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Can DTC brands beat the performance plateau?

A couple of weeks ago I published this post asking why and when startups should start investing in brand advertising. My answer was to get ahead of the curve and start brand building while your direct response activities are still working well.

In retrospect, it feels like I dodged the real question, so I decided to take a more data-driven approach to find a better answer. And guess what? The answer is 42.

Why 42?
OK, I made that answer up. Sort of. But as Douglas Adams said of his choice of 42 as the answer to life, the universe, and everything, "42 will do." In this case, 42 refers to months. If a DTC startup starts building its brand 42 months after launch, then maybe it stands a chance of avoiding what Tom Roach refers to as the performance plateau.

How did I arrive at 42 months?

No, I did not build a supercomputer to get the answer. Instead, I took a set of 15 Direct to Consumer (DTC) brands and used Google Trends to calculate their search results over time. The results of my analysis cannot be considered definitive, but I believe it provides food for thought.

When I matched brands by their founding date it results in the chart shown here. On average, brand name search doubles each year for the first 4 years. However, between years 4 and 5 the average trend changes dramatically and begins to trend down marginally. I also tried matching the point at which search began to rise for each brand – to allow for differences between founding and the actual product launch – but the finding is similar, the trend flattens at the end of year 4. This being case, maybe DTC brands need to initiate their brand building about 6 months before they reach their 4th birthday. In practice, that means they need to start thinking about how best to build their brand at the end of the third year.

The flip side of the performance plateau

Is this performance plateau? Not directly, because we are looking at brand name search data, which might have been triggered by a variety of different cues, e.g., people remembering the brand when they encounter a new need, a response to seeing but not acting on performance ads, news coverage, and word of mouth (influencer or informal). However, as noted in the previous post, because organic traffic from search plateaus, brands must either make their performance advertising even more effective or invest substantially more in performance advertising to sustain their sales growth. Or, they could add brand marketing to the mix to ensure that when people enter the market theirs is the brand that is thought of first.

The average hides significant variation

Like all averages, the overall trend hides some significant variations by brand, but before we examine some of the variations, here are the brands that I included in my analysis:

Warby Parker (eyeglasses)

Bombas (socks)

Glossier (beauty care)

Stitch Fix (apparel)

Solo Stove (firepits)

Birchbox (beauty care)

Ipsy (beauty care)

Dollar Shave Club (men's grooming)

Rent the Runway (apparel rental)

Everlane (apparel)

Casper (mattresses)

Allbirds (shoes)

Away (luggage)

Bonobos (men's apparel)

Chubbies (men's apparel)

The 15 brands included in the analysis launched at different times, starting with Bonobos in 2007 and ending with Allbirds in 2016, which is why I used the month they launched to match their trend data (the trend data is monthly). Unfortunately, I do not have easy access to advertising spend data for each brand, but I believe that all of them continued to invest in performance marketing after their fourth anniversary (although not necessarily at the same weight). I did exclude a couple of brands from the analysis because they did not make it through the analysis period, e.g., Mahabis slippers which declared bankruptcy after 4 years (Coincidence? I think not. Mahabis invested heavily in performance advertising.)

Learning from Warby Parker

As you can see from the chart, Warby Parker's trend is similar to the overall set of brands, but instead of plateauing, its growth trend continues but becomes much slower. That accords with the brand's 2023 results, with net revenues up 16% and an adjusted EBITDA margin of 7.8%, up 3.3 points compared to 2022. That is impressive, particularly given the brand donates a pair of glasses for each pair bought. 

Warby Parker launched in 2010 and three years later opened its first store. The brand is now reported to have 237 stores in the US. Not everyone is interested in shopping online, and Warby Parker was quicker than most DTC brands to recognize that fact, even if it is not the only one. Kyle Leahy, Glossier's CEO, commenting on her brand's presence in Sephora stores, states,

"Direct-to-consumer is just a channel." 

Most DTC brands are not doing anywhere near as well as Warby Parker. Take the example of Birchbox, which was all over the news following its launch in 2010. Hailed as the first monthly beauty subscription box, by 2014 the brand claimed 800,000 subscribers and a valuation of $485 million. Google Search Trends suggests that interest in the brand peaked at the end of 2015 and by 2016 The Wall Street Journal identified at least 300 competitive subscription beauty services, including Ipsy which launched after Birchbox. From there, it was downhill all the way. In 2021 the brand was sold for $45 million, and then sold again last year.

Brands need more than a great customer experience
Another DTC brand that is struggling with declining search, revenue, and user base is Stitch Fix. Digital Commerce 360 reports that in response Stitch Fix has plans to improve overall customer experience and is introducing a new customer onboarding system this year to inspire confidence among customers. I am not saying this is a bad thing, but I would be a lot more confident that the brand could recover its mojo if it focused on attracting new customers as well. Back in 2019 I wrote a post for my old Kantar blog which questioned whether a DTC subscription model could break the Double Jeopardy relationship, whereby bigger brands have more loyal customers (better retention) than smaller ones. My conclusion was that it would not. All brands lose customers and need to replace that loss before they can grow, and as I noted in my previous post on this site, that is usually going to require creating predisposition to try or buy among people not yet in-market.

Brands need both brand and performance advertising
I was intrigued to read this article about Warby Parker's marketing and how the brand is holding to its direct-to-consumer marketing roots but reducing spend in the face of higher advertising costs. It is the old performance marketing story: spend in the more efficient channels, find media savings, and create new news to generate excitement. However, just because you have a lot of useful content on your site and are ace at SEO does not mean you are investing in your brand (although I have seen these activities classified as brand building). If Warby Parker wants to continue growing I believe it will need to reach beyond the people who already know the brand exists. That said, I do note that co-CEO Neil Blumenthal is quoted as saying,

"We'll also continue to launch unique partnerships, collaborations, and campaigns to fuel awareness and brand affinity. We believe the power of our brand and our ability to surprise and delight customers continue to differentiate us within the industry."

Bombas breaks the mold
Building on the previous section and before I finish, I just want to spend a few seconds to consider the example of Bombas socks. Like Warby Parker, Bombas pursues the buy-one-give-one model and is reported to have given away 45 million pairs of socks to the homeless. 

Unlike many DTC brands that are solely focused on digital media, Bombas has also invested in TV and outdoor advertising. There is clear seasonality in the search, although it is not clear whether this is due to the brand's advertising spend or true seasonality (in which case, who knew so many people gave socks as a gift?). Given that growth in brand name search has slowed, maybe the brand needs to test advertising at other times of the year. Be that as it may, Bombas is reported to be profitable and ranks number one of 'Shark Tank' products with $1.4 billion in retail sales

Like I said, this analysis does not prove that a brand will avoid the performance plateau if it turns on its brand building efforts before hitting the 4-year mark. However, I think it is a reasonable supposition based on the evidence provided. So here are my takeaways from this post.

In the absence of a change in strategy, most DTC brands are likely to suffer a dramatic slow down in brand name search at about the end of their fourth year.

Success factors seem to include,
  • Addressing a big and repeat purchase market, like Everlane, Warby Parker, and Bonobos. Even though Bombas only focused on selling socks for 8 years, people buy a lot of different pairs for different needs (witness a drawer of socks that I used to wear with my business attire before Covid switched everyone over to Teams, Zoom, or Google).
  • Creating quality products, like Away, Bombas, and Warby Parker. Particularly if your brand is going to rely on repeat sales for its continued success, product quality is a must, particularly in this age of reviews, influencers, and good, old fashioned word of mouth.
  • Selling at what is perceived to be a good price compared to incumbents, as most of the listed DTC brands do.
  • Investing in a physical retail presence, not just relying on DTC. Remember, DTC is just a channel. It is not magic.
  • Retention is good, but acquisition is critical. All brands lose customers and to grow you need to acquire more than you lose. Improving retention alone will not provide enough leverage to grow over the long-term.
  • And, like Bombas, using a multimedia approach to build brand predisposition, combined with performance marketing, will probably fend off the performance plateau. The general evidence suggests that using more media channels and balancing brand building and performance advertising results in stronger growth and I see no reason that would not apply to DTC brands as well.

So, in conclusion, if your DTC brand has made it to its third birthday successfully, it is time to start thinking about brand building, not just relying on performance marketing. If you launch an effective brand campaign at 42 months, then its full short-term effects should be taking hold just about the time that organic growth starts to wane.

But what are your takeaways? Please share your thoughts in the comments box below.
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May 25, 2024