📩 What do the best DTC brands have in common?
Founders Factory Startup Bulletin #13
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Industrialization has seen populations flock from the countryside into urban areas. Where we might have once lived off the land, few now have the space for true self-sufficiency.
Early innovators saw this opportunity in the late 1700s. Where would households get their milk from if they no longer had space for their own dairy cow? Instead, what if you could bring milk directly to your customer’s front door? Thus, the milkman was born, as was the first direct-to-consumer (DTC) business.
DTC has transformed since then, first through mail order catalogues, then through live teleshopping channels, and now the internet. Brands can now offer better prices, more variation, personalisation, all topped off with the convenience of the product being delivered directly into the customer’s hands.
Huel, Bloom & Wild, and Smile Direct Club are just some of the brands who have transformed commerce through this innovative business model. So what is the DNA that runs through all these DTC giants? Mike Stevens, founder of healthy chewing gum/mint brand Peppersmith, has spoken to some of the world’s biggest DTC brands, and shares with us five things they have in common.
In this month’s newsletter:
What do the world’s best DTC companies have in common?
Our top recommended reads
Latest news from the Founders Factory portfolio
🙌 Before we begin…shout-outs
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💡What do the world’s best DTC companies have in common?
Mike Stevens is co-founder of Peppersmith, having worked on the early team at Innocent Drinks, and now works as a consultant for challenger brands. Having spoken to some of the leading DTC brands (including XYZ), he shares his insights into what runs through their DNA
Over the last decade, brands have piled into DTC—due to the opportunities and the relative ease of entry. As a result, the competition for attention is fierce, digital marketing costs are skyrocketing, margins are under pressure, and top draw customer service is expected in every transaction.
So while DTC is a no brainer when it comes to introducing a new product, building a profitable business around this channel is getting harder and harder.
Writing The Direct To Consumer Playbook, I wanted to identify the fundamental strategies and behaviours of the best in class DTC brands. They all had the following in common:
1. Their mission builds emotional connections
One of the beauties of DTC is that your brand isn’t diluted by other businesses who are delivering the product. Retailers have their own cultures and agendas, so when a consumer picks a product off a shelf in a superstore, they only get a limited view into who the brand is and what they stand for.
For that reason, there’s a huge opportunity for DTC brands to forge a personal relationship with customers—built on shared values, desires, dreams and fears. Having a strong purpose and personality is the difference between a customer who will bounce off your website in seconds, and ones that will not just buy everything you make but tell all their friends and family why they should too.
2. They build communities around their products
Your community of customers is crucial. They are the ones who most believe in you. They tell you what to do more of. They tell you what to fix. They help each other. They share. They care.
Heights, the brain health supplement brand, is a great example of how to do this. They knew they would need to build a community before launching their nootropics. So they spent a year writing newsletters, assembling experts, and hosting events and podcasts before they launched their products to sell to their pre-built community. This has fuelled the startup’s success, as well as their record-breaking crowdfunding campaign, run just a few months after launch.
3. They’re acutely aware of the economics
Choosing to launch a DTC product comes at a cost—so you have to ensure you understand the economics of your product well.
Working with retailers means you only have to transact with one retailer or one chain. DTC, meanwhile, means you have to deal with every individual consumer of your product, along with their individual payments, orders, questions, complaints, etc. Therefore, certain products may not make economic sense for DTC. Bulky items, for instance, may mean postage outweighs the cost of the product.
DTC brands have to be able to drive high margins. Nutrition supplement Huel understood this all too well, resisting launch until they could price a product at £45. Snag, the tights brand, only launched when they had a large enough margin to allocate 25% to marketing costs.
4. They don’t rely on cheap Facebook advertising
Once upon a time, brands could plough all their money into cheap Facebook advertising. Sadly, those days are gone. Competition is so great that it’s become harder and harder to justify even a modest spend on paid social.
So what’s the solution? A strong brand and a good SEO-driven website are important. But perhaps more important is building trust and establishing expertise.
Dog food brand Tails have established this through customer support and helpful advice about looking after pets.
Hiut denim focuses on newsletters, events, and yearbooks—talking more about other people's brands, innovations, and creations than their own. Why so? They know that they need to keep the conversation going to create an ongoing connection with their customers. If they can do this successfully, they will be top of mindwhen their customers need their next pair of jeans.
5. Data drives their decisions and direction
Through the amount of data being collected directly, technology-backed DTC allows brands to innovate at warp speed. Examples include reviews, website visits, repeat purchases, and demographic and psychographic data. Hugh Thomas from Ugly Drinks told me that he could learn more from the data provided by DTC interactions in a week than in a year on a supermarket shelf.
For this reason, there’s huge value in not outsourcing your customer service. Even if its a complaint, every interaction allows you to build trust and learn more about how to serve your customers better.
You can read Mike’s unedited article, or for an even deeper dive, you can order The Direct to Consumer Playbook
📚What we’ve been reading
A startup’s guide to financial modelling (Founders Factory) - Camila Zattar from our Venture team shares her step-by-step guide for founders building financial models
Creating a powerful data department with data science (Venture Beat) - Founders Factory data science maestro Ali Kokaz answers some of the most Frequently Asked Questions he gets about data science from founders
The vanishing designer (DOC) - how design is becoming more homogenous, and how designers can rebel against this movement
Progressive decentralisation: A playbook for building crypto applications (Jesse Walden)
💸 News from the Founders Factory portfolio
Shop Circle has come out of stealth mode, announcing $65m in funding to date from investors include NFX and QED. They’re tapping into the exciting Shopify ecosystem, acquiring and growing e-commerce software
In-game monetisation startup Admix has acquired Landvault, the largest metaverse building studio. The whole company will now be rebranding as Landvault, with founder Sam Huber as CEO
We announced the launch of the Planet Fund, in partnership with Sky, to invest £100m into climate tech startups
Health tech startup Peptone has raised $40m in Series A funding (led by Bessemer Venture Partners) to help them develop their AI technology for drug discovery. Peptone also featured in the Evening Standard’s 20 Hottest Startups after London Tech Week
Chief Strategic Development Officer David Hickson spoke on a panel at London Tech Week on the ‘Dark Secrets and Paradoxes of VC’
DTC pet health platform Scooch is launching on Crowdcube, raising an already-oversubscribed pre-seed round of £500k. You can find out more and preregister for their campaign here
Skincare concierge service Renude are also launching a crowdfunding campaign, on Seedrs. You can pre register here to get priority access
Heal Community founder James Maskell featured on Dr Rangan Chatterjee’s podcast Feel Better, Live More, where he talks about their innovative community approach to healthcare
🗓 Opportunities for founders
Interested in becoming a founder, or starting your next company? We’re hiring a number of exciting Entrepreneur-in-Residence positions for our Venture Studio
GiGu - connecting Western audiences to innovative hygiene gadgets from East Asia
Healthkey - API-first platform connecting health startups with payers
Nickel.ai - SaaS ecommerce assistant for founders
Healthy Food Distribution Venture - retail channel for food producers & brands
Project Lime - DeFi insurance for the masses
Parity - Web3 freelance marketplace
NEF+ is launching its September 2022 cohort (Applications open now, early bird until July 14th) - join their six month programme for ambitious entrepreneurs to get education, 1:1 mentorship/coaching, and network. Find out more
See you next month 👋
Interested in reading similar insights? Check out the Founders Factory blog, and previous newsletters. Want to learn more about Web3? Read & subscribe to ff3