Will the real #D2C brand, please stand up?*

A lot has been talked about D2C brands recently, especially in the post Covid-19 world when supply chains got disrupted and most traditional brands struggled to reach their consumers. A number of other terms and hashtags have also been coined to describe young, consumer brands (examples being #challengerbrand, #digitalfirstbrand, #newagebrand, #consumerfirstbrand) and these have been often used interchangeably with the word D2C. So, let me attempt to summarize my thoughts on what are some of the key characteristics that define a true-blue D2C brand?

1. Distribution Structure: As the name Direct-to-Consumer suggests, D2C brands at the bare minimum need to have a direct access to sell a product or service to its consumers. In the context of the internet world, this has been made possible through web, mobile and related sales fulfillment infrastructure. Consumers now have the ability to buy directly from the brand without any level of intermediation. So that leads to an immediate question, are the brands that largely sell through large e-commerce platforms also D2C brands? Maybe not! The customer relationship is primarily anchored by the e-commerce platform and it is well within their prerogative to decide on which brands to promote and sell. The other extreme is whether private label brands sold by all retailers are D2C brands first. Et tu, Mr. Private Label? There is at least no intermediation when a consumer buys private label products. The correct answers to some of these questions are a lot more nuanced and may warrant a longer discussion, so let’s get into other characteristics first.
2. Contribution Margins: The flip-side of having a direct distribution structure is that margins that are otherwise shared with the retailer, distributor, stockist et al. are saved, except for direct distribution costs incurred (read customer acquisition, delivery, payments, service etc.). In the Indian context, the direct distribution costs in some categories are still very high and hence do not end up in significant savings vs. the traditional distribution structure. For categories where the difference is a net positive number, these savings should be used to deliver more value to the consumer and not necessarily just give a discount or spend more on advertising expenses. But we seldom see that play out in most situations. So the key question is, what are the net contribution margins made by a D2C brand vs. its closest competitor in the traditional world and how are those margins used to deliver better value?
3. Feedback Loops: This is perhaps the most important aspect of building a D2C brand. Many of the traditional brands have failed to listen to consumer feedback and consequently lost market share over time. A large part of the blame goes to the multi-tiered distribution structure, where the feedback from the consumer never reaches the brand or gets lost in transmission like in a game of Chinese whispers (no pun intended!). By the way, anyone remembers anonymous market surveys or focus groups of the old days? A D2C brand should have the ability to establish a continuous, 2-way communication channel directly with the consumer and thereby listen to and incorporate all forms of feedback. The feedback could be simply on attributes of existing products, service quality or after-sales support. However, the loop on New Product Development (NPD) has to be a priority and can give a D2C brand an edge in experimenting and failing quickly, while capitalizing big on its winners. So always ask, what are the feedback loops and how are they giving an edge to D2C brand?
4. Customer Segmentation: Brands that are targeted at a certain consumer segment are often referred to as challenger or D2C brands (examples of segments — millennials, new moms, middle-age consumers, men with beards, brands catering to regional tastes & preferences etc.). These are actually just blind spots that were left vacant by large consumer companies because either these segments were too small or a product manager failed to track initial activity. Having said that, a good D2C brand should have the ability to segment and create specialized offerings for its various consumer segments. Because of their inherent ability to distribute small quantities directly to each consumer, D2C brands should be able to profitably service these segments as long as incremental NPD costs are viable.
5. Building Communities: One of the key attributes of a good brand is its ability to build communities of consumers that have a strong affinity to the brand. Creating such communities has been made a lot easier in the digital age and something that D2C brand should definitely focus on. Vibrant consumer communities could potentially have a snow-ball effect for the brand across various parts of its business including customer acquisition, NPD and overall performance.
6. Full Stack vs. Part: I have often read the definition of a D2C brand as “a brand who is able to manufacture, market, sell, and ship their products to customers without relying on middlemen”.Some of the parts of this definition may not be true. Not all D2C brands need to manufacture all of their products in-house. Similarly, not all D2C brands need to have proprietary fulfillment infrastructure. Building a full-stack D2C brand could be essential in segments where either 3rd party infrastructure is not readily available, or where a brand is not able to exercise enough controls to ensure quality. So being full-stack may be desirable, but definitely not a necessity for a D2C brand.
7. Internet-only?: Important but tricky question — are all D2C brands internet-first or internet-only? I do not completely agree. Many of the traditional, brick & mortar retailers like MUJI (translating into “no-brand quality goods”), Uniqlo (unifying the entire clothes-making process) or even Starbucks have been D2C in their own unique way and have created large franchises. Though some of those opportunities may not exist today, but that does not mean that a D2C brand has to be internet-only.
8. Annual Recurring Revenue (ARR) for D2C?: And last but not the least, I have seen a number of D2C brands use the term ARR for denoting their current business traction or revenue run-rate. Honestly, that is a classic facepalm moment for me. Misuse of the term ARR warrants a new post but let’s leave that aside for a different day. My recommendation would be to avoid using the term ARR for D2C brands and simply use monthly or annual revenues as a metric.

To summarize, the next time you see someone calling itself a D2C brand, ask if they can stand up to all the key characteristics before winning that highly coveted D2C badge?

* Title of the post inspired from the hit song “the Real Slim Shady” of early 2000s, and often used in a rhetoric manner to communicate that the specified person should clarify their position and/or reveal their true identity. Disclaimer: Some of the characteristics mentioned in the article are neutral to the product or service (eg. f&b, fashion, personal care, education etc.) and hence may not be applicable to all categories. This post is a personal opinion only.

Originally published at https://www.linkedin.com.