There are days when it’s easy to believe that consumers flock to D2C brands because they’re somehow just more appealing than plain-Jane retailers or ecommerce companies. And at a moment when people are buzzing about Stitch Fix’s still-soaring revenues or Edgewell’s $1.4 billion purchase of Harry’s, it’s hard to argue that there’s anything amiss in the business model.
But a new study from CommerceNext and Oracle reveals a more problematic reason: D2C companies just outspend everyone else on marketing. And yes, they’ve noticed those radically outsized budgets make profits (ostensibly, the reason companies are in business) kind of impossible.
While others say their digital marketing budget is somewhere between 5% and 19% of online sales, most D2C brands say it’s 10% or more. And 22% say their budget is greater than 30% or more. For perspective, small-business experts would likely recommend new businesses spend between 7% and 8%, while the average among large companies of $1 billion or more is around 11%, according to Gartner’s latest spending survey.
And D2C companies are not slowing down, with 78% saying their budget this year is higher than 2018’s, compared to just 60% of conventional retailers. Only 7% lowered their budgets, versus 11% of the others.
Those findings make sense to those at non-D2C companies, who are wondering how they can keep up. “Of course, I’ve known these brands spend more,” says Charlie Cole, chief global e-commerce officer at Samsonite +Tumi, who was included in the research. “But I had never seen it quantified so sharply.”
He says it can be frustrating to have results at Samsonite, a traditional brand moving toward a more D2C model, compared to a D2C company burning through investor funding, or a company like Amazon selling multiple brands. As a publicly traded company, “we’re spending 6% of revenues on marketing,” he tells Marketing D2C Weekly. “It’s a completely different business model.”
It also intrigues Cole that 40% of the D2C brands in the study say their biggest marketing challenge is achieving “profitability at scale.” Any kind of
profitability, when marketing equals nearly a third of sales, is difficult. “And honestly, when I look at a lot of these D2C brands, I don’t see them wanting to achieve profitability. It's
really about growth, growth, growth,” he adds.
The CommerceNext study estimates that there are some 22,000 companies in the digital-first, D2C retail category, which it defines as ecommerce retailers that sell “directly to its consumers via its own online channels, whether through subscriptions or other sales while seeking to provide an end-to-end brand experience.”
These companies are more likely to spend on acquisition marketing, as was true of all companies in the survey. They spend more, and are happier with the results, with 85% saying they met or exceeded their goals last year, compared to 74% of incumbent brands. They also avoid promotions and discounting. Meanwhile, 56% intend to raise their investment in programmatic TV to engage customers.
The study also uncovers some inherent advantages to D2C. Because these companies are relatively young, they’re less hobbled by factors like aging technology systems, which plague 41% of traditional retailers, compared with just 7% of D2C brands.
The study was based on responses from 100 senior-level digital retail leaders at companies with more than $10 million in revenues, including digital-first D2C brands, traditional D2C brands with brick-and-mortar wholesale manufacturer that sell direct, traditional multibrand retailers and digital-first multibrand retailers.