No. 331 Part One: As Seen on TV

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In a private New York City dining room sat a few dozen executives across digital media and retail. Of them included companies like The Chernin Group, Cameo, Instagram, Barstool Sports, Stripe, Digiday, Seat Geek, theSkimm, Andie Swim, 2PM, and Zola. These companies ranged from venture-backed DTC brands to digital media companies that are valued well into the nine figures. Everyone had a particular problem to solve. We discussed industry-wide concerns to include: advertising efficacy, margins, scale, and sustainable growth.

On this night, Instagram wasn’t the center of the universe. At least not at first. A rarity given the social media giant’s surroundings. The moment that quieted the room wasn’t one devoted to the foretelling of a new marketing technologies, innovations, or hacks. Rather, it was an anecdote about traditional marketing channels.

Andy Khubani is the CEO of Ideavillage, a holdings company that pumps out well-researched, highly marketable “power brands.” Flawless, a hair removal system for women, was the brand name of his latest success.  A power brand tends to be asset-light, high growth, with high margins, manufacturing leverage, logistics prowess, and a sustainable competitive advantage. 

In 2018, he sold Flawless to Church & Dwight for $450 million (or 2.5 times revenues). In year two, his company grossed $180 million with a 30% EBITDA margin, according to a March 2019 press release. 

To scale the company, he used a traditional style of advertising and promotion. 

Backed by print advertising, ads on New York City taxis and blogging campaigns— to go with the full-scale DRTV campaign— Flawless has quickly become a top-selling retail beauty product in As Seen On TV sections and in-line beauty and shaver departments. [1]

In a room full of digital advertisers, platforms, and merchants – everyone was likely asking themselves the same question: how did he reach critical mass so quickly? With no outside capital raised and no performance marketing spend alloted, Khubani built a brand worth nearly half of a billion dollars in just two years. Absolutely no one in DTC is doing that. The most recent acquisition was of Oars & Alps for $20 million. They raised nearly $7 million. This week, Tristan Walker recorded his episode of “How I Built This.” He sold his company to P&G for less than $40 million. Greats Brand sold to Steve Madden for less than $30 million. I could go on.

Khubani’s magnitude of exit is incredibly rare in the DTC space. Since 2007, fewer than seven DTC brands have exited for a price as high as $450 million. Flawless’ early profitability contrasts most in an industry where LTV:CAC optimization is a law akin to the Old Testament. The widely held consensus is to spend heavily now, despite a lack of profits, to earn a customer for a lifetime. This method extends the horizon and heightens the capital requirement but it also absolves executives of the near term pressure to achieve scale early. The LTV:CAC optimization theory is one that I have found to be disingenuous at best. Markets change, competition arises, technology improves, and consumer sentiments shift with the gusts of pop culture and the zeitgeist.

From No. 310: The DTC Playbook is a Trap

As long as DTC brands attempt to follow what’s been done before them, you too should be skeptical of the industry. Many investors seem to look for a DTC Playbook to hand their portfolio companies. As if to say, “Here is how it’s done. Now execute the game plan!” But it’s likely that it will never be that way. As digital-natives begin competing in traditional retail’s territory, heritage brands should serve as a reminder. They had unique paths to critical mass, very few encountered the predictability that the DTC era seeks.

There seems to be two considerations for challenger brands of today. Either optimize for the early exit or settle into growth over a 15+ year horizon. Venture capital doesn’t typically compel either outcome. It is the pursuit of the uncomfortable “in between,” the 5-10 year horizon, that may be a root of DTC’s liquidity problem. For many companies in that space, there is a lot to learn from power brands. The ones that scale fast and exit. Flawless is but one of many.

As Seen On TV / As Seen In Stores

Over the past weeks, several data points suggested that the days of DTC playbook are long past. As traditional brands adopt the technologies and the web-first approaches to growth, many of them have widened their advantages between their own companies and the challenger products vying for the same shelf space.

eCommerce is a tremendously challenging, frequently unprofitable business. It also doesn’t take into account how much consumers still want to be in person with brands and products and people.

Andy Dunn

In an interesting breakdown by Yotpo VP Raj Nijjer, the retail executive presented a few surprising metrics [2]: Sealy Mattress’ direct to consumer sales surpassed Casper’s total revenue in 2018 despite Casper taking the mindshare of online retail advertising and consumer chatter. He also noted that Madewell: a brand that is primarily driven by physical real estate, traditional advertising, and traditional brochures – will do $534 million through online retail channels.

[Dunn] said that, in the case of Bonobos, the brand’s “most profitable business” today is its partnership with Nordstrom. Bonobos now also boasts 66 brick-and-mortar stores known as “guides shops.” [3]

When Khubani detailed how he built Flawless into a relative powerhouse, he made it clear that part of the problem with the DTC era is the inability to truly compel purchases. In short, few DTC executives know how to actually sell. Many are dependent on the superficiality of the impression as a metric rather than the depth found when executives target more than a consumer’s eye balls.

I don’t really like digitally native vertical brands. What gets me excited are brands that are really strong and direct-to-consumer, but also have got omni.

Andy Dunn

He believes that he has it down to a science. And it’s hard to argue that he’s wrong. When the typical DTC brand or digital media operator considers the word “targeting”, it instills a sense of modernity. “Television ads are inferior to the quantitative capabilities found with Facebook and Instagram,” a refrain that you will hear from the typical media agency founder. Khubani suggested that brand managers should reconsider the definition of “targeting.” While television advertising espouses a broader approach to reach, it targets a different part of the consumer.

Screen Shot 2019-09-16 at 3.32.01 PMThe consistent approach to an Instagram or Facebook ad is to engage the eyes. We visit the app to mindlessly consume images. Rarely do we stongly recall what we’ve seen after we’ve left the app. We don’t tweet about it; we rarely talk about it. That collection of targeted, inline advertisements are calculated impressions. They are visuals that spark a mental consideration by capturing a consumer’s eyes – if only for a second. It’s why you see scrolling .gifs of coupon codes, diagrams with price incentives, or photos of marked with fabric qualities. On social, brand advertising is often a science and not an art. Brand managers are working to compel the sale through the logic of price and comparison. Television is different. It inspires the heart. When we consume our favorite show, we talk about and we spread the joy of consumption through social channels.

On this night, Instagram wasn’t the center of the universe. At least not at first.

Just as a physical billboard that is uploaded to Instagram or Twitter becomes a social ad; a consumer good that we discover on television accelerates the growth curve through social and distributive channels. Those crude “As Seen” advertisements have been known to compel purchases so well that stores devote aisles to the category of products. But in this era, the benefit is even greater for brands like Flawless. Early traction, often fueled by television can equate to wider physical and online distribution. This perpetuates affiliate deals, social influencer participation, and earned media. These are all key performance indicators of DTC marketing traction for many brands.

The Two Andy’s: Dunn and Khubani

It’s been rumored that for that $180 million in 2018 sales, Flawless paid for less than $2 million in traditional advertising. With a $450 million exit + incentives, the return on advertising was clearly remarkable in size and in velocity. But surprisingly, that wasn’t the key takeaway.

As DTC brands improve their ability to sell, they will advertise more like the original direct brands, ones that intrigued consumers through their televisions. These brands compelled the sale via phone, computer, or that distinct shopping aisle in Walmart or Target.

The report, which synthesizes information from 125 top DTC brands representing 52 different categories, found that DTC brands included in the study spent 60% more on television ads in 2018 than they did in 2017, totaling $3.8 billion in television ad spend last year.  [4]

Consumers are due to see more television ads from brands like Away.  But for some categories of products, the production style will shift away from brand statement and towards the longform style of selling that you’ll only find on TV. This new era of retailer will be slow to use television in the longform manner that marketing executives have mastered. The traditional television demographic may not be suitable for many new brands or their products.

But, for certain categories, marketing and distribution strategies will continue to evolve in that direction. These will include many of the cues found in those hard-selling infomercials.  There are new tools available to brands that are looking to adopt more of the merchant’s DNA. As television, billboard, and QVC-like platforms feature more DTC brands, these selling strategies will make their way to digital-first platforms.

In this way, Andy Khubani’s thoughts were prescient. The direct-to-consumer industry commonly appeals to consumers through two styles of media: (1) the lofty brand statement or (2) the coupon code value proposition. The style of advertising that drove Flawless from $0 to $180 million was a combination of both styles, designed to carry the potential customer from discovery, to intrigue, to conversion, to evangelist. As Andy Dunn noted, digitally natives brands will continue to struggle without an omnichannel approach to growth.

Brands are using traditional retail sensibilities to achieve half billion dollar exits by year three. Nearly $534 million in DTC revenue by Madewell, a J. Crew-owned private label headed towards IPO. Walmart building their own brands rather than acquiring digitally natives. And the godfather of the term “DNVB” noting that being a digitally native is now a disadvantage.

In the coming months, DTC brands will build around the aforementioned style of television advertising. They will test it on platforms like Instagram, ads will playfully mimic the cadence and tone. They’ll build the processes out on newer platforms tailor-made to achieve efficiently scalable levels of reach and engagement. The two Andy’s seemed to be advocating for similar best practices. By 2018, the cloud-based technologies commonly used by online-first brands had been widely adopted by legacy retailers. For challenger brands to regain their competitive advantages, they should look to the proven advertising and distribution strategies of the old guard. And then, they should make them their own.

Read the No. 331 curation here.

Report by Web Smith |About 2PM

No. 290: On DtC brand defensibility

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If you’ve seen a battle scene from a movie about knights, soldiers, and castles, you may understand the concept of an economic moat. If you watched an old war film lately, a moat is often depicted as a water-filled ditch. It typically helps to defend a fort, village, or castle. In that film, you may have seen projectiles fly toward the castle and cannons fire from atop, in return. Enemy combatants rush the castle only to encounter a deep and wide area of water, poison, hot tar, and sharp spears. As the castle faces fire on all sides, the offensive is often ineffective. The moat helped the castle defend its position. 

People don’t know what they want until you show it to them.

Steve Jobs

In traditional tech, there are moats all around us. Apple builds moats into many of their hardware devices. Your Macbook prefers its Safari browser (until you otherwise designate Chrome), Apple Car Play exclusively defaulted to Apple Maps until iOS 12, and your Airpods defaulted to Apple Music unless you specified Spotify. For physical goods, there are brand moats as well. The best example happens to be at Nike.

Nike works with youth leagues to outfit elite teams, providing young players (and their parents) incentives to purchase all of their wears from the brand. The sportswear manufacturing giant outfits the NFL, the NBA, and the vast majority of NCAA sports. When fans purchase licensed apparel, consumer psychology tips in favor of Nike.

Amazon Prime has become a funnel for the retailer’s private label brands and their high margin devices. Walmart has operated at such a low cost-basis, that their most loyal consumers have little to no market substitute. Shopify attract new merchants with little revenue and fosters them along their path to $20 million per year, introducing a suite of products to keep them from replatforming.

And then there’s Whole Foods Market, who – prior to acquisition – competed in a red ocean. They succeeded for a long time by building an economic moat around their brand and user experience. For decades, Whole Foods’ economic moat was a collection of subtle advantages: nicer fixtures, a wider assortment of organic foods, great lighting, and a knowledgeable floor staff. There was little to nothing technical about the retailer’s growth, but the collection of these advantages locked customers in. An economic moat can be built by more than a company’s technological advantages.

How do you compete against a true fanatic? You can only try to build the best possible moat and continuously attempt to widen it.

Warren Buffett

The internet didn’t destroy the moat, it changed the definition. The smaller the niche, the less the competition. For products in a small niche, there’s less of a need for brand defensibility. But for product manufacturers in a red ocean, defensibility is the difference between stalling out and taking flight. Yet, brand defensibility is often deprioritized. In some cases, brands will focus on customer acquisition (at all costs), often at the expense of building a lasting economic moats.

Old consumer economy. Initially, there were three influences to consider when launching a product in this new consumer economy: brand, product, distribution, the hive, and acquisition model. Prior to the rise of direct to consumer retail, a brand’s moat consisted of these:

  • brand: the impression made upon consumers. The perception created around a physical good mattered most. This impression helped brands remain top of mind between their visits to their shopping centers or the occasional television advertisement.
  • product: the quality of the goods. The value created by the manufacturer influenced brand perception, customer satisfaction, and even word of mouth influence.
  • old distribution: where it is sold. The better the product, the more likely that a consumer could find it anywhere. This signaled that there was consensus around the quality and durability of what is being sold.

With this model, a brand’s trajectory and defensibility was mostly predictable. This was pre-internet: before the rise of the internet and digitally native vertical brands. With the proliferation of direct to consumer brands, influences have changed.

New consumer economy. With the internet, any retailer can market, sell, and deliver physical goods. Brick and mortar distribution is no longer defensible against upstart brands. The web democratized the ability to build product-based brands. In the new consumer economy, a brand’s moat is not only its features, price, and availability. It’s a consideration of product experience, technical advantages, and brand evangelism.

If you don’t land the first and loyal 100, your brand is less likely to earn the early adopters who look like the first 100. Without early adopters, you will not achieve the attention of the masses. The first 100 are the foundation. Without the support of the 100, the masses will not adopt. Made famous by Simon Sinek, heed the diffusion of innovation theory: the early majority will not try something until someone else tries it first. Brands are judged by this early majority.

No. 277: The Power of the 100

In the new brand economy, maintaining defensibility has become more complicated. In physical retailers, traditional luxury brands know their buyers’ preferences. Today, the savviest DNVBs are in direct contact with many consumers by way of customer service, email, and private messaging. They are using these channels, pricing strategies, branding to influence outcomes. Brands have optimized around, beautiful packaging (see: Lumi) fast shipping (See: ShipBob), and easy returns (See: Loop). And with these technological and brand advantages, they are siphoning the loyalty away from incumbent brands like Gillette, who are still operating under the rules of the old consumer economy.

Here are the revised influences:

  • brand: the reputation of the product manufacturer. The collective sentiment of the brand’s consumers.
  • product: the value created by the product. But also, the value created by the ease of purchase, the fulfillment process, and the customer follow-up  upon purchase.
  • new distribution: how is it sold? The better the product, the more likely that a consumer has a 1:1 relationship with the brand.
  • acquisition model: how does the brand achieve meaningful foot traffic? And what is the right combination of paid and organic growth? Is organic growth sustainable?
  • the hive: who is the product’s first 100? Has the brand experienced organic growth on the foundation of this digital community? Will the “100” defend the brand when skeptics criticize it?

A practical example of competition

In this recent post by Harry’s, their team addresses Gillette head on:

In the face of competition from companies like Harry’s, Gillette has lowered its prices for certain razor models. Yet, Harry’s may still be the best value if you’re looking for a 5-blade razor with a flexible head, lubrication strip, and trimmer blade—the key features many guys consider to be most important for a great shave.

How long have you been overpaying for your razors?

At Target stores, Harry’s maintains the majority of the mindshare in the men’s skincare aisles. Often in spite of Gillette’s legacy of long-term performance. And today, Procter & Gamble disclosed that the company is downsizing it’s valuable Gillette real estate in Massachusetts. Presumably, the P&G label is preparing to more efficiently compete with online-first brands that are eating into their market share.

A moat for DtC brands is the competitive advantage earned by focusing on brand, product, distribution, acquisition, and the hive – the brand’s most visible customers and product activations. This competitive advantage fuels incremental growth in established industries.

I’ve compiled two distinct lists of the DNVBs that have emerged in industries that are highly competitive: luggage, skincare, supplements, digital media, and athleisure. These brands aren’t notable because of their lack of competition; rather, they are notable because they rise above tremendous competition. Paul Munford, founder of Lean Luxe, reports on direct-to-consumer brands. He made the following selections:

  1. Away
  2. Rapha
  3. Soylent
  4. Outlier
  5. Wone
  6. Bevel
  7. Hodinkee
  8. Monocle
  9. Casper
  10. Rxbar

And here is 2PM’s list (more at our DNVB Power List):

  1. Away  | revenue leader in the carry-on travel DNVB industry
  2. Casper | revenue leader in the DTC mattress space, distributorship through Target
  3. Harry’s | leader in the men’s shaving, effectively growing into other verticals.
  4. Chubbies | top performer in the men’s casual space
  5. Glossier | leader in makeup, a substantial amount of traffic driven organically
  6. Hodinkee | there isn’t a more credible community of watch journalists
  7. Four Sigmatic | the leader in alternative coffee sales
  8. Mizzen + Main |combines DtC commerce with a targeted physical retail presence
  9. Serena & Lily | leader in DTC furniture, organically driven by quarterly brochures
  10. Wone | redefined ultra-premium in athleisure by selling out of $320 leggings.

One similarity that our lists seem to share: brands’ focus on its customers. And not just traditional customer service but the incorporation of customer feedback in many of their decisions. Above and beyond price and product, a brand’s hive can influence its defensibility.

A common mistake made throughout the consumer economy is the belief that customers are won and lost on features and price – alone. It’s a product manufacturer’s responsibility to build 1:1 relationships with consumers who are power users. In our recent report on Nike’s physical retail efforts, we began with this:

I walked into the Melrose store and I didn’t think that it was for me at all. I’m not the millennial luxury consumer. And that’s who Nike’s after. The Los Angeles retail fixture is very specific to the area, in aesthetic and in offering. Every square foot of the store is built for Instagram. And for a moment, I realized that though I am a millennial, I am not the millennial that Nike pines for. This store is for them.

No. 289: Nike and hyperlocalization

A defensible product becomes consumer’s first choice. Building a community around this is very difficult but this is what separates defensible brands from the brands without it.

A common misconception is that a brand with a strong economic moat has no competition. Quite the opposite, brands with the strongest means of defensibility often have numerous competitors vying for increased sales and brand equity. What sets the one apart from the many? A focus on relationships, value, and retention – not acquisition, alone. The conversation begins when the purchase is made.

As more brands focus on DtC commerce, an economic moat does more than protect the product manufacturer from growing competition. Without an economic moat, existing customers may depart for alternative options based on price, merit, and availability. In this context for brands, defense can be the best offense.

New to 2PM? Read the latest subscriber curation here.

By Web Smith | About 2PM

No. 264: Welcome Common Thread

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Pictured: The founders of Qalo

2PM has the privilege of working with a new corporate partner [1] for Q2 2018. Common Thread Collective is one of 2PM’s noted eCommerce agencies, notable for what they are doing on behalf of digitally vertical native brands. Demand generation for eCommerce is an oft-discussed topic on 2PM. There are three styles of content x commerce strategies. The most talked about models:

(1) publishers who are building an eCommerce as a revenue source:

(2) vertical brands who insource content-publishing to bolster organic traffic, improving net promoter score (NPS):

There is a third way that brands interact with top-of-the-funnel consumers. And it centers around connecting brands to influencers, using messaging to develop content that resonates with prospective buyers. From there, it’s about harvesting first-party data to develop one on one relationships with consumers. Here is a highlight from a recent 2PM Executive Member Brief that should provide context for you:

Member Brief No. 3: The Attention Stack

First-party data (FPD) is information compiled and stored by by DNVB’s, media groups, and marketplaces. FPD describes your brand’s visitors, customers, and loyalists. Because companies with FPD have a prior relationship with their customers, they are in a position to use the data, to include names, addresses, email, demo, and gender — to communicate directly with them. First-party data is what is stored in your brand CRM. The attention stack is what your brand and data-minded operatives work to build by harvesting this data.

There isn’t just one way to approach the attention stack or the collection of first-party data. Here’s a look at one of Common Thread Collective’s methods.

  • Step one: understand the brand’s existing and potential customers.
  • Step two: recognize who influences the brand’s potential customers.
  • Step three: configure the most efficient and effective approach to reaching potential consumers with the influence that CTC has cultivated on behalf of your brand. Invite them to engage with your brand.
  • Step four: drive them to conversion or re-engage and retarget with the previously engaged consumer with dynamic product ads.

Given the importance of building the eCommerce sales funnel (i.e. the attention stack), I sought out an agency partner that would allow 2PM to observe their work with DNVB’s and mainstream retailers. Over the next three months, 2PM will examine the processes that have worked for their brands.

As Facebook begins to address their data controversy, agencies like Common Thread Collective will be the first to adjust, better serving their brand partners who are dependent upon Facebook’s marketing data to drive numbers at the bottom of the sales funnel.

Why should you know Common Thread?

Their approach to optimizing a brand’s attention stack is working and it’s working well. On top of this, their culture is truly unique. Prior to settling in on agency life, the group of managing partners focused on two areas of business that remain pivotal to their work: product entrepreneurship and professional athletics. The CTC partnership includes the former founders of Power Balance and are the existing owners of Qalo. Common Thread’s key clients are:  Diff Eyewear, QALO, Theragun, 511 Tactical, 47 Brand, and Owl Cam.

Many of CTC’s influencers were introduced to brands through the partners’ personal network for professional sports contacts. And influence is vital because CTC’s approach to bolster product sales is driven by social proof. There are two reasons that the average American consumer purchases a product: (1) low pricing (2) recommendations from someone that they trust.

We believe social networks are fueled by human interactions and video content, so to be great at social advertising you have to be able to create human content. We create content and activate influencers in unique and scalable ways. 

Taylor Holiday, Managing Director

Growing their own eCommerce brands, in house, is an additional datapoint that sets them apart. The founding team operates a holding company of micro-brands under their 4×400 incubator umbrella, to include: Slick Products, Opening Day, and FC Goods.

By building an attention stack for their own brands, it provided them with a deeper understanding of the economics that determine paid media’s best practices at scale. Common Thread Collective has skin in the game and proving sales efficacy on your own products is not often seen in the agency space. And their work is serving them well, Common Thread Collective’s typical return on advertising (ROA) ranges anywhere between a 4.06x to 8.3x ROA.

Elephant in the room: Facebook changes?

The success of digital ad buys depends heavily on the troves of data that Facebook has on consumers. Given that Facebook could face regulation, this could spell trouble for retailers who are dependent upon Facebook’s ability to influence product sales. The common fear is that Facebook will begin to roll back some of the data collections that allow the best brands and agencies to do their work.

My top priority has always been our social mission of connecting people, building community and bringing the world closer together. Advertisers and developers will never take priority over that as long as I’m running Facebook.

Zuckerberg, Testimony before U.S. Congress

Considering that greater than 70% of Common Thread Collective’s ad money under management is with Facebook and Instagram, Common Thread will be at the forefront of  the agencies tasked with managing these potential changes. We’ll continue to discuss those developments here. In the meantime, learn more about Common Thread by clicking the logo below:

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Read more of the issue here. 

By Web Smith | Web@2pml.com | @2PMLinks