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July 7, 2021

How to Build Your Differentiation in Your DTC Business

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eBrandcast / How to Build Your Differentiation in Your DTC Business

Massive eCommerce success is synonymous with the DTC giants of the last decade like Casper and Warby Parker, but the DTC business model that once revolutionized retail is losing its relevance. These brands appealed to consumers on a few key advantages: a better product at a lower cost, greater convenience, and exclusivity. Advantages that have all been wiped out by a flood of competitors and their own growth. It’s a signal to entrepreneurs that the eCommerce landscape has shifted again.

Success today requires strong branding that hooks consumers emotionally, a unique value that can’t be copied, imitated, or negated by the competition. In today’s episode, Neil breaks down how to build “soleness” for you brand, and ensure you’re strategy is relevant in 2021, not 2012.

You'll Learn

Why the DTC model is no longer the smart option in eCommerce

What “generatives” are, and why you need them in your business

A case study of White Claw, and how they built a brand no one can imitate

The NEC model for creating soleness in your brand

Resources

Full Podcast Transcript

Hello Beings of Earth! I’m your host Neil Verma.

Welcome to eBrandCast, where we decode what branding truly is, so you can build a dominant eCom Brand.

In today’s episode, we’ll do a bit of a reality check.

The fact is what it takes for you to stand out today in the eCommerce market has changed.

Particularly for DTC companies.

The DTC boom in eCommerce started in 2010, as digitally native brands cropped up offering better products to consumers at a lower price, 

and greater convenience with subscription models and disruptive delivery processes.

The brands that emerged from this first wave like Dollar Shave Club, Everlane, Casper, Warby Parker, and Bonobos became household names, and stole significant market share from legacy retailers.

These early DTC success stories were characterized by customer-centric business models.

And this extended to their branding.

DTC brands didn’t just make the rational case for their passed-on savings, but framed it emotionally.

Take a look at Dollar Shave Club’s viral launch ad.

Mike, the brand’s founder, asks, “do you like spending $20 a month on brand name razors? 19 go to Roger Federrer.”

He makes the point that even brand name razors actually cost a dollar, but you’re willing to pay more because you’re being tricked by marketing.

It’s a sly way of signaling that it’s a brand for savvy consumers who are tired of being talked down to and manipulated by legacy brands.

This messaging coupled with easier and cheaper purchasing was a huge breath of fresh air, and it swept those DTC companies to eCommerce dominance.

But branding wasn’t the whole story.

DTC eCommerce brands also benefited from good timing in terms of the economics.

Their rise dovetailed with increased confidence in eCommerce, greater access to Asian manufacturing, and a new era in social marketing.

In the early days of DTC, customer acquisition costs through social media marketing was pennies on the dollar compared to traditional advertising.

Also, at the time, social media ads weren’t yet flooded with DTC offers, so these first movers really stood out.

Fueling their growth beyond this, was massive investment that pumped money into DTC brands who then doubled down on marketing which in turn led to significant market share.

However, investment in eCommerce DTC has slowed significantly over the past few years.

As of September 2020, just $1.9 billion was invested in retail by VC firms, based on deal value. By comparison, 2019 saw $3.4 billion and the year before 2018, a 13-year peak of $3.7 billion, according to data from PitchBook.

In large part because the economics have changed drastically.

It didn’t take long for ad platforms like Facebook, Instagram, and Google to increase prices, and with more competition flooding in for the same ads, customer acquisition costs spiked.

This has led to the DTC bubble bursting, and many of these brands are hemorrhaging money and struggling to find profits.

Often because they’re spending every spare dollar advertising, fighting to stay top-of-mind and maintain a steady stream of sales.

But the numbers behind this strategy are harder to make work in 2020 than they were 10 years ago.

There are 2 numbers that have to be right for a DTC brand to survive.

First, you need a gross margin of at least 50%, and potentially as high as 85%, depending on your product category.

Even with growth, the fact is there are only incremental gains to be made to your gross margin.

Second, our old friend customer acquisition.

Since the DTC boom, acquisition costs on the socials have skyrocketed.

Although the COVID pandemic led to a drop in ad prices, relying on acquisition costs to make you profitable is almost always a losing strategy.

It might have worked 10 years ago, but not today.

And just like gross margin, counting on economies of scale to bring acquisition costs down is another illusion.

In eCommerce particularly, the first customers you earn tend to be more receptive to your offers, and more cost effective to convert.

Widening your customer base requires more impressions which leads to an increase in acquisition costs.

Not to mention, those costs can also change drastically on a month-to-month basis.

No matter how clever your products and marketing, if your gross margin and acquisition costs don’t align, you won’t have a sustainable business no matter what you do.

Increasingly, these numbers are getting harder to get right.

In addition, the success of the original eCommerce DTC brands has spawned countless copycats.

Casper might still be the mattress-in-a-box brand, but today there are dozens of others.

Dollar Shave Club is now being outsold by Harry’s.

Even among eCommerce brands that don’t follow the exact same model, the DTC boom has calcified a lot of bad habits among entrepreneurs.

There’s an obsession with performance marketing, and a tendency to focus on attracting a constant stream of new customers with little to no attention paid to retaining customers.

Even though retargeting past customers is a lot more cost effective, and actually drives down your acquisition costs.

And maybe most important, DTC fatigue is setting in among consumers.

The rush of copycats has meant they’re starting to all look the same.

Not only are they using the same business models and value propositions, but their creative assets are starting to blur together, too.

These newer DTC entrants are underestimating the savviness of consumers thinking they can copy market leaders and get away with it.

But consumers are highly sophisticated and can spot an empty copycat a mile away.

So what it’s going to take for your business to stand out today is changing.

Although we often praise the branding of giants like Warby Parker and Everlane, and they have a lot to teach you about it, their path to dominance isn’t going to be yours.

One of the main reasons for this is that what made their offers unique in 2010 and 2012, have been negated.

A lower price and greater convenience, the main drivers of DTC’s initial success, are easily imitated.

They weren’t actually unique selling points in the first place.

In many ways, modern DTC brands are following the same general business model as mail order catalogues.

Of course, with more direct access to customers and better targeting methods on social media the model was a lot more successful online.

But in truth, it was an old model amplified by technology, not a new approach.

Where this leaves us, is bringing us back to branding.

One of the missteps for some of these early DTC brands was that they built their branding on those early purchase drivers: lower cost without sacrificing product quality, and convenience.

It certainly stood out in the market at the time and resonated with customers, but these advantages are vanishing.

And they’re qualities that are easily imitated.

Everyone has access to the same marketing tools and Asian manufacturers, and with so many DTC offers around, cost and convenience just aren’t powerful selling points anymore.

Something else that’s worth pointing out, one of the smart things these DTC brands did, was transform rational purchase drivers into an emotional payoff.

Like how Dollar Shave Club successfully flipped the perception that their lower price might indicate inferior quality by arguing the premium you’re paying for well-known brands is just a marketing trick.

The emotional implication of the message being that Dollar Shave Club is for the savvy consumers that aren’t susceptible to mass marketing.

The brand gave early adopters a sense of exclusivity, that they were among the smart few who saw through expensive and manipulative messaging.

Of course, while we definitely advise that the emotional appeal of your brand be grounded in the reality of your products and offers, the problem is that this “exclusivity” wasn’t sustainable.

First, because as more and more DTC brands cropped up offering the very same perks, they reached mainstream availability.

But even without the crush of copycat competitors, the brands themselves undermined their claims of exclusivity as they grew, since it required reaching out to new customer segments to widen their base.

There are 2 core lessons to take from the bubble bursting on DTC.

Branding is the art of understanding why consumers prefer one brand over another.

Particularly when there are “rational” reasons like a lower price to choose something else.

Like these early DTC successes, your brand needs to understand the emotional hook that will attract and resonate with consumers.

But on top of that, while DTC brands in 2010 revolutionized an old business model and succeeded in standing out in the market, 

long-term your brand needs a unique appeal that can’t be imitated or copied to be sustainable.

Otherwise, you’re building your brand on a foundation of sand.

Here at eBB, we refer to this inimitable quality as your brand’s Soleness.

And if you want more detail on how to discover your brand’s Soleness, or build a brand from the ground up that has Soleness, we offer a free eBook, called Checkout, that will walk you through the entire branding process for eCommerce.

Head over to ebrandbook.com for more information if you’re interested, or to order a copy.

So, this brings up the question: what actually qualifies as unique?

This is a pretty nuanced question given the unprecedented access we all have to the same information over the web.

It’s easier than ever to copycat competitors, or for others to steal ideas from you.

In addition, the sheer amount of DTC offers out there in nearly every category means consumers have multiple, highly convenient options for any given product.

In many cases, several sellers are often offering the very same products from the same manufacturers.

And like our DTC friends have taught us, beyond product level benefits and exclusivity, you need to be careful of relying on offers that anyone else can come along and imitate.

A legacy example would be Domino’s 30-minute pizza delivery guarantee, which was revolutionary at the time it was introduced, and launched Domino’s back to dominance in the pizza world.

But it wasn’t long before it became an industry standard, and Domino’s had to find other ways to regain their advantage.

In the DTC eCommerce world, Casper’s 100-night guarantee on their mattress was an industry watermark.

Especially because traditional mattress stores were notorious for zero guarantees and expensive restocking fees if you changed your mind.

Casper’s mattress-in-a-box copycats have rushed to offer the same, although some are trying to one-up them.

Hamuq, a Canadian mattress DTC company offers a 101-night free trial.

No good idea goes uncopied.

I’m not saying you should avoid these kinds of innovations, if you find this kind of an angle in your category, absolutely pursue it, and embed it in your branding and messaging.

But if it can be imitated, don’t make it the centerpiece of your brand, rather look at it like an extension of your brand.

So, the 100-night guarantee needs to be an extension of supporting greater ease, a more relaxing purchase and the overall reduction of pressure and stress.

It’s not the make-or-break appeal of the brand, just a nice perk that aligns with their real emotional appeal.

Meaning, the fact that other brands have copied it doesn’t take away from Casper, because those brands aren’t offering the same overall brand experience.

And having a unique brand is one of the best ways to make your customer acquisition costs more effective.

When you have a unique strategy, emotional appeal, and voice, reaching customers is a lot easier.

But they must be unique to your brand, because consumers don’t want a copycat, they want the real thing.

Brands with Soleness are a lot less vulnerable to losing market share to copycats, or being imitated at all.

Because one of the major advantages to having a unique brand that’s meaningful to customers is that it builds a real emotional connection with consumers, which can’t be imitated, stolen, or replaced.

So it’s critical for eCommerce entrepreneurs not to underestimate the importance of unique emotional brand benefits.

Not just because it’s this emotional dimension that can’t be imitated by competitors, but because all consumers make decisions emotionally, rather than rationally.

Professional brands know this, and it shapes the world around us.

The reason every grocery store you’ve ever stepped into in your life has produce and flowers near the front door is to give shoppers the immediate impression of “freshness.”

While consumers do consider rational benefits like a lower price, 

fMRI studies have shown that what’s really happening when we consciously weigh rational attributes in our minds, is that we’re justifying a brand choice we’ve already made emotionally.

And we’re not always consciously aware of the importance of our emotional connection to brands.

Consider one of the biggest rebrand fails in recent history.

Tropicana’s ill-fated re-design of their packaging was based on market research.

Customers reported they wanted packaging they described as “table worthy,” “refreshing,” and “modern.”

But when Tropicana unveiled the new package that customers said they wanted… it led to $20 million in lost sales in the first month.

The new packaging ended up looking so generic, customers could no longer find it on store shelves, and many thought it made the brand look cheap.

Even though Tropicana implemented everything customers claimed they wanted, the rebrand failed.

Specifically, it disrupted how customers felt about the brand, from their first choice, to “cheap.”

Tropicana underestimated the emotional appeal of their original packaging and seemed to pursue a change for change’s sake.

Some of their customers underestimated their own attachment to the packaging as well, apparently, even though nothing about the product actually changed.

What was uncovered here is the brand’s intangible appeal, what isn’t transferable to another “brand.”

It’s this non-transferrable attachment that’s your brand’s Soleness, and what makes you truly uncopyable.

To make this a little more tangible, Kevin Kelly, founder of WIRED magazine, argued that the internet has made copying and imitation infinitely easier.

It’s a situation that changes people’s calculation of what’s really valuable.

It also means it’s much harder for creators and entrepreneurs alike to offer something genuinely unique.

Kelly came up with a list of 8 qualities, called “generatives,” that are both highly valuable to consumers, and can’t be imitated.

The very term itself, “generative,” is instructive because what Kelly is arguing is that today, Soleness can only be generated, it’s something you build, nurtured, and cultivate.

It’s grown overtime, not something you can produce in a factory and sell.

For example, one generative we’re all familiar with is trust.

Trust is created over time and multiple interactions, it’s something that has to be earned.

I won’t go into detail about all 8 generatives on his list, just enough to give you the idea of what he’s getting at.

One generative is immediacy.

Think of a movie release.

Every major movie will eventually make its way onto television or a popular streaming service where you can watch it for free, or for the subscription cost you’re already paying.

But there are always people willing to pay a premium to go to a theatre and watch the movie the day it releases, because seeing it first is more important to them than the longer term savings.

Another generative that’s a huge driver of sales in eCommerce is findability.

Because content today is so easy to produce and distribute, it has led to an overwhelming amount of it.

And frankly, in this climate content doesn’t have value until it’s seen, so just being easy to find is important.

Applying this generative to eCommerce we find the value of straightforward choices.

This is minimalism as luxury: Bonobos started out by only selling a men pants, and other giant DTC brands offer shallow product lists to remove the overwhelm from customers.

It’s also the algorithms that run services like Netflix to help make recommendations you’re more likely to be interested in.

In the years since Kelly’s article was posted, others have expanded the list.

One new “generative” quality that has emerged with the explosion of social media is network effects.

Social media platforms themselves are driven by this effect.

Facebook, for instance, is only useful because almost everyone has a profile.

If your friends aren’t on a platform, you’re not going to be interested in it.

It’s a fancier way of saying “social proof,” as many products have emotional appeal because other people like or own it.

This generative is important for eCommerce entrepreneurs because word-of-mouth recommendations have never been more valuable.

And it’s a quality that can dramatically improve your brand’s Soleness.

A perfect brand to case study here is White Claw, a hard seltzer launched in 2016 by Mark Anthony Brands, the parent company of Mike’s Hard Lemonade.

By 2019, White Claw owned 54% of market share, something they managed to do almost exclusively with Soleness.

Hard seltzer’s have been a fast growing alcoholic drink category, but have always been targeted at female consumers.

This perception was based on the fact that the “ready-to-drink” category has always done better with women, and there’s a stereotype that beer and liquor are more masculine.

Qualities of the product itself also seem more stereotypically female-friendly, as hard seltzers typically have fewer calories and carbs than beers of the same size, and a lower alcohol content.

In addition, unlike most beer and many liquors, hard seltzer is gluten-free.

And although it’s false, there’s a prevailing perception that hard seltzers are more hydrating than other alcohols.

All of this has led to the category catering heavily to women, something apparent in the packaging.

Most of which is pink and plastered with unicorns and mermaids.

But White Claw saw the opportunity to carve out space by positioning themselves as gender neutral.

To that end, unlike the obnoxious packaging and colors of their competitors, White Claw stands out on shelves with sleek, black and white creatives and a logo of simple, illustrated waves.

This neutrality extends into their marketing.

Although like other alcohol brands White Claw frequently features images of beaches and parties, their images rarely feature people.

Even when they do, they are careful to evenly represent both men and women in balance.

The brand wants to make it easy for consumers to picture themselves in the scene, so stage them a little like a blank canvas.

But the genderless appeal also makes it easier for people to recommend the brand to fans and share it with others.

Now, I hope you’re all screaming at me that gender neutrality isn’t enough to qualify as uncopyable.

And you’re right, it isn’t, it’s just one element of their Soleness.

Another reason why the brand took off when it did was because it fit into other trends, like consumers demanding healthier options.

White Claw combines a gender neutral approach with the tangible benefits of low-calorie and gluten-free of the product.

Their messaging thus focuses on emphasizing White Claw as the option for people who still want to have fun, without sacrificing their health.

Alcohol without the beer gut, in other words.

This appeal to a more balanced life, makes the brand aspirational, but also approachable, especially when it’s combined with neutral marketing.

It’s the perfect marriage between meeting customer needs while offering a better experience.

They also back this up with a unique approach to content marketing, as White Claw makes extensive use of Pinterest.

Although Pinterest skews heavily female, it’s popular with their target age demographic of millennials and gen Z.

And Pinterest does have a quickly growing male user base.

Pinterest is where the brand showcases their appeal to those looking for healthier lifestyles, and they post recipes and pairing choices.

It’s a strategy captured in their tagline, “Purest Hard Seltzer in the World.”

White Claw also has a unique approach to customer outreach, they do extensive sampling at events after they realized once people taste the product, they’re highly likely to become repeat buyers.

But they smartly targeted the right audience at the right events.

An early boost to the brand came from a sampling effort at Coachella.

White Claw saw a big spike in social mentions, particularly on Instagram where users were posting group photos of themselves and their friends with the brand.

The qualities of the brand, it’s easy-to-share, ungendered attractive packaging, and healthy but fun appeal made it instantly popular on social media.

After fulfilling customer needs and nailing the brand experience, this community appeal gave the brand a “cool” factor.

A network effect, in other words.

But what really clinched the brand’s ascendency was a viral video produced by comedian Trevor Wallace on his YouTube channel.

It was a skit that wasn’t in any way associated officially with the brand, a pure moment of user-generated content.

The central joke of the video was something the brand was already capitalizing on: that for some reason once people try the drink, they can’t shut up about how much they love it.

The video, titled “drinks White Claw once” is basically a 5-minute rant about how cool it is to like the brand.

It was an instant hit, exploded the brand’s presence on social media and spawned countless memes.

The video’s most famous line, “Ain’t no laws when you’re drinkin’ Claws” was endlessly parodied and repeated.

Wallace even tried to sell t-shirts with the tagline, but White Claws’ lawyers weren’t so keen on the implications.

But what the video did positively for the brand, aside from increasing awareness, was increasing the acceptance of the drink’s appeal with college-aged men.

And in the summer of 2019 when the video was released, there were nation-wide shortages of White Claw due to its meteoric popularity.

Now, this isn’t exactly a trajectory you can easily follow, because there was certainly luck involved with Trevor Wallace’s video contribution.

But notice that the video would not have been possible without the qualities deliberately cultivated by the brand.

And it does follow an emerging model for future DTC success, call it DTC 3.0.

We call it the NEC model: which stands for needs, experience, and community.

White Claw is a brand with deep Soleness because it meets its customers needs, provides a unique experience, all of which is solidified by a strong community around the brand.

The community of meme creators and other forms of user-generated content is the point where customers take ownership of the brand, which reflects their emotional bond with it.

It’s a network effect on steroids.

The community aspect elevates needs and experiences to Soleness because that emotional bond, and in White Claw’s case, their pop-culture relevance, absolutely cannot be copied.

Emotional bonds can’t be manufactured, only encouraged.

One thing we have to give the original eCommerce DTC brand credit for was their insight into the importance of creating more customer-centric brands.

Shifting the conversation away from conglomerates towards the needs and experience of customers was their golden ticket.

New DTC brands need customer-centric brands, too, but as White Claw shows us, the definition of customer-centric is evolving to mean community and collaboration.

Because being truly digital means your brand has the ability, and willingness to have 2-way conversations with your customers.

The bond created through community can only make your brand’s Soleness stronger and more fundamental.

Increasingly, community won’t just mean a bond with customers, but partnerships with other brands to find new ways to meet customer needs and improve experiences.

Online brands could partner with local businesses to share distribution channels, allowing those small businesses to piggy-back on an eCommerce brand’s logistics infrastructure.

Or setting up recycling drop-off points that accept waste or products from other brands to be responsibly disposed of and reused.

And don’t forget, closer contact with your brand community means faster and more accurate insights into your customers needs and feedback about your brand experience.

It creates a more effective flywheel for evolving and improving your brand, gaining more speed on product development because you’ll be so in touch with customer needs, 

and decreased price elasticity because customers will have a much higher, more stable perception of your brand’s value.

You’ll be irreplaceable.

And it’s at that point that you have a brand you can sustain long-term.

All with the updated model for building a unique brand, Needs, Experience, and Community.

Keep these 3 components in mind as you build or evaluate your own brand, and pretty soon you’ll have a brand not even your most cut-throat competitors will be able to imitate.

Wouldn’t that be nice?

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