D2C (Direct to Consumer) brands and start-ups truly democratised and innovated retail when they first came into the picture. In challenging the traditional distribution chain, and cutting out the middle-man they not only offered lower prices but also clever tech solutions, distinct brand aesthetics and improved the connection with consumers. By becoming digital-first and consumer-centric, they offered a consumer service that people actually enjoyed. As they were doing that, they quickly realised the power they had in their hands, or rather, in their consumer data. Knowing what their clients enjoyed, and who they were, allowed brands to paint their pictures, start talking to them and meet their needs. Clients felt understood and listened too, so they kept coming back. D2Cs had consumers in their hands, strengthening the power of what a brand represents and is.

This activity led to a spike in VC (Venture Capital) investments in D2C disruptors, and between 2019 to early 2020, D2C startups raised $8 – $10 billion. At the peak of the hype, everyone believed the model was here to stay and untouchable. It was all until Casper’s IPO, that the faulty D2C business model came to the spotlight. The mattress company had a pre-IPO valuation of $1.1B, but in 2020 when it debuted on the stock market it dropped to $500M. The secret lies in the numbers – while the company had more than 50% gross margin, which VC investors found compelling, their high acquisition cost meant they were not profitable. On average, Casper was losing $157 per every sold mattress due to its high advertising spend. 

Casper is a great example of D2C’s fall from grace because it highlights the key problems with the original D2C business model.  

Key reasons why the D2C business model failed 

The first problem is, ironically, connected with what made D2C start-ups so compelling in their early days. As a brand new model, they were challenging retailers and disturbing how (and where) people shop. Having e-commerce websites gave them tech capabilities and assets, but it never actually made them tech companies. This would be irrelevant if they didn’t pitch themselves as such…

While digitally native, they were unable to leverage the economies of scale which tech start-ups utilise, which is what their business models and VCs relied on. The more they sold, the bigger their costs which meant continuous seed rounds, but little return. In practice, it meant VCs kept investing in a plan that was never set to succeed – the expected results were simply unrealistic. 

Marketing strategies, influenced by the business and monetisation models, were equally flawed. VCs were chasing a vision of gigantic audiences, eagerly investing in shiny campaigns and ads. All that they wanted was consumer acquisition. But that strategy was a bit like straining pasta with a spoon. While it might work for some at first, sooner or later the continuous pressure makes it spill out. D2C brands weren’t doing enough to retain the consumers that they acquired. Ultimately, D2C without community, cult following and exciting experiences are easily replaced and forgotten.

Moreover, the focus on acquisition had its turning point when Apple updated their privacy policy and enabled iPhone users to opt out of ad tracking. This seemingly small move impacted the entire e-commerce ecosystem and put the D2C business model on its head, as marketing pricing skyrocketed. Suddenly, D2C brands found themselves spending a lot more on their social media advertising, and they were no longer able to compete in the market. As social media ad spending rose by 41% in 2022 compared to the last year, more and more D2C brands started losing their grip and ability to grow. 

These three issues led to a moment in history when a change is inevitable. D2Cs must change or die, and fortunately a new breed of D2C companies are amending their operations to survive and thrive. As new entrepreneurs enter the D2C space, they are demonstrating what comes next and how to solve the problems we have discussed.

Key things new D2C brands are doing right 

We are now seeing more and more founders taking a step back to reflect and think of what it is that they want to offer. Above all, they are now designing businesses so that they can have a genuine impact, not just growth. Whether by creating extraordinary events, and experiences or introducing new services, they are creating brands people love. Consumer loyalty is a top-of-mind topic, so entrepreneurs are designing valuable habits into their propositions by moving away from ‘purchase’ brands, to ‘usage brands’. By creating experiences that evoke emotions and build memories, consumers get attached to the brand and subconsciously choose to return. 

Talking about retention vs acquisition, Barkbox is a phenomenal example of how to do both. This dog products subscription balances the CAC (consumer acquisition cost), and CLVT (consumer lifetime value), with a 95% retention rate. They’ve built retention as a key pillar of their operations and processes to make loyal consumers feel the love. Every box they send out is specifically prepared with that consumer’s dog in mind, consisting of toys and treats ideal for the age or size of the dog. Details make a difference. 

Multichannel strategies are a new prominent direction and another great way of balancing acquisition and retention. By moving beyond their websites, opening brick-and-mortar stores, or launching pop-ups they are acquiring new consumers. D2C companies are building prominence through word of mouth; in particular for Gen Z, who prefer to buy clothes in-store more than any other generation. We don’t have to look far for examples to see both new and old players heading in this direction. Glossier, a previous retail resister, is opening new physical stores to increase its cult following and encourage community amongst consumers. To extend their reach beyond major cities, they’ve also just announced their products will be stocked in Sephora.

Operating across different channels isn’t the only new take on D2C, because so is the funding. Previously heavily relying on VCs and investors, many Direct to Consumer entrepreneurs are now going on the self-funding path. They consciously prioritise sustainable progress over fast-paced and unpredictable growth. They want to feel in control and build businesses that are perhaps smaller at first, but profitable in the long run. They want their brands to be here to stay. 

The new D2C approach is a game changer   

The new D2C start-ups are certainly innovating the space, and turning heads. From selling at retailers, and opening brick-and-mortar stores, to self-funding, they are breaking the outdated D2C rules. While no two startups are doing things the same way, there is one key similarity. They are on a self-discovery journey so that they can be genuine with their clients, and do things in their unique way. They keep that sentiment in mind when they decide on funding, as they are all slowly walking away from VC investments and approaches. 

D2C’s declining interest in VC funding, alongside its multichannel strategies, brings one strong presumption to mind. The increasing similarity between D2C’s and CPG’s (Consumer Packaged Goods) business models. The two are no longer worlds apart, they now speak the same language. Partnerships and acquisitions in this space can become a lot more common. With CPGs launching digital channels, and D2C flooding physical spaces the two have an opportunity to meet in the middle. CPGs don’t have what D2C does, and vice versa, so power balance in such investments can bring many benefits to both parties beyond just monetisation.

Looking at the changes that are happening it’s fair to say that the new entrepreneurs are rescuing the fate of D2C brands. Their next moves are going to be fascinating to watch.