D2C: Dimensions to Conquer

This article tries to identify some of these dimensions and how they can become powerful tools to conquer D2C space. Thus, looking beyond the conventional models of price and product mixes, it tries to establish clear causal relationships to identify winning dimensions which hide in plain sight.

Dimensions that Matter

1. Community affiliations: Since time immemorial, brands have tried to create unique associations to establish bases of brand loyalists, advocates and evangelists. They followed age old practices of carefully curating their brand identity, defining unique product attributes, carefully steering course with brand/product extensions etc to keep these bases intact and avoid churns. Brands rarely stepped out of their defined brand image, after, many made failed attempts to pivot as their markets shrunk. The logical choice then was to stick to the game plan and carefully crafting plans which helped secure their territory. Marketing channels served as entry barriers and smaller brands had little opportunity to widen their reach, which essentially limited everyone’s share of the pie.

Everything changed in the recent past. D2C brands harnessed the power of community building, something which established brands failed to acknowledge, and thus remained heavily reliant on brand/product associations. These D2C brands silently gained pace under the hood and unlocked the power of WOM (word of mouth) marketing, while big brands were still riding the wave of influencer marketing. These D2C players heavily leveraged ‘Pool’ community affiliations, wherein the shared activity (goal, or values) is the key.

2. Economies of scale: While economies of scale is widely accepted as one of the key factors for success of an apparel retail business, in D2C space, it hardly matters. The content and the products are carefully curated for a specific target segment and mass manufacturing is counterintuitive. Social media algorithms come in handy while targeting the right segment without burning cash, and personalisation becomes the key. In D2C retail, cost benefits emerging from economies of scale can quickly be subdued by cash stuck in unsold inventories.

To tackle low sale-throughs and high leftover inventories, various D2C brands have now perfected their ‘pilot first’ operating models, after years of iterative learnings. In a ‘pilot first’ approach, a design is exposed to a test group with limited quantities and is then given a go-no-go decision based on the response received. This helps them avoid high inventories, dead stocks and an ability to quickly pivot if markets do not respond favourably to a product. The premium paid for these small batch sizes save D2C brands from overbuying costs.

This dimension thus serves as a caution for those who wish to enter D2C space with their manufacturing prowess and are relying heavily on the benefits emerging from economies of scale.

3. Brand stature: Defined as a combination of ‘Knowledge’ and ‘Esteem’, brand stature serves as a critical measure to identify brand equity in BAV (BrandAsset Valuator) model by Y&R Group. ‘Knowledge’ is one of the sub-dimensions that helps identify whether consumers possess knowledge (not merely awareness) of the brand. Also, it helps know whether they are aware about the brand beyond conventional knowledge or is it simply another brand they consume without having meaningful affiliations with.

‘Esteem’ on the other hand is a measure of weather they feel a sense of pride to be associated with this brand, and if they will act as brand advocates/evangelists.

While brand marketing teams work tirelessly to improve these metrics, in WOM marketing this becomes a make-or-break KPI. D2C brands, which score high on this rather intuitive metric, can generate significantly higher CLV (customer lifetime value), and are able to control their CAC (customer acquisition costs).

4. Brand strength: Brand strength is derived from two of the most frequently argued sub-dimensions, namely ‘Differentiation’ and ‘Relevance’. While differentiation directly refers to a brand’s ability to differentiate itself from the competition, relevance is a measure of whether customers perceive the brand relevant in its present state. Many contemporary brands, surprisingly, fail to score on both these measures. Oftentimes a D2C company’s brand strength is knitted around a niche segment and thus can quickly implode when that space is breached by other brands with higher brand stature. This holds true for brands having significant brand stature too, where a significant dip in their brand strength may push them into a commodity quadrant, where customers may now believe the brand has lost its edge.

5. CLV/CAC: The fact that many of these brands are startups and are funded by VCs, makes CLV/CAC one of the significant financial metrics for valuation. It simply evaluates a business on its ability to capture value from its acquired customers over and beyond the expenses it incurs to acquire them. This can be tricky though, as a higher CLV/CAC may indicate that the brand is not investing enough in acquiring new customers, while a lower CLV/CAC may raise red flags in its ability to break even. D2C brands, which try to generate high traction through influencer marketing, usually have a lower CLV/CAC for obvious reasons. This also threatens their sustainable operations in the long run.

Figure 1 outlines first principles of succeeding in apparel D2C space, clearly indicating that while economies of scale and brand strength are two good to have (and widely known) abilities, community affiliations, brand stature and CLV/CAC are the ones which differentiate winners from the rest of the lot.