DTC is an expensive beast 💰
DTC is an expensive beast 💰
The "Apples" of the world stop innovating. It leaves a wide space for new brands to launch exciting products. In last decade, new brands took the "fancy" DTC route to launch. The cost is unbearable🥹
👋 Hola! Welcome to Out of Singapore. I am Shantanu, friends call me Shan or Shan Shan. I love the abbreviated name. My day job is building businesses. I don’t believe in specific functions. I do everything required to get the business up and running.
Last few weeks, especially last week, was tough. I could feel the blood thumping on the back of my head. The current production process and fulfilment system terrifies me. Simply put, our demand is 3-4 times the production capacity. On top of this, our 3PLs don’t seem to show ownership of customer orders. It has become a every morning struggle to ensure orders are being sent out. 🥹
To relieve my pain, I slept like a Panda the whole afternoon.🐼
Before I jump to the story of the day, help me understand this
DTC is a key channel for entrepreneurs to launch new brands. It helps them escape the expensive retail distribution channel. If you are curious, retailers charge as high as 70-80% of your product margin as their fees. If you sell to retailers and distributors, you are left with low margin and no customer information. The brand becomes just a manufacturer or sourcing party for the retailers. Pretty bad for brands, right?
When internet became capable of handling online transactions, direct to consumer brands came on the seen. The motto is simple - escape the traditional expensive distribution channels, build direct relationship with customers and provide value to the end customers. Have a look at some of the successful DTC brands in the graphic from USA.
DTC brands close to SG are - Prism+, Noah, Happy Human, Moom, and True Classic. In the last 5 years, DTC brand groups such as RPG Commerce, Una Brands, Qurio, and Ordinary Folk have come up.
There have been three major phases of the famed DTC story.
First wave (2010-2014) - Athletic Greens, Everlane, Warby Parker
Second wave (2015-2019) - Casper, Away, Allbirds, “Drop shipping” brands
Third wave (2020 or covid wave)
This third wave have disrupted the whole DTC ecosystem negatively. Suddenly the cost of acquiring customers has ballooned. The cost of building DTC brand does not look appealing now. Let’s look at why DTC is so expensive?
#1 Cost structure of DTC brands
Here are the usual costs for a brand. Today we will focus on the cost of sales and marketing. Here is a brief summary.
Let’s look at Singapore specific costs
Shopee takes 8-10% of the sale as commission. Marketing ROI is 3-5x, meaning platform ads costs 20-30% of sales. No store development cost. So, total of operating on Shopee is 30-40% of sales.
Tiktok takes 5% commission. Tiktok affiliates take 20%-30% commission. Marketing ROI is 5-8x (sometimes even higher), meaning platform ad spends are 12% to 20%. Total operating cost on Tiktok Shop comes out to be 40-50%. The major cost is commissions paid to livestreamers since sales are driven by livestreams by creators.
DTC (Shopify, BigCommerce, Shopline) - Payment gateway charges are 3-4%. Fixed fee of 100-150 SGD per month. However, Facebook and Google take 100-200% of your sale. Plus, development customisation cost are massive (assume 500-1000 USD a month).
Retail and Distributors - 40-70% commission. Additionally brands bear the cost of promotions and provide incentives on delivering monthly targets. I am not an expert in offline, so I will share more when I learn this better.
When a brand is trying to build their DTC channel, there are few options to advertise - Facebook, Google, Tiktok, alternative display networks and offline media. Among all, Facebook is easiest to set up and scale. Hence, brands love it. They love it a little bit too much.
Fulfilment is extremely expensive in the USA. However, that’s a topic for another day.
#2 How expensive are Facebook ads?
Acquiring a single customer via Facebook ads can cost anywhere between USD 30 to USD 100+. Our cost of acquisition is on the higher side. Terrible, right?
The industry claims that a good CAC (cost of acquisition) should be 50% of their annual customer lifetime value. I would call bullshit on it. The best CAC is 30% of your average order value. Why, you would ask? A 30% CAC ensures you have breathing room to cover rest of your costs. For us, our CAC should be USD 20-25, not any higher. We are burning money to get our customers. It doesn’t work well for a long term business.
The CAC costs have risen in last 3 years since everyone now is advertising online. I did some digging online, and the rise is close to 2-3x compared to 2019. Inflation is eating online advertising. 🍴
#3 When does DTC make sense? 🤔
DTC is essentially an owned online storefront. It is an essential part of existing online (similar to a social media and email account). For an offline focused brand, it would mean having their own or franchise stores.
DTC is the only channel where you own your customers contact details and buying preferences. It allows you to use cheaper retargeting methods like email and WhatsApp marketing. It also the place where you show your entire brand - design and messaging. DTC provides you the flexibility to do anything and everything on the website, unlike a marketplace platform like Shopee and Amazon.
Okay, coming to the real question - When does DTC make sense? It makes sense financially when
The sale volume is very high (above 10 mn USD a year, ideally even more) - Brings down the acquisition cost
You want to build a long term brand name - Justifies the initial investment in marketing
The product provides real value (in terms of benefit, price, delivery and service) - This will reduce marketing costs automatically, since organic word of mouth and repeat purchase rate will go high.
Customers buy repeatedly from the brand (repeat rate of 50%+) - This means additional cost of marketing trends to zero for such customers.
#4 How to survive as a brand in this expensive environment?
I use a simple method - Add less expensive channels to the mix and ensure overall cost is not high. In marketing terms, it is called MER. I optimise on MER, while accepting that DTC will remain a high burn channel.
Marketing efficiency ratio = total sales ➗ total marketing cost
MER can be improved by these 3 interventions -
Open up more sales channels that complement the DTC channel - We opened up Shopee, Lazada and Tiktok Shop. We are on the way to set up Amazon store too. We are an online brand. Customers must find us in all the major online marketplaces. They can discover us via Facebook ads and decide to buy from their preferred channel. This works wonders for us.
Start building low cost marketing levers such as social media marketing and email marketing. This is underrated. Instagram shop and TikTok shop allows you to sell products via your social media content. It is already working great for us, bringing close to 40% of our sales this month. However, we rely on affiliates. We need to start investing to build our own social media channels.
Introduce subscription as a buying method to ensure repeat behaviour. This is straightforward - the cost of acquiring a customer becomes a one time cost. Repeatability is enforced in this buying method.
Offline channels - Our customers sometimes ask us if we have offline store. Maybe it is time we launch in offline stores in Singapore.
Beyond these methods, the obvious one is - improve the efficiency of ads we run. We are working on it as well.
Thank you so much for reading till the end. Yes, you are a superstar. 🤩
It’s my 8th month of writing consistently. I started writing back in March 2023 to sustain myself - not financially but mentally. Zaloom, my first startup, was defunct and closed. It was a failure. I didn’t want it to consume me. I chose to start writing to remind me of the good learnings. I am so happy that I write every week. I feel so productive, haha.
I also managed to inspire a friend to start writing. Here is the welcome post from Jose. He carries an extensive experience across South America, USA and Singapore. I am so glad to have him as a friend.
If you liked this edition, please like the post. If you have a friend or colleague who will benefit from these writings, please do share the newsletter with them. I will be glad.
Today is a sad day. Chandler is no more. He filled our lives with laughter with his character in Friends. I hope he rests in peace.
In another news, Jisoo is single again. yay!
Can someone send my love to Jisoo, please! 💓
Have a great week folks! 🙌
Another awesome insights! Keep it up!
Thanks Justin! Glad you liked it 😁