Intermediation is killing the dream that is DTC

Freeing ourselves from today’s broken model won’t be easy —structural overhauls never are. But the tech? It’s ready.

We’ll get to that.

Let’s talk pain points first. With enough pain, change is inevitable.

First up, the brand.

Why The Time Is Right For Brands 

DTC brands aren’t just ready for change - they are crying out for it. The DTC model is broken and is in danger of being scrapped all together. Two reasons: an unsustainable cost structure and monolithic gatekeepers soaking up margins.

Remember when DTC brands were referred to as “DNVB” (“Digitally Native Vertical Brands”)? Pretty sexy moniker. Not so sexy in practice. Well, the  “D” now stands for “Duplicative”, as in every brand reinventing the same wheel. Customer acquisition? Tech stack? Operations? We’re all doing the same playbook, but solo. No economies of scale in sight.

Perhaps if there were network effects from being vertically integrated then we wouldn’t have to spend so heavily on marketing. Brands aren’t platforms though, so the lack of stickiness combined with the intense competition doesn’t leave much choice in the matter. 

So we outsource the stickiness to a corporate network, Meta, where we battle our fellow DTC brethren to acquire the same customer, individually.

Meta, the benevolent?

More than enough has been written about soaring customer acquisition costs through Meta. What I don’t think gets enough attention is the trust we’ve placed in a black box algorithm controlled by a company with past trust issues.

Meta knows entirely too much about our businesses. We trust that the data we pipe to them will be used in good faith, but really, more questions should be asked about how our data is leveraged. 

Here’s a thought experiment. You launch a product in an entirely new vertical and acquire your first customer via Meta. You transmit that purchase data back to Meta to attribute the purchase, but don’t really concern yourself with what Meta has learned in the process. Well, it’s now aware that one of their users has purchased a product in this new vertical. 

Sure enough, your first competitor comes along and also spins up a campaign on Meta. Will Meta show your first customer this new competitor? And if so, how did that impression come about? It’s a black box, so we don’t really know, but what’s stopping them from doing so?

And would it really stop there? Because not only do you transmit purchase data to Meta, but you also transmit site visit data as well. When a customer comes back to your site and abandons their cart, could Meta use that signal against you and sell an impression to the highest bidder? They could! If they needed to squeeze out more profit, would they? It’s entirely possible.

The fact that this is even a possibility makes for a very troubling predicament. Due to the sheer number of competitors, retention has been a problem for DTC brands, but advertising on Meta may actually be exacerbating the issue. Remember, Meta’s goal is to maximize ad revenue, not to protect your brand’s exclusivity! They aim to keep their users fed in order to keep them scrolling. If they have to “brand farm” to do that, what’s preventing them? 

Meta is a company that has struggled with the truth in the past (and that’s putting it mildly). I think it’s naive to assume they would ever put DTC brands first. Public corporations only have one boss, the shareholder. More and more profit is always demanded and imaginary lines in the sand can be redrawn at will. 

At a minimum, Meta uses your data in ways that don’t fully benefit you, the brand owner. Yet DTC brands have no choice but to play, because if you don’t, your competitors will. This is a relationship fraught with potential conflicts of interest over which brands have no visibility or control.

Amazon: The black hole of the brand universe

Then there’s Amazon, where every brand is reduced to the pleb status of “Seller”. Amazon has no interest in your brand equity - it’s all about convenience (intellectual property rights be damned). Making your product appear to be entirely fungible isn’t a bug, it’s a feature. A no-name seller from Shenzhen slinging your knockoffs? Same stage, equal footing.

Amazon famously operates at the leanest of margins and makes their consumer profits through Prime and ads. Much of their margin is given away to consumer convenience. Not satisfied with a cheap knockoff product you received? Boom, it’s free. Want to order 5 sizes of the same pair of pants and return all 5 for free? No questions asked. And much of this convenience is born at the brand’s expense.

Amazon uses the Prime subscription as a salve for a whole host of profit destructive behaviors by consumers and sellers alike. This has created a carryover effect where customers now expect these same conveniences when shopping with DTC brands. During the go-go days of DTC 2.0, VC cash let brands try and play this game for a while. But the dollars dried up and we can’t afford to be as accommodating now (full disclosure: Onward, where I run the business side of things, helps level the playing field by offering a customer-sponsored Prime-equivalent service for DTC brands. More about Onward as we go).

Since it’s 50% of ecommerce, brands almost have to play Amazon’s game. And if you don’t, here’s the kicker: some of that awareness you paid for on Meta gets diverted to your competitors. Many of those customers discovering you on Meta are then searching for you on Amazon. If you’re not there, Amazon is great at making sure your competitors are. So you play defense and decide to list your products, but that’s not enough (it never is). Amazon’s pay-to-play ad system forces you to bid on your own brand terms to keep competitors from hijacking your traffic. Sound familiar? It’s Google’s playbook, but with a 15% take rate and rising CPC costs.

You can go on the offensive too, of course, and bid up non-brand terms. Good luck trying to figure out the incrementality though. That “conversion” on a non-brand term? Might just be a customer who discovered you organically on Amazon and clicked that sponsored product listing much deeper in the purchase path. Or maybe it’s a customer you’ve already acquired on Amazon. Since they refuse to share customer data to aid your retention efforts off their platform, you just might be paying to re-acquire that customer on Amazon again and again. Amazon is totally fine using your data though to identify top selling products and then undercut them with their own cheaper versions. Really, they’d just prefer you were none the wiser.

The Current Game Sucks, We Need A New Game

Meta and Amazon have been feasting on us for years. You don’t have to squint very hard to see them working in concert together at our expense. But they’re just doing what corporations do: maximizing profits. So long as the game on the field remains the same, they get to set the rules. 

For now, very few DTC brands are in control of their own destiny.

Many have thrown up their hands.

We need a better way. 

It’s up to us to change the game.