact, there is no “secret ingredient” that supports Zesto’s claim to consumers that it performs better than every other product in the category.
This is where marketing goes from being a key tool to support the growth of a differentiated product in the marketplace to being flash and dazzle. Ultimately, it’s not which tactics that you use to reach your customers that matters, it’s the fact that you’re selling something that meets a real unmet need they know they have.