On Mavely and the unspoken opportunity ahead for the DTC industry. When Greats Brand was reportedly acquired by Steve Madden after their most recent year that saw $13 million in earnings, it was a shock to many in the industry. Revenues seemed lower than what many expected but inline with the realties of buildng an omnichannel brand with an often-costly means of customer acquisition. It’s likely that profitability was an issue. This begs the question, how would things have been different if Greats’ customer acquisition model was one built on profitability and value? The venture-dependent, high growth model may elevate a select few brands in the ecosystem but it seems to be depressing the exit optionality of the majority of them.
Percentage of ad spend is a fine tool for aligning incentives. The problem is not with tested and vetted agencies. It’s with bad ones using it to pad income before providing value.
Founded by Ryan Babenzien, Greats was considered a well-respected, independent shoe company with great propects to become a brand as promising as Allbirds. Babenzien’s marketing team had command over several types of outreach. Greats employed several methods to include performance marketing, direct mail, strategic partnerships, and even text-based promotion. But in the end, the brand never achieved profitability. It was a stark reminder that we may be turning a corner in the DTC space; there seems to be an added weight to the importance of earning profits. A rebuke of the SaaS multiple model that many tech companies can adopt to grow in value. At the intersection of growth and profitability, its the street named ‘Profitability’ that DTC brands should run along.
Greats, which still sells most of its shoes through its eCommerce site, opened a 500-square-foot location on Crosby Street last year. The brand also inked a wholesale partnership with Nordstrom and unveiled a buzzy collaboration with men’s fashion authority Nick Wooster.
The company seems to have done everything right and yet, Greats reportedly sold for no more than two times the previous year’s revenues (June 30, 2018 – June 30, 2019). Greats raised $13 million in funding and sold for around a reported $26 million. It became abundantly clear that an absent path to profitability became the issue that drove the wedge. Steve Madden’s supply chain and organization will be a great fit for this reason, the company drove north of $410 million in the previous year. And they did so while maintaining profitability.
We want to build a profitable business and we’re one of the few digitally-native brands that hasn’t raised an ungodly amount of money that makes it challenging to build a profitable business and exit where everybody wins. We weren’t trying to build the company that had the biggest valuation in round one. We’re trying to build the company that had the biggest valuation at the end. 
The news of this acquisition served as a wakeup call for many in the direct to consumer space. What else can be done to improve the viability of DTC brands? Is an early-stage path profitability that crucial? If there is one thing that’s clear, the days of optimizing for ‘at any cost’ growth may be over. As customer acquisition costs continue to skyrocket, retail media has begun reporting on several marketing alternatives. Of them is Mavely, a relatively new platform that launched with a unique approach to reducing CAC for these brands. Mavely’s big idea: turn these DTC brands into multi-level marketing companies.
Mavely is trying to put a new spin on the multilevel-marketing model, in which companies recruit people to sell for them but which has gotten a bad rap for leading a lot of people to actually lose money. Wray said Mavely has no cost to join, no inventory requirements that consumers must maintain, and no minimum follower count that users need to recommend products. 
Founded by Evan Wray, Peggy O’Flaherty, and Sean O’Brien, the Chicago-based company has raised $1 million and is reportedly profitable “on a per user basis.” The app-based service has 10,000 users and currently operates as a glorified, peer-to-peer affiliate model. But while it may eventually and significantly supplement organic and paid growth for brands, that timeline is likely to be longer than Mavely would care to admit. Critical mass for this type of service means that Mavely will have to earn tens of millions of users. It will be interesting to observe whether or not Wray’s company can remain committed to growing the way that they’re preaching to their DTC partners: cost-effectively, perhaps a bit slowly, and by one customer (down-line) at a time. In the meantime, the performance marketing industry may be due for an evolution of its own.
I’m not sure that a lot of DTC brand owners realize that they’re building companies valued at 1 – 1.5x revenues.
In a recent conversation on the merits of percentage of ad spend as a profit center for media buying agencies, agency owner David Hermann provided his perspective on how business should be pursued between DTC brands and agency partners.
This is why we do percentage of revenue tied to ROAS that’s based on their margins and what the break even point is after costs associated with our fees and expenses. Trust is key, we lay everything out before we get started so they never are in dark on anything. 
It presented a worthwhile question. As institutional investors continue to pour more and more venture capital into the DTC space, the approach to marketing should evolve with the volume. CAC has risen as a result of an influx of capital spent on performance marketing. This cycle has led to an unintended result; larger but largely unprofitable businesses. Perhaps the math of success or failure should be reconsidered by investors and founders, alike. What Hermann suggests is correct, agencies should consider a new model for compensation – one that emphasizes healthy contribution margins for these retailers.
Hermann went on:
[My firm is] dealing with one client’s margins right now. [We’re] helping them find a better supply chain. They needed a 2.15x margin just to break even after fees and expenses, so I am now helping on their margin-side. As I always say, media buying is just one side of the job now.
There is an opportunity for a new style of performance marketing agency. Agencies equipped with brand-side, practical expertise could build acquisition strategies around healthy margins, paving the way for percentage of profits as the key performance indicator shared between DTC brands and their agency partners. This solves several problems. Of those concerns, this model accounts for: (1) sustainability, (2) efficient paths to profitability, (3) longer-term relationships between agencies and brands, and (4) decreased dependence on institutional capital. Rather than media buyers being compensated for what they spend, agencies should consider compensation on the profits that they earn for brands.
It’s acquisition vehicles like Mavely, BrandBox, DTX Company’s Unbox, and Showfields that may influence this shift in the agency business model by providing meaningful opportunities for CAC diversification. And if so, the DTC era may finally begin to solve its profitability problem. This could be the first step towards improving valuation multiples and exit optionality for an industry in need of another feather in its cap.
Report by Web Smith | About 2PM