There is a tectonic change in the retail and services industry. The Direct-To-Consumer movement. While it already began a few years back, these brands and entrepreneurs are now in every industry, changing the habits, preferences and share of wallet of the most desirable consumers.
Direct-To-Consumer brands are products or services that are financed, designed, produced, marketed, distributed and sold by the same company. They bypass the middleman and connect directly to consumers.
These brands operate differently from the brands you usually see in Nordstrom, Walmart, Bestbuy, Amazon or from unbranded services you find on classifieds sites.
The difference is in the way power is distributed along the value chain and how profits are shared.
In the old days, brands were responsible mainly for the design, production and some of the marketing activities. Everything beyond, such as sales, operations and distribution, was based entirely on wholesale partners and distributors, leaving them with the larger piece of the revenues.
Direct-To-Consumer brands do things differently. They master everything- from the design to the final sale, take over every part of the sale cycle, own the customer and keep all the revenue.
The Value Chain
The Old Way
The New Way
Legacy and up and coming brands alike, are taking control over the customer journey from beginning to end. They release themselves from huge retailers, absurd promotions and the control of distributors. They are taking control over the buying experience. They are taking control over the communication with the customer. They are taking control over the data that will help them create better products and the margins that will help them be more profitable.
WarbyParker, OneDollarShaveClub, Casper – All these $1B+ brands, and many more, are paving the way in recent years. They’re writing the guide book of taking on a huge market and winning over consumers who are blind to most advertising messages. They do that by owning the entire relationship with the consumers, even from before they knew they are a consumer.
These brands are taking over by using new digital platforms and tools, that help them create new communication channels, broaden their reach and maximize revenue with data-oriented marketing and sales methods.
What can be a “Direct-To-Consumer” brand?
It can be a product like a dress or a car.
It can be a person who sells information products.
It can be the place you live in or work at.
It can also be a service provider, like a lawyer.
The Honest Company, Everlane, Reformation, NatureBox, Away, Casper, Hello Noémie, MeUndies, WarbyParker, Casper, 1DollarShaveClub, WeWork and so many others are changing the way we choose what to spend money about from the ground up.
These are the cord cutters of retail and service. By breaking the traditional distribution equation and being treated as a commodity, they are heading towards distributional freedom and being uniqוe by disconnecting themselves and not depending on huge chains.
Even legacy and well-known brands are taking this new route and investing heavily in Direct-To-Consumer sales and marketing channels. NIKE predicts they’ll grow in DTC sales from $6.6 billion in 2015 to $16 billion in 2020, and this is after they beat their $5B target for 2015 by over $1.5 billion.
Why is this a thing?
Backing up a bit, let’s talk about what caused this change and why it was inevitable.
Direct-To-Consumer brands are taking back control over 4 main channels that change everything for them.
Consumers are expecting everything to be perfect, from the product quality to a seamless payment. It should just work and look amazing. In many cases, the differentiator between first and return buy for consumers is the purchase experience.
But when a manufacturer sells through a distributor, it has no control over HOW the product is sold. There is rarely a personal touch, the experience is the same for many products, the payment and service are the same and the manufacturer doesn’t have a say. Whether it’s brick-and-mortar or a website, the customer experience is not part of the product and definitely not owned by the brand. By selling directly to the consumer, the entire journey from discovery to loyalty is part of the brand vision, aesthetics and execution.
“Your audience is your asset” is a mantra that is voiced in every marketers conference on the planet. It is true. When you form a direct connection with your consumer and create a relationship of trust and familiarity, your ability to sell them your product increases tremendously.
When a brand is in control of its narrative and messaging, the relationship with the consumer can be way more personalized and effective. Even if the consumer didn’t buy your product, but spent time on your own asset, store or website, the relationship setting has already started. You don’t get that when working with external distributors.
Customer data is changing the way products are designed and marketed. Selling directly to the consumer in mainly digital channels creates opportunities to measure everything in the user journey and the ability to iterate on the funnel and on the products themselves.
All the best companies are “data oriented”, which means they rely on facts and numbers when making decisions and predictions, not on assumptions, “experts”, common-industry-knowledge and hunches.
When you deal with companies that enjoy their economy of scale, you can’t negotiate the terms from an equal position. Brands take a hit everywhere in the value chain – distribution, shipping, promotions, and payments. Everywhere.
By removing most if not all brick and mortar stores from the equation, focusing on online channels and owning the customer, margins get bigger and the numbers make much more sense to the brand.
However, there is a catch
The bigger the gain, the greater the risk. Let’s say you’re in fashion and starting a new Direct-To-Consumer brand. It will require significant capital to start, unless you have some tricks up your sleeve.
If you want to sell, you need inventory. It is hard for new companies to finance large volume of high quality products without having early orders from a large distributor, that can cover the costs of the factory in advance.
Now let’s say you made it through the financing of the product. What now? Unlike traditional channels, shoppers will not mysteriously appear on your website. You need to have a good marketing team to generate PR, buy online ads, reach targeted traffic and so on.
On top of that, there are the 45% “weirdos” who still don’t usually shop for clothing online.
This is a huge challenge for DTC brands. While it is obvious that owning the experience, relationship, data and margins is a good thing, having no one visit your shop can feel pretty shitty.
Bringing online traffic to jumpstart and maintain sales without a distribution partner, is part of the startups and tech companies world. It’s not the world of physical brands and services.
Up and coming brands – how can they generate online traffic?
For new or unknown direct-To-Consumer brands who must get their name and products out there, traffic is the only currency.
It goes without saying, that the most important thing is to create beautiful and useful products that people love and talk about. However, unless you’re ridiculously lucky or extremely connected, getting people’s attention takes time and keeping your product alive costs money. So you need to make sure the time between releasing your product to the world and the world noticing, is minimized.
Jokes aside, I’m assuming you already know how to build good products and you’re still reading this because you want to know how to get even more traffic to your brand.
E-commerce websites, online services and publishers who monetize their content are all fighting for traffic.
If you’re new or small, there are many tactics you can use to get “free traffic” or “hack” your “growth”. The problem with that is that everybody else is trying to do the same thing. “Growth Hacking” is basically the new online marketing.
In the end of the day, on a budget and before you have a known brand, you can hack your way to get a lot of low quality traffic or a small amount of high quality traffic. Not both. You may eventually (hopefully) get a lot of good traffic but it will take a lot of time or a lot of money.
So what can be done?
Getting a steady volume of high quality traffic (which means people who are actually interested in your brand) to a new brand is possible in 2 ways:
- Organic search – this will take a long time. Years, in most cases. This is usually the best kind of non-paid (I don’t write “free” on purpose) traffic
Anybody who tells you differently is a consultant that is trying to take your money and will charge by the hour. Do not listen to them.
I don’t want your money and moreover, I don’t want to waste your time. Organic traffic is the best traffic you can get. If you can get organic search traffic by yourself right now – You don’t need to read any further. Just keep on doing what you’re doing and walk away with all that cash stacked in your back pocket. Baller.
But, assuming you don’t have the luxury of organic traffic yet, you are probably still testing. From your products, pricing, marketing and sales channels, the branding and everything else that you need to be testing in the beginning.
In that case, you probably need to spend money on paid marketing channels that will work and minimize risk of losing money.
What are the best ways to get paid traffic that will convert?
Facebook / Google – high volume, accurate targeting, highly expensive
These 2 companies will be more than willing to take all your precious marketing coins and show your potential customers the way to your virtual lemonade stand. Google and Facebook are worth so much money because they can send an unlimited number of people to your website. After all, they are advertising companies. Ignore the drones, VR and self-driving cars. Google and FB are advertising companies. 89% of Google’s revenues are the result of direct advertising. With Facebook the number is 96%.
They will also charge the most for their traffic. In terms of actual pricing, in the US alone, Facebook CPC (Cost Per Click) average price in 2016 was 27.35 cents while Facebook CPM (Cost per 1,000 impressions) was $5.95 according to Adspreso. The more specific your ad targeting will be, the higher will be the price. So for example, if you’re targeting young moms in urban areas, expect to pay up to $5 per click and about $20 CPM.
Assuming that only 2 people out of 100 visitors in your website will become paying customers, and your product costs $50, if you’re paying more than $1 per click, you’re losing money.
I know it’s a bit complicated to calculate, but no worries – I made you a calculator to find out what is your sweet spot for your CPC and your ROI (Return On Investment) from your marketing campaigns. Read on!
Google search ads are generally more expensive due to high competition from other advertisers on the same keywords, but display ads (banners) are cheaper. The average cost per click in AdWords across all industries is $2.32 for search and $0.58 for display according to Wordstream.
Besides Google and Facebook, it will be wise to try giving a shot to Pinterest, Linkedin and even Snapchat. These advertising solutions can also offer great opportunities for reaching large volumes of targeted traffic, but are limited to specific demographics. On any given day, Snapchat reaches 41% of all 18 to 34 year-olds in the United States. Pinterest is the go-to social network of the small businesses and on Linkedin, you can target 450 Million professionals around the world. Be warned though, it is extremely expensive.
RTB and Ad Networks – Don’t go there, at least not yet
Ignore the world of RTB (Real Time Bidding) and ad networks that are not Google or Facebook. It will not work for your new Direct-To-Consumer brand unless you have huge budgets, years of experience and a lot of patience.
In today’s RTB world, you can definitely get your message in front of millions of people very quickly. Most leading platforms have the ability to target people based on their online behavior across their different devices and based on their demographics.
Thing is, while in theory they can, in practice there is so much noise and bad data out there, that succeeding in this world means losing most of your budget to ad-fraud and a lot of trial and error with different audiences and publishers.
Don’t get me wrong, if you’re experienced, you can profit by spending large amounts of money on the right networks that will eventually lead to successful conversions. This is great for brand awareness as well. But unless you can afford spending a lot, and by a lot I mean high 5 to low 6 figures a month, stay away.
Don’t go RTB before you’re 110% sure of your online sales funnel and your user’s behaviour across time. Otherwise, you WILL lose your money.
Buying media directly from publishers
You can buy traffic directly from websites or companies that specialize in this vertical and pay them for display advertising products such as site take-overs, ads etc. This at first seems like a great way to target your audience, but at the end of the day, this traffic suffers from all the sickness of the RTB and you won’t get a lot of volume.
There are many websites that will partner with you and offer a targeted marketing solution. The quality of this traffic dramatically varies and you need to check them on a case by case basis.
Use SimilarWeb for that, that’s the most reliable and comprehensive data source out there (Disclosure: I work there).
In general, there are 3 main types of on-site advertising products you can buy directly from websites:
- CPM campaigns
- Sponsored Posts
- Social Media Mentions (Including FB, TW, YouTube, Snapchat, Periscope etc)
It’s hard to put a price on these promotions. Content focused companies are evaluated based on 2 main factors: 1) How much traffic (volume) the can they send 2) How targeted (quality) the traffic is. Pricing their advertising offering is a result of the two.
Quality is more important than volume as a rule. The more targeted the audience, the bigger the check you need to write to the publisher.
It’s very important to keep track of your marketing spend and make sure every dollar you invest will return at least $1.01. That thing I did here is called ROI – Return On Investment and this number is your best friend.
This is your northern star in calculating how much money you can and should spend per marketing channel.
If you’re not sure how to calculate your ROI, no worries – I made this calculator just for you.
What is the best way to get high-quality traffic on a budget?
Your best option is finding online golden nuggets (but they are extremely hard to find).
You need to uncover hidden hubs of targeted traffic. Communities of potential clients you can tap into. These hubs tend to be underpriced and over performing. Why? Because they are harder to find, so the demand is limited. For now.
The reason is that it’s much easier for a lazy marketer to buy a generic 200X150 ad unit on Huffington Post than to contact a newsletter owner with a mailing list of 5,000 people, but both options can lead you to your target audience. Most people are lazy, so you’re lucky because you’re not.
But it’s hard. Because if it was easy, Google and Facebook and that team of 1,000 (lazy) media buyers who work for your competitor would already find every single one.
There are 3 main traffic sources that are not indexed by regular search engines:
- Social Media Influencers
Outbound email traffic is more than promotional offers and sketchy email lists. While email marketing has a justified bad reputation and 86% of emails are still spam, email has the highest ROI from all online marketing channels.
A recent study proves that even among millennials and gen-Y, the age group that people like to believe will soon stop using email entirely, email is actually the most reliable way of communication. They check their email every day and do it more often on their laptops, which means more attention and purchase intent.
Apparently, when consumers receive a message from a brand they trust and chose to hear from, they are exponentially more receptive to what the brand has to say. Think of getting a text from your friend versus getting a text from someone you don’t know. Which message are you going to open first and take more seriously?
But how do you tap into this type of traffic before you have your own email list or a nice sizeable audience?
Unlike most email communication between brands and their customers, there is another kind of email communication. Communication between publishers and their audience. There are many websites, people, places or even events that maintain a steady flow of email communication with their audience. And this is worth a lot of money.
In some cases, there will be newsletters that don’t have any web presence besides a signup page. Good luck finding them. However, these newsletters tend to be the highest quality newsletters of all.
While many of these emails mainly send updates and news about the entity who created the newsletter, a large portion of these newsletters link to other companies in their emails and let brands advertise in them like they do in a regular website.
The hard part about newsletters and the reason they are still underpriced for the quality of traffic they can offer, is because they are extremely hard to find. The main newsletters in every industry are pretty well known, but to find the majority of high quality traffic and the long tail of newsletters – well, you simply don’t have any way to do it besides asking people you know, learning about them in conferences and bumping into them online.
Podcast is a digital media file, either audio or video, which is distributed to listeners and viewers via web services to personal computers or mobile devices.
Similarly to newsletters, there are many types of podcasts and many brands maintain an active podcasting routine as part of their content marketing strategy. This type of media, which the consumer can consume on the go, creates a special opportunity for publishers to connect with their audience on their own terms.
Unlike newsletters, the vast majority of podcasts are produced without any official affiliation to a known publisher. While I couldn’t find any research with actual reliable figures, It’s safe to assume there are about 100K podcasts worldwide with the vast majority being recorded in the US and distributed via iTunes. This number is growing 25% year over year.
This is astonishing given the statistics one in four Americans ages 12-54 listened to a podcast once a month and regular listeners listened to 5 podcast episodes every week. The podcasts listeners come from all types of demographics and the most apparent virtue of them is that they are highly educated and their household income is higher than average. Sweet, right?
The most common way podcasters monetize their podcasts, is by doing sponsored episodes or sponsored bits inside the episodes. The way marketers measure the effect of this effort is either by doing the same thing they’ve been doing with other non-performance marketing channels (not measuring) or by encouraging the audience to visit a specific webpage or to use a coupon code when purchasing. Counting the number of hits to this page or the specific coupon can show the marketer how impactful was the campaign.
Instagram, YouTube, Twitter, Facebook, SnapChat, musical.ly – you name it. There are people who know how to use these platforms and gather audience that is following every single piece of content they produce. These people in turn, can send huge amounts of traffic to advertisers that decide to partner with them.
This angle is pretty known and many marketers already use it for branding and performance campaigns. However, in the last couple of years a few influencers ad network become popular by letting advertisers reach many influencers at once and discover them based on their audience and popularity.
With that said, I have yet to see a significant achievement in this space that is not a digital talent agency (which cannot scale) or a traffic generating arbitrage play (which is amazing, but not what the Direct-To-Consumer brand try to achieve).
Bringing it all back home
Direct-To-Consumer brands are paving a new road for E-commerce. They are defining new categories and shaping a new generation of well-rounded business people who know design, production and online.
But on top of that, these brands are improving the online marketing craftsmanship. They are pushing the industry to a new frontier of quality and perfection.
If you’re in this industry, you’re in luck. Adventures ahead.
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