In March I was part of a community conversation about what makes a Direct to Customer (DTC) business. Web Smith of  2PM was kind enough to feature this in his newsletter Issue 197 (which is a must read and subscribe).

These businesses go by different names depending on your opinion about the industry. Andy Dunn calls them DNVBs (Digital Native Vertical Brands), M. Paul Munford refers to them as MLC’s (Modern Luxury Companies), I see them as Direct to Customer (DTC) as I believe that is the most important part of their brand power.

  1. How do DNVB’s succeed in an economy that places premiums on horizontal eCommerce (Walmart, Amazon, Target)? They enter new spaces and establish consumer loyalty. The consumer relationship can be just as important as the product itself.
  2. There is no middle of the eCommerce market in any vertical. Either you’re great or you’re gone. Amazon destroys “middle” by using their financial muscle to drive said business into the ground.
  3. So how are the DNVB’s doing as a whole? A lot of the supposed winners are cash hungry, burning platforms of doom. I am not going to name anyone, but ask yourself one question — why are certain brands constantly in publications such as Recode, TechCrunch, or Fortune? Fashion public relations is often a cost-center disguised as a profit-center.
  4. Consumer Packaged Goods startups (Harry’s, Walker and Co., Dollar Shave Club) have a lot of upside as publicly-traded incumbents are in need of millennials for continued growth. There is a premium on CPG-specific DNVB’s for this reason.
  5. For DNVB’s to survive they must be both vertical and specific. What do they possess? (1) A limited selection of products with marketing and operations optimized for long term margin growth and (2) an authentic story. Tracksmith, Tuft and Needle, and M.Gemi have stayed true to their roots, are cash efficient, and are run by driven entrepreneurs. They have solved customer retention woes by using tech, clever brand-differentiation, and the sourcing of excellent products.
  6. The sudden growth of the vitamin and supplement category has long term growth prospects. As health becomes a global driver of decisions these direct to customer businesses are able to access educated customers with a new breed of products that are cost effective and have repeat purchase implications.
  7. For DNVB’s to be sustainable — LTV (customer life time value), retention costs, and unit economics need to be the priority on day one. The brands that succeed have to operate like they’ve raised little to no money at all.

I believe that direct to customer ecommerce is here to stay and will be found in all markets with the exception of China. Chinese ecommerce is dominated and controlled by Alibaba and JD.com and the distribution model contains them and as such direct to customer businesses cannot be formed.