A beefy new report from a team of analysts at Raymond James offers a peek under the hood at how investors size up the fast-growing field. The insights are especially helpful to someone like me, who tends to evaluate every new brand I meet as a consumer.
One of the key shifts Raymond James tracks is just how many D2C companies are hoping to pivot, evolving from a product brand to a category brand. Using data and their already-strong consumer relationships, some seem poised to succeed: For example, Peloton, which sells stationary bikes and live-streaming classes, launched Tread, whose live-streaming content has blossomed with yoga, meditation and boot camp classes, and it is beefing up its app. Dollar Shave now sells deodorant, oral health and skin care products, and Harry’s has launched Flamingo, razors aimed at women. Mattress company Casper is leaning into sleep technology.
While all those expansions aren’t always likely to connect with consumers -- at least not as strongly as the initial hero product -- the report also zeros in on five factors that seem to distinguish what makes a D2C brand succeed.
*Level of disruption. “We believe the most successful D2C brands are ones that offer the most disruption vs. the status quo,” the report says. “D2C brands are asking consumers to switch to their product and to do that brands can’t have a ‘me too’ offering.” That includes lower prices and better value, as well as a superior buying experience -- especially with more personalization and customization, and transparency. And products that focus on sustainability, or that are at least better for the planet, are increasingly important.
*Competitive advantage/ differentiation. Standing out from conventional brands is important, but more and more, companies also need to set themselves apart from new D2C competitors. Those strategies can include adding proprietary products, content-based strategy, or -- for companies like ThirdLove and Stitch Fix -- the commitment to use data to build a better product.
*Customer lifetime value. Most D2C brands zero in on a three-to-one ratio between lifetime value and customer acquisition costs, a goal the Raymond James team generally likes D2C companies to achieve within three years. “Lifetime value has a number of inputs including: average order value, frequency of purchase, repeat purchases/ churn, gross margins, and other variable costs,” the report says. “Of these factors, we believe repeat purchases as well as frequency of purchase can be the most difficult for companies to predict and are likely the key elements in successful vs. non-successful brands.”
*Customer acquisition cost. Developing an efficient way to attract customers is one of the trickiest components of a D2C business model, and can be quite volatile, “especially as competition increases on platforms like Facebook and Google. Often D2C brands will have strong initial success in acquiring users at a relatively low price but as the category or product matures, customer acquisition costs increase.”
*Revenue potential/total available market. The investment company says it prefers D2C businesses that address larger total available markets, where “even gaining 1% market share in a large total-available-market category such as auto, with about 40 million used car sales a year in the U.S., would arguably be very successful.”
But it also points out that a large market hardly guarantees success, pointing to the troubled meal kit category as an example. Food and grocery may present a tantalizing $1.2 trillion opportunity, but “we have seen many D2C brands scale quickly, then top out in the $50 to $100 million revenue range.”