Both Shopify and DTC seem to have been knocked down by relentless share prices and market caps immediately after a brief industry peak. Shopify has fallen from a high of $1,762 to a recent low of just over $700 and as low as $510. The DTC sector as a whole is down over 20%.
Before we turn our attention to the plight of the DTC brands, let’s first review why they have risen so quickly over the past 10 years, securing a series of capital raises and IPOs:
- The spread of new technologies in the Internet, mobile Internet, and cloud computing over the last 20 years has laid the foundation for digital and online business life；
- Over the last 10 years, social media has been on the rise, from Facebook to Instagram to TikTok. Traffic and attention have been constantly redistributed. The power of communities continues to be strengthened;
- There is a change in the main consumer group. Consumer habits and psychology are also showing stronger intergenerational differences due to the rapid changes in the environment in which they grow up;
- E-commerce services represented by Shopify have lowered the bar for branded e-commerce, with huge IT departments being replaced by various SaaS and Shopify plugins.
Growth Fatigue of DTC
By examining the development of several DTC brands, we can see several general characteristics:
- Revenue growth was initially strong and then weak, accompanied by increasing losses. Difficult to make a profit.
- The brand gradually moves offline, breaking the perception of consumers that DTC is “purely” online.
- Competition in the same category is becoming fierce.
Why is this so? We see 2 inevitable phenomena plaguing the development of the DTC brand:
Brand building lags behind customer reach
Due to the reduced cost of trial and error, many DTC brands do not follow the so-called traditional branding approach. The easy and inexpensive access to online customers provided by internet technology, combined with the price advantage over traditional brands, has enabled these brands to gain immediate access to a pool of online customers without the need to invest heavily in brand strategy and channel strategy.
But the limited success of online customers has not been enough for them to reach a larger mainstream consumer base.
Shortcutting DTC brands are not good at planning the communication of a brand across different channels to users with different characteristics. We have seen these DTC brands work hard to broaden their channels and increase their spending, but the actual effect is that while revenues are growing, costs and losses are rising at a greater rate.
Lack of scalability in the assumptions of the unitary economic model
With traditional marketing, a budget is often planned for all costs. A brand will know exactly how many products it needs to sell within a set timeline to cover costs and therefore generate a profit.
And DTC brands will treat some extremely important assumptions as fait accompli:
- Assumptions about the cost of customer acquisition;
- Assumptions about the length of the customer’s ongoing relationship with the brand;
- Assumptions about the frequency with which customers purchase goods.
When DTC brands were in their infancy, these assumptions were relatively simple and intuitive. As DTC itself becomes more competitive, and as traditional brands begin to master the DTC playbook, the costs of channels such as social media are escalating. Even more frighteningly, if we add to this the cost of logistics, tariffs, inflation, and so on, this simple yet fragile assumption becomes even more fragile when times are turbulent.
How DTC is going to evolve?
Additional media attributes or self-contained traffic and community attributes
Even in the heyday of digital marketing and precision placement, top-level influence is still of paramount importance to brands, and celebrity endorsement is a time-honored “truth”, but it is a scarce resource； So, content production and community operations are back in the brand’s circle of competence, and can no longer rely on three-way data and placement to solve the problem.
In this sense, the importance of platforms like TikTok will rise further, as influential individuals, content, and organizations may be born from such platforms in the future.
As the cost of the online channel continues to rise, the cost-effectiveness of offline may become viable again. Simply put, it is relatively more expensive to open direct shops offline, where the brand directly controls the channel, but it is also a more effective way to acquire new customers.
The D in DTC is not Digital, but Direct, which is the most important thing to do to improve the customer experience, to respond immediately to customer feedback, and iterate quickly to improve the product and experience. Whether it is social media-driven or purely online depends on the input/output ratio of the different channels. Purely online is not a dogma.
New traffic platforms (TikTok/Metaverse/NFT)
TikTok’s e-commerce attempts are already underway globally, and TikTok’s traffic and reach have long been leveraged by DTC platforms and brands, including Shein. TikTok’s value for money is looking increasingly attractive compared to the high prices and hard-to-measure results of Facebook’s fierce competition.
Whether it’s about first-hand data, omnichannel operations in the digital age, or new traffic, the core competence still lies in the “data” capabilities of brands. In the past, Facebook has taken on most of these functions, but in the future, both DTC brands and other traffic platforms will need to face and solve the “lack” of Facebook in this area.