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4 Ways to Understand the Rise and Fall of DTC Brands

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Just a few years ago, direct-to-consumer (DTC) brands were the new kids on the retail block. Agile, innovative and hungry for success, they leveraged digital channels to target niche audiences, ultimately disrupting how we shop.

Fast forward to today, and the landscape has changed dramatically. While some DTC brands have soared, others face significant challenges navigating an ever-evolving landscape. This begs the question: Why is this happening, and what lessons have been learned for hopeful brands?

Not too long ago, getting products into customers’ hands meant relying on mediators like wholesalers, distributors and retailers. But then direct-to-consumer brands burst onto the scene, challenging the traditional model and carving a direct path to their target audience. They embody the innovative spirit that drives many entrepreneurs to launch their own ventures, challenging the status quo and reimagining how products get to consumers.

With that in mind, here are four key areas where DTC brands are hitting some turbulence and also explored potential solutions, highlighting the role AI-based technology can play in terms of helping brands overcome these challenges and other tools brands can use to connect the dots.

Related: 3 Reasons Brands Should Shift to a Direct-to-Consumer Model

1. Increasing customer acquisition costs

Remember when Meta and Google were all you needed to execute your digital marketing utopia? Just spin up some ads, and the dollars would follow… Well, times have changed. With skyrocketing CPM rates and conversion data becoming less reliable, even the most well-funded DTC brands are feeling the pinch. Plus, iOS 14.5 has also thrown a wrench into the mix, making it harder to track customer acquisition costs due to enhanced privacy features. So, what’s a DTC brand to do?

It’s time to get creative, folks. Firstly, it’s worth noting that most brands still spend the majority of their dollars on Meta and Google — that hasn’t changed. But now, more than ever, exploring alternative advertising platforms like Pinterest, TikTok and good ol’ premium publishers increases in value and deserves your attention. By diversifying your marketing mix, you will tap into new growth audiences you need to grow awareness.

Thus far, brands have been somewhat slow to implement technology and strategies when collecting and activating first-party data to improve acquisition efficiency in light of the iOS 14 privacy changes. Most companies use platforms like Klayvio or Mailchimp for marketing automation and Segment or Bloomreach for personalization. Still, the key step involves using predictive modeling within that data to unlock incremental revenue. Most are still analyzing activity after the money has been spent, what if we optimized things before or during money leaving our bank account?

Related: 3 Ways Direct-to-Consumer Brands Can Leverage Media Coverage

2. Scaling and operational challenges

Now, let’s talk about growth. It’s all well and good when you’re small and nimble, but scaling up makes everything harder. Managing inventory, expanding product lines and ensuring a seamless customer experience, all while finding new audiences, can feel like a Herculean task.

Investing in technology, infrastructure and human resources to help you navigate the rough seas of scaling is necessary — now. Platforms like TradeGecko or Fishbowl streamline inventory management, while ShipStation or Shopify can automate order fulfillment. There are also incredible tools in the market that can help brands stay agile and responsive in the face of changing consumer preferences and market trends. Building that technology stack remains critical.

On scaling customers, brands are often focused on ROAS as their holy grail — but I’d argue that this is an incredibly limiting factor when it comes to scaling. Instead, there needs to be a greater focus on new customer CAC, LTV and revenue goals. That also means that a correctly balanced KPI and measurement framework can be a freeing exercise toward realizing your growth potential.

Google Analytics still powers most insights for brands, but exploring tools like Rockerbox or Triple Whale can provide tooling to help you grasp a more holistic picture of performance. And at the top end of the most advanced marketing functions, MMM (media mix modeling). Not only that, MMM with added predictive capabilities on where you should spend your budget.

3. The need for an omnichannel presence

Alright, here we are, we’ve reached a point of maximum friction for DTC: omnichannel presence. With mobile shopping gaining importance and brick-and-mortar stores offering undeniable benefits, DTC brands need to understand better how they can utilize brick-and-mortar to support their growth, or they risk getting left behind.

Whether that’s a showroom where customers (and potential customers) can try your products, a store in a densely-populated city or a smart activation like SSENSE where you can order to store for try-on, it’s the dealer’s choice. The challenge lies in managing a consistent customer experience from online to store and ultimately connecting experiences for your customer so that things not only feel positive but seamless.

Here’s where technology and data integration come into play. Platforms like Adobe XD or Sketch can help with user experience design, while Segment or Tealium can assist in data integration across channels. A cohesive brand presence across all touchpoints fosters customer loyalty and drives long-term growth. And for those considering physical stores, always weigh the potential advantages and costs carefully before taking the plunge.

Maybe a pop-up with a short-term lease or a “store-within-a-store” will do the trick beautifully.

Related: 3 Ways Direct-to-Consumer Brands Can Leverage Media Coverage

4. An AI-first mindset

Simply put, AI-based technology can help DTC brands enhance their business processes and customer experience. Companies can improve personalization, customer service, demand forecasting, pricing optimization and supply chain management—all by leveraging the power of AI.

Using AI to analyze customer data and deliver tailored product recommendations, content and promotional offers is a space where brands are already innovating. We’ve seen Amazon, Starbucks and Ulta have done great things to deliver growth and increased basket sizes in recent months. Plus, AI-powered chatbots and virtual assistants provide instant, round-the-clock support for customers, improving response times and allowing customer service representatives to focus on more complex issues.

Demand forecasting is another brilliant area to deploy AI. By examining historical sales data and market trends, AI can generate accurate demand forecasts, optimize inventory management and reducing stock-related challenges. AI can also help brands monitor competitor pricing and market conditions (like search trends) to determine the optimal pricing strategy or bidding strategy in media, ensuring profitability and helping brands of all sizes maintain a competitive edge.

What does this all mean when taken together? The meteoric rise of DTC brands in recent years has disrupted traditional retail and created new opportunities for growth and success.

However, as the industry matures and competition intensifies, these companies face considerable challenges in the coming decade. Rising customer acquisition costs, exacerbated by the impact of iOS 15 and scaling difficulties, not to mention the need for an omnichannel presence, will test the resilience and adaptability of these companies.

By exploring alternative advertising platforms, leveraging customer data and market insights, and investing in technology and an AI-based infrastructure, DTC brands can more strategically navigate these challenges and maintain their growth trajectory in an increasingly competitive landscape. So, buckle up and enjoy the ride!

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