Building High-Growth Profitable D2C Businesses

Published January 2-9, 2023

Backgrounder – 1

Over the past few weeks, I have had many conversations with a wide cross-section of D2C (direct-to-consumer) founders. I found very similar questions coming up. What follows is a Q&A format essay which answers the most common concerns and queries. Hopefully, it can work as a guide and playbook for D2C founders and marketers as they seek to build profitable businesses.

Let’s begin with understanding India’s D2C market first before we get to the Q&A.

Two charts from a Bain report on “How India Shops” positions D2C among a wide array of emerging e-tail models and highlights its growth of D2C:

A recent report by Shiprocket explains the traditional brands approach to reaching customers and how D2C brands are different.

Backgrounder – 2

Fortune writes: “D2C, or digital-first brands, which leverage internet to sell directly, without the traditional distribution network of wholesalers, stockists and retailers, are having a dream run in India, thanks to its vast 700 million internet users and online shopper base of 140 million, third-largest after U.S. and China. India is now home to about 600 D2C brands with estimated combined revenue of over ₹14,000 crore (around $2 billion), says Ankur Bisen, senior partner at Technopak Advisors. The Indian D2C market is estimated at $1.9 billion, contributing close to 1% of the domestic FMCG, home and consumer accessories market, according to a white paper published by Technopak. It is expected to grow to $22 billion by FY25, more than 10% of the total market…To win big, brands will have to step up offline play. But how many can do that? Analysts say many D2C firms are using large e-commerce platforms and are restricted to the online medium. Given that e-commerce accounts for just 2-3% share of retail, it is important to have an offline presence. “To become a ₹20,000 crore brand from a ₹2,000 crore brand, companies will have to go the traditional way. They will have to look at distribution in general trade. This is going to be a big challenge for D2C brands, especially the small and mid-sized ones,” says Rajat Wahi, partner at Deloitte. Offline distribution requires substantial capital, says Wahi. “Once some of these brands hit the ₹50-100 crore revenue mark, they will potentially get acquired by big internet companies.””

From an HDFC Securities report: “D2C is here to stay; omni-channel the way forward: There are about 600 to 800 digital first companies in India. While many of these companies are only present on digital platforms and marketplaces, companies that have achieved a certain scale are endeavouring to expand into the offline channel. Speakers [at our conference] were of the consensus that online and offline channels will coexist. Selling on own websites is beneficial in terms of cost-effectiveness and easy access to data (that helps develop products), while an online-only presence limits the scope of growth…While an online presence gives customers easy access to the products, offline helps products achieve sustainable growth…Customer acquisition cost has sharply risen in digital space, which is a risk for D2C brands, if repeat purchases are not high… While D2C companies start to become sizable, many traditional companies are adopting the digital way. It is done through incumbents acquiring existing D2C brands to enter new niches that the brands were present in.”

The report has a couple of good slides which compares D2C with traditional FMCG:

A story in Economic Times summarises key findings from a report on D2C by ICICI Securities:

The era of mega brands is behind us and large companies will have to do a lot more hustle and have a portfolio of multiple mid-sized brands and a disruptive approach on some of the emerging trends, said a report by ICICI securities.

D2C or direct to consumer brands are better placed over large companies in select areas, not just restricted to the speed of execution.” With some of the underlying shifts in the environment, it’s getting a ‘level-playing’ field where large companies will have limited competitive advantages. Better consumer-level data and targeted marketing capabilities place consumer companies at an advantage to the larger players,” said the report.

D2C brands refer to businesses that have the majority of their revenue or customer acquisition from direct-to-consumer online channels or started with an online-first distribution before going omni-channel.

“Slowly but surely D2C players will impact large FMCG companies with their innovative product offerings and variety of flavours. With the kind of time people spend online, they are coming across D2C brands more often and the recall is increasing. Already D2C brands are seeing increased trials as consumers are now looking at options from their regular brands. Be it apparels, personal care or foods,” said Soumyadeep Mukherjee, cofounder, Spicestory. “The challenge for D2C brands however, will be to scale offline. At some point in time, all brands will have to go offline and build volumes there in order to keep treading the path to profitability.”

Another story in Economc Times lays out some of the challenges for D2C:

One of the primary disadvantages of a D2C-only brand is discoverability. Online marketplaces such as Amazon, Myntra, and Nykaa help consumers find new brands either with the help of search engine optimisation or marketing tools within the category search with the help of banners and more. Either way, coming across a new brand and trying it out (as the consumer trusts the retail channel) is much easier using marketplaces.

However, digital-first brands are engaging with their target audience with the help of focused content which allows them to have followers on social media channels, which in turn makes even first-time consumers feel confident about shopping from these D2C channels. Therefore, once the brand and consumer have come in contact, chances are that the consumer will place her next order through the D2C channel, app, or the brand’s social media page.

Backgrounder – 3

Netcore’s report on D2C lists its advantages: greater access to customer data, building 1:1 customer relationships at scale, and greater control over product catalogs, pricing, and profits. A Netcore D2C ebook lists the challenges: finding new customers (Acquisition), converting users to customers, poor product discovery, cart abandonment and low AoVs (Average Order Values), difficulty in retaining customers, and lack of hyper-personalization.

Harshil Salot writes: “The D2C model comes with several benefits, such as brand values, convenience, ease of use, and a feeling of community. According to Google India’s report, there has been up to 80 percent growth in customers searching for a brand’s official store. The changing consumer behavior is one of the top reasons for brands to adopt the D2C model… The D2C business model looks appealing. However, it comes with its set of obstacles – customer experience being the toughest. It is crucial to not only focus on scalability and revenue and incorporate new capabilities to deliver a smooth customer journey… D2C players engage with the customers directly, which aids in personalization. Using customer feedback, brands must merchandise good products, analyze the right price points, and manage demand. In the absence of middlemen and third-party suppliers, these players utilize an innovative marketing strategy to enter the market directly. There are no barriers between the producer and the consumer, allowing businesses to control their reputation, marketing, and sales tactics.”

YourStory: “The growth of social media platforms, including Instagram and Facebook, made it easier for manufacturers, retailers, and service providers to directly communicate with their customers. Courtesy of the D2C route, the conventional layers of the distribution channels are coming off. Products can now directly reach customers from the manufacturer or retailer’s location as the reduction of the supply chain pitstops enhanced the ease of access. People who buy personal care products, travel services, fashion, fitness, or food products can easily recall seeing ads on Instagram, etc., before visiting the seller’s website and purchasing the desired product…One of the main reasons why people buy a product from any seller is due to their trust in the quality and price offered in comparison to others. This trust and generation of the brand recall are of utmost importance to any D2C brand’s success.”

Inc42: “While there are many success stories and the future looks bright for D2C brands, there are challenges for the brands selling through the D2C channel due to both macroeconomic and sector-oriented factors. The new-age D2C brands, particularly the emerging ones, continue to face high competition from legacy players and marketplaces. For instance, the FMCG space, which has the largest number of prominent D2C brands in the country, has the presence of giant companies like Unilever, Nestle, ITC, Parle Agro, Colgate Palmolive, Procter & Gamble, among others. The list gets even bigger when it comes to global competition. Besides, it often becomes difficult for the new-age D2C startups to keep up with the pricing and discounts offered by large marketplaces like Amazon and Flipkart. On the other hand, they also have to bear high customer acquisition costs (CAC) as they need to spend significantly on marketing, face challenges on managing logistics, and low customer retention and loyalty.”

With this as background, we are now ready for the Q&A with D2C founders. The focus is narrower and centred around martech: how to acquire, retain and develop customers, and build high-growth profitable brands.

Getting Started

D2C Founder: One of the first decisions I need to make is whether to sell on marketplaces or build my own website/app. What should I do? How do I acquire my first customers?

While marketplaces are good for the initial boost, the longer-term focus should be on building one’s own properties (website or app). CAC (customer acquisition costs) have been increasing rapidly over the past few years. Witness Google and Facebook’s growth in India: as Business Standard reported, their combined revenue in FY22 rose 77% year-on-year to over Rs 41,000 ($5 billion). My belief is that about half of this spending is being wasted on wrong acquisition and reacquisition. While marketplaces have the audience, they too are getting into advertising as a revenue stream for brands to promote their products. D2C brands also run the risk of the marketplaces coming up with private label offerings in the same category. Yet, in the short-term, marketplaces offer the best starting point for new brands.

Another approach which can be taken is to build community and influencers, and then get into commerce. This also depends on the product category. If there are passionate buyers, then a content and community approach could help reduce initial customer acquisition costs.

Of course, the alternative is to raise plenty of capital and spend on acquisition – either on marketplaces or owned properties (website/app). But with venture capital becoming less available, this is becoming a harder option.

D2C Founder: How can I collect customer data via marketplaces?

The strength of marketplaces comes from their access to customers and the data they accumulate over time. For D2C brands, the lack of buyer data means that they stay dependent on the marketplaces. In some categories, it may be possible to include options to get end customer information. For example, a brand could include an extended guarantee or a discount on a future purchase if buyers provide their email address and mobile number.

D2C Founder: How can I reduce CAC in case I have my own properties for selling?

The first step is to understand where the AdWaste is happening. The two primary problematic areas are wrong acquisition and reacquisition. The first step is to understand the magnitude of the waste. This can be done by analysing data of acquired customers. To reduce wrong acquisition, brands can take data of their Best customers (“Best Customer Genome”) and target prospects with those attributes – rather than lookalikes of the entire database. To curtail reacquisition costs, brands need to build hotlines with their customers – and the best way is to make sure an email ID and mobile number is collected. This provides at least three other options than to reach out again: email, SMS and WhatsApp. Another approach to reduce CAC is to customer-led marketing, aka referrals. Ask and incentivise existing customers (especially the Best ones) for references.

At a broader level, founders need to shift focus from acquisition of new customers to maximising lifetime value of existing customers. Acquisition spending is easy but is a leaky bucket; retention, engagement and growth is harder but is the only path to building exponential forever profitable growth businesses. For retention, D2C brands eventually will need to build their own digital properties.

After Acquisition

D2C Founder: What is the most important action I should do after I attract a prospect to my website/app?

Do your best to collect identity information – email ID and mobile number. This will allow push messages to be then sent to the shoppers. For this, consider offering useful content. For example, a fashion brand can offer a 10-day email series with tips on dressing better. A beauty brand can offer a series on how to take care of one’s skin. A grocery brand can offer recipes. A jewellery brand can offer suggestions on how to make the right purchase decisions. A healthcare brand can provide a series on a stress-free life. The key in all cases is how a multi-day content program can get anonymous visitors to subscribe and thus provide personal identity information. Very few brands actually do this today. The result is that they lose the acquired visitor, and then they are trapped into reacquiring the same visitor via the Big Adtech platforms.

D2C Founder: Which channel works best for building the initial relationship?

While I am a bit biased given Netcore’s presence in email, I strongly believe that the best RoI channel remains email. And with innovations like AMP and Atomic Rewards, it is going to become even better. Be it a first-time visitor or an existing customer, building a hotline is the crux in the brand-customer relationship. Email 2.0 (interactive, incentivised, individualised) is the best channel for building the hotline. While brands can use WhatsApp also, the costs can become prohibitive for customer engagement on a consistent basis. Email 2.0 does all that WhatsApp can do and more.

D2C Founder: What are other rookie mistakes to avoid in the first contact with a prospect?

Not having a good search engine and not personalising the site experience are two mistakes which reduce the prospect of a sale.

If the product is in the catalog but doesn’t show up in the search results, it is not going to result in a sale. As has been said, “Jo dikhta hai, wo bikta hai.” (What is seen is what is sold.) Unbxd, now a Netcore company, offers one of the best search solutions for D2C brand sites.

Visitors leave breadcrumbs as they browse the site. By using historical data with AI, it is possible to make good guesses on what products are likely to be of interest and thus personalise the products shown. This will hasten the first sale.

At a broader level, the goal must be to remove friction at every stage. Once a product is added to cart, the payment and delivery process must be simple and quick. Amazon is the gold standard globally on frictionless commerce – right from search and personalisation to payment and delivery. It is the attention to detail which will differentiate successful D2C brands from also-rans.

Retention and Growth – 1

D2C Founder: How do I retain and grow my customers?

There are three important ideas to consider for customer retention and growth: customer-base audit, Velvet Rope Marketing, and a unified martech stack.

The Customer-Base Audit by Peter Fader, Bruce Hardie, and Michael Ross explains:

A customer-base audit is a systematic review of the buying behavior of a firm’s customers using data captured by its transaction systems. The objective is to provide an understanding of how customers differ in their buying behavior and how their buying behavior evolves over time.

It is important to note that we are not talking about “knowing the customer” through the lens of traditional market research. We are not interested in the demographic profile of our customers. We are not interested in their attitudes. We are interested in understanding their actual buying behavior.

…A customer-base audit is all about gaining a fundamental understanding of the behavior of the firm’s customers. It involves a serious engagement with the fact that revenue is generated by customers pulling out their wallets and paying for a firm’s products and services, and that any attempt to think about a firm’s revenue streams must start with a good understanding of how customers differ and how their behavior evolves over time.

According to the authors, the audit can answer questions such as:

How many customers does your firm have?
How many customers do you really have?
How do these customers differ in terms of their value to the firm? For example, how many one-time buyers did you have last year? How many customers accounted for half of your revenue last year?
How many customers who bought your products last year can be expected to buy from you this year?
What proportion of your sales this past year came from new versus existing customers?
On average, what proportion of your new customers have made a second purchase within three months of their first-ever purchase? Within six months? A year?
Which of your products are most appealing to your most valuable customers?

Velvet Rope Marketing is about using the customer-base audit to identify the Best customers – those with the highest CLV (customer lifetime value) – and then creating differentiated experiences for these customers. Ideally, D2C brands must create a separate SBU for such customers – because these 20% customers can generate 60% of revenue and 200% of profits. More than a loyalty program, they need a royalty experience. Here are some examples of creating memorable experiences:

Finally, to make it all possible (data gathering from the properties, experience differentiation, omnichannel personalisation), brands need a unified martech stack which has all the components integrated together:

A colleague, Nick, frames this this: “The fundamental requirement is a martech stack that is tightly integrated, with a common data model, that enables data to flow seamlessly across all systems of activation. This can be accomplished by stitching together point solutions, but it is hard, expensive, takes a lot of time, is prone to failure, and often requires significant internal resources to maintain. A unified stack is a more efficient way to go, and marketers need to be efficient now more than ever. Gartner calls this out in recent research – “Turbulence in the macro environment has cemented reliance on the integrated suite approach to the procurement of marketing technologies. According to our survey, a staggering 60% of respondents say they prefer an integrated suite approach to selecting technology. Meanwhile, just 25% say they prefer a “best-of-breed” approach.” [Source: Gartner: Disruptions Derail Progress in Martech Utilization: 2022 Marketing Technology Survey Insights. Published 6 September 2022)]”

These three ideas and solutions – customer-base audit, Velvet Rope Marketing and a unified martech stack — taken together lay the foundation for customer retention and growth.

Retention and Growth – 2

D2C Founder: Is there a framework which brings all these growth marketing ideas together?

Yes. And this is how it looks:

Hotline and Properties are at the heart of a D2C business. Marketplaces provide an initial sales channel, while acquisition needs to be targeted to minimise AdWaste.

Here are a couple of graphics which take a customer-centric view of the journey and the various interventions that marketers can make:

D2C Founder: How will I know if I am succeeding? Is there a North Star Metric?

While there are many numbers that can be tracked, the most important number is Earned Growth, which “is the accounting-based counterpart for the Net Promoter Score. It reinforces the effectiveness of NPS and provides the organizations that use it with a clear, data-driven connection between customer success, repeat and expanded purchases, word-of-mouth recommendations, a positive company culture, and business results.”

Here is an explainer in “Net Promoter 3.0” in Harvard Business Review: “Earned growth has two elements. The first is the back-for-more component captured by a battle-tested statistic called net revenue retention (NRR), which is used in several industries, most notably software-as-a-service (SaaS). Once you have organized revenues by customer, you can determine your NRR. Simply tally this year’s revenues from customers who were with you last year, divide that amount by last year’s total revenues, and express that figure as a percentage. The second component is earned new customers (ENC). It is the percentage of spending from new customers you’ve earned through referrals (as opposed to bought through promotional channels). To determine your earned growth rate, add NRR and ENC together and then subtract 100%.”

12 Mantras, 12 Essays

I have put together 12 mantras for winning in the D2C business.

Identity: Build a 2-way interaction channel with your customers. Collect email ID and mobile number for every customer.
Hotlines: Use Email 2.0 (AMP for interactive messages) and Loyalty 2.0 (Atomic Rewards for incentivised messages) to ensure that the push messages sent get opened and acted on. Atomic Rewards can be used for a transaction upstream (attention and data) and downstream (ratings, reviews, and referrals).
Habits: Provide informative content daily to customers (after opt-in) so they get into the habit of acting on the messages sent.
AdWaste: Calculate the digital marketing budget that is being wasted on reacquisition and wrong acquisition. Redirect this towards Atomic Rewards. In other words, pay customers, not Big Adtech.
Audit: Do a customer-basis audit to understand buying behaviour of customers.
Best Customers: Using customer lifetime value as a marker, identify the top 20% customers.
Velvet Rope Marketing: Create differentiated experiences for Best Customers. These could be based on exclusivity, ease and access.
Unified Martech Stack: Go beyond point solutions and deploy an AI-powered Martech 2.0 stack across the properties (website, app) to automate routine tasks and provide omnichannel personalisation.
Search: Ensure that search results fully reflect the product catalog.
Referrals: Happy customers can bring in friends and family which means zero cost of acquisition.
Acquire Best Customers: Decode the Best Customer Genome and look for new customers like them – rather than focusing on a ‘spray and pray’ approach to acquisition.
Earned Growth: Make earned growth (revenue increase from existing customers and referrals) as the North Star Metric.

As you build the business, make profits and not valuation as the goal. Valuation, as we have seen in the past year, is ephemeral. A focus on profits ensures best practices are followed in business building. They are the best source of capital – because the only way to earn profits is by providing something of value to customers. The ideas described here are the keys to powering “exponential forever profitable growth.”

Many of the ideas have been expanded on in my writings on marketing. To go with the 12 mantras, here are 12 of the best essays:

So, dear D2C founder, venture forth and build. But do it right. Eschew the path of raising lots of capital and burning it on customer acquisition. Remember the most fundamental of all business principles: “Bring your customer back for more, and ensure they get their friends.” Choose the path of profit-centric marketing, and build an enduring, great company.

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