DTC Brands are collateral damage in the Battle of the Titans
How Apple's iOS 14.5 update is creating havoc for DTC Brands
Targeted ads generate $86B in revenue for Facebook per year. You are likely familiar with how your personal data is being cultivated and used to push down specific ads, targeted just at you. I wanted to buy some gym equipment for my basement and after one google search, was inundated with ads on my FB & IG feeds.
I’ve had a lot of conversations with DTC companies over the past month, that have relied on this data flow to create a marketing push strategy, with many of them generating +60% of their revenue based on this strategy alone. However, for many of them, that revenue flow has completed dried up & they are desperately looking for alternatives to plug the difference.
So what is exactly going on & what could be a pivot for DTC brands who are now scrambling for new revenue streams?
Facebook vs. Apple
Apple CEO Tim Cook commented earlier in the year, “users should have the choice over the data that is being collected about them and how it's used”. This underscores the fundamental core of how each company makes money;
Apple - sells smartphones & tablets + cut of fees from app developers
Facebook - sells ads that can target based on info gathered
The new iOS we all upgraded recently has given us the ability to opt out of being tracked by denying the app permission of following us around to other websites/ apps.
According to Flurry Analytics, after the iOS 14.5 update, U.S. users are choosing to opt out of tracking 96% of the time. Facebook responded by putting out full page articles in newspapers claiming this will harm small businesses (which is an odd way for a social media company to spread the word).
The battle between the 2 goliaths really begin to heat up when you realize that Apple is also reducing its in-app purchase fees to 15% for <$1M revenue businesses. It appears that Facebook’s poor reputation for protecting user privacy is catching up with them and Apple is happy to capitalize.
So you are a DTC Brand & are caught in the cross hairs. What is your pivot away from FB ads?
While Direct to Consumer (DTC) is on trend and capitalizing on the e-commerce COVID growth wave, I’ll try to make the case here that DTC should embrace the “old” brick and mortar strategy to combat lost Apple user sales. Let’s take a look at a macro trend in the market…
According to data from Digital Commerce 360, while the e-commerce sales have increased by 64% over the past 2 years, retail sales have held steady even through rolling lockdowns have limited in-store shopping for many retailers. Don’t turn your back, in the hunt for new revenue streams, from a part of the economy that is still almost x4 larger than online shopping. However, to properly assess whether retail is the right strategy for a DTC brand, you must look at the cost vs. benefits.
Benefits of selling through retail…
High AOV due to bulk wholesale transactions —> leads to lower ship cost per unit
Unload customer acquisition costs to retailer —> they acquire the customer (the hardest part) & utilize their platforms
Generate many new points of distribution quickly
Instant gratification for consumer
Easy to return products
Retail merchandising strategies are a honed science - you can benefit here
DTC Brand can borrow against A/R to generate more cash for future inventory
Costs of selling through retail…
Retailer could lose interest in your category, by cutting the section from 12/8ft to 4ft or find a newer option in your category
They control any email lists - however, offer future discounts, product training or a warranty by providing an email directly to you
You still need to help the retailer get it off the shelf with trade support in the form of pricing/ merchandising + brand awareness building
You have to rely on their sales support to talk intelligently about the product
You must develop a retail pricing + merchandising landscape so if you’re listed at Walmart and Target they both feel like they are getting support
A/R Risk especially if it’s a smaller distributor
Distribution mark-up
Watch your gross margins; here is a calculation of “cost to serve” comparing the 2 models…
As an example, taken over a sample of several brands I’ve laid out what to expect from these 2 models. These are % of sales, comparing retail cost to serve (left) vs. DTC (right) with profit as the top bar.
As you can see, DTC will generate a higher margin but with retail being a lucrative option if you can control the 33% of sales trade cost. Let’s do a deeper dive into trade, which is comprised of…
Pricing - you control your price points, to an extent, with retail. What I mean is that you tell them what is your regular and feature pricing + how many weeks your brand should be on sale. To support these lower pricing, you’ll need to pay the retailer “trade” so that you are absorbing the impact of lower prices, not them.
What you’ll have to manage; did that last feature price point generate enough lift to justify running it again? (hint: they often don’t)
The retail will get addicted to these trade dollars so it’ll be up to the DTC Brand to suggest another way to spend those dollars on an unprofitable price promo (another hint: it wasn’t unprofitable to them)
Merchandising - where in the store will it be shelved?
Will it be at eye level?
Will it be in a busy section of the store?
Can you display at the front door or an end cap?
You may have to pay a slotting fee to get the product in the door but you definitely have to pay for busier/ more prominent spots in the store. The more you spend the better support you’ll receive.
Marketing - retailers have their pet programs like a Christmas sale, a 4th of July blowout or a $1/$2/$3 gimmick to get people in the door. Be prepared that you’ll be asked to participate in these programs and could even be penalized if don’t agree to pay up.
Retail, for many DTC brands can seem like it’s “off strategy” or a scary place to do business but as long as you understand the components that go into a retail cost to serve and actively manage them, it doesn’t have to be.
The sheer size of retail makes it a compelling channel to DTC brands making up lost FB ad revenue but ONLY IF you control trade dollars, getting the best ROI you can on them. It has it’s place for DTC to help grow their e-commerce businesses and even help create brand awareness for future e-commerce sales. Your goal is to use retail as a tool to get that consumer into your online ecosystem.
P.S. - since researching and writing this article Snapchat is pushing Youtube ads to me giving me $5 off my first targeted ad spend with them. So the machine still does work in certain pockets.