No. 331 Part One: As Seen on TV


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

Member Brief: The Straw Man

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According to Meeker’s report [1], YoY growth in interent ad revenue from Google, Facebook, Snapchat, Pinterest, Amazon, and Twitter has fallen for the first time since Q1 of 2018. This communicates a potential correction. Meanwhile, Meekr goes on to cite her concern for the rising customer acquisition costs of doing digital business. She concludes with two takeaways from her section on online advertising: (1) CAC cannot exceed LTV for long and (2) effective and efficient marketing means happy customers and positive recommendations.

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No. 324: Own The Audience

On the hidden costs of social platform innovation in retail. Where, how, and what we buy is constantly changing. A scenario where a consumer relies on their Amazon Alexa to order “the dress that Emma Hill wore on her Instagram post from Wednesday” is just as probable as buying that same dress, directly from Emma Hill’s Instagram account. The tools of the trade evolve, the funnel shortens and widens, commerce becomes linear. There’s no better example of this than on Instagram, where the lines between brand, promotion, and commerce continue to blur.

Instagram’s native cart is part of an industry shift shift towards linear commerce. Chinese superapps, like Little Red Book and WeChat’s Good Product Circle have already turned the Chinese consumer’s collective review power into an integral part of their shopping experience. And, with American platforms’ ad models being under attack from regulators, adding social commerce capability is a hedge that will become increasingly common throughout audience-driven platforms. Stateside, platforms like Verishop include native promotional posts from Instagram and Snapchat influencers throughout the user experience. 

No. 314: Law of Linear Commerce

The digital economy rewards the companies that work along the line that separates traditional digital media and traditional eCommerce.A great product needs an organic and impassioned audience. Captive audiences will need products and services tailored to their tastes. Linear commerce is the understanding that digital media and traditional online retail will eventually meet at the center – along the line – the most efficient path for growth. Brands will develop publishing as a core competency and publishers will develop retail operations as a core competency.

Powered by Instagram’s native checkout, social commerce has narrowed the line between promotion and consumption. We are just as influenced by the peers that we follow, than we are by mass marketed influencers, brand models, and marketing campaigns. Linear Commerce on social platforms like Instagram, Snapchat, and Pinterest represent the ultimate merger of consumption and influence. It moves the business of consumerism into creative pursuit, where the brands that are best rewarded are often the most creative. Today, social media has become, both, a driver of economic value and a canvas for artistic expression.

Retail tacticians are quick to celebrate wonders of the convergence between inspiration and the checkout funnel. As performance marketing continues to increase in cost as it’s value flattens, this form of influence-driven sales has emerged as a more cost effective alternative.

A great product needs an organic and impassioned audience. Captive audiences will need products and services tailored to their tastes

Platforms like Instagram have successfully monetized our attention. They are in the process of commercializing our network. This will increase the platforms’ power as gatekeepers, a strategy that we’ve seen before. 

Member Brief: A Familiar Strategy

In 2010, the ten most popular brand pages on Facebook looked something like this: Pringles, Converse, Victoria’s Secret, Converse All-Star, Red Bull, Skittles, Disney, Oreo, and Starbucks, and the top brand: Coca-Cola. With over 22 million fans and Facebook’s once-famed organic reach at its peak, brands’ investments into growing their audience was a lucrative practice. Fast-forward nine years and Coca-Cola’s page is now at 107 million. A recent post received just 1,500 likes. That’s right, just .0014% of Coca-Cola’s audience “liked” the post.

Strategically, there will be consequences suffered by brands who rely upon external social platforms to amplify commerce. Curating an independent audience is an involved process with long tail benefits and short-term headaches; marketing executives have long underestimated the value of this approach to community development and marketing. But while we extol the virtues of platform-driven linear commerce, it has an expiration date. The optimal path forward for brands is an independent one.

On Platform-driven Retail concerns:

Contributor: Member of Forbes’ CMO Next, Ana Andjelic has earned her doctorate in Sociology.

Products > Brands. Platform-driven linear commerce emphasizes individual moments over brands. Consumers are purchasing a look, not a particular brand. In this way, the brand equity of a product can be secondary to its part within a whole. In this way, the mechanics of social platforms have emerged as product seeders. This product-focused model does little for brand equity. It could also have a detrimental effect on sales in the longer term. 

Taste Bubbles. If you read enough reporting on the issue, Instagram has replaced the mall. The difference is that, your typical, suburban mall isn’t partitioned by pre-set preferences. Consumers have little no control over the shoppability of these platforms. Rather, they serve as recommendation bubbles. The dangers of content bubbles have already been copiously documented. Consumers are served content that they already approve of, creating biases that can quickly entrench a person’s concept of quality, availability, or preference. Now imagine a taste bubble, where consumers are served products of which they’ve already shown an interest. Here is a great example of an algo-driven interpretation of an understanding that was previously deemed subjective. 

Longer Product Life cycles. If online retail influenced consumers away from physical malls, social platforms discouraged ownership. The total resale market is expected to double in value to $51 billion in the next five years,according to ThredUp. Traditional retail operates on product innovation and seasonality. In what could be another detriment to brands, social platforms may extend product life cycles. The same products can be marketed and remarketed as long as its component of an influential capsule or influencer outfit. Consider retail influence app, Depop. In the “about us” section: 

After realizing that Depop needed a selling function, Simon re-envisioned the app as a global marketplace — a mobile space where you can see what your friends and the people you’re inspired by are liking, buying, and selling.

In turn, your friends and creative influencers all over the world can see the things you like, buy, and sell, and are inspired by you. This ecosystem has supported Depop becoming a global conduit of connection, not only in m-commerce, but culture, design, and creative communities around the world.

Shortened zeitgeist cycles combined with extended product life my impact retail operations, production, distribution, and merchandising strategies. These areas of the retail business have had to evolve to respond to real-time ebbs and flows of product preferences and tastes.

The rise and demise of brand dependence on social platforms will mirror media’s former dependence on these same platforms.

Today’s trends are the result of buying decisions made outside of direct influences of brands or advertising. Social platform investments were emphasized by retailers hoping to amplify word of mouth influence. However, retail growth may be stunted by these efforts – in the long term. Products are increasingly character-driven, not brand driven. Look no farther than Lady Gaga’s launch of Haus, covered here by Lightspeed Venture Partners.

The rise and demise of brand dependence on social platforms will mirror media’s former dependence on these same platforms. The only appropriate solution is ownership of the audience; the savviest brands are becoming their own publishers. 

The digital economy rewards the companies that operate along the line that separates independent media and independent retail. The line between the two industries is no longer a line of demarcation for brands. That line represents the pulls and influences of both disciplines. It has become the retail strategy for the brands that will endure.

Read the No. 324 curation here.

Report by Web Smith and Ana Andjelic, Ph.D. | About 2PM