DTC Strategy: Choices and Constraints for Direct-to-Consumer Brands

Strategic Alignment in Business

Organizations routinely need to establish strategies that are consistent with the interests of their customer base, workforce, stakeholders, and governing bodies.

A deeper understanding of the decision-making processes of these external parties directly informs and clarifies a company’s own strategic direction.

The Role of Regulatory Preferences

When regulatory bodies consistently prioritize consumer choice, businesses can readily adapt to accommodate diverse preferences. For example, Shopify facilitates a variety of payment methods through its partnerships.

Conversely, Apple previously limited payment options, demonstrating a different approach.

Impacting Change Through Intervention

However, impending regulatory changes are poised to alter this landscape.

It is anticipated that Apple will be compelled to broaden its payment options as a result of this regulatory intervention.

Regulatory pressure is therefore a significant factor in shaping platform strategies.

Nash Equilibrium and Netflix Viewing Habits

The concept of Nash equilibrium provides a compelling, retrospective understanding of numerous business choices.

Essentially, Nash equilibrium suggests that when the outcome of another party's decision is known, a decision-maker can select their own course of action without experiencing regret.

This means that, within a given interaction, neither participant has a reason to alter their strategy once they are aware of the other's optimal position.

A Domestic Illustration

A relatable example of this principle unfolds regularly in my own household.

While I am content with solitary reading or enjoying Netflix with my child, a situation arises where my availability for streaming is met with my child’s preference for reading – a scenario I find less than ideal.

It highlights how understanding the other party’s choice, and the lack of incentive to deviate from a known outcome, mirrors the core tenet of Nash equilibrium.

Understanding the Dynamic

The situation isn't about forcing a specific activity, but rather the inherent satisfaction derived from shared experiences.

Knowing my child's preference doesn't change my own, but it does influence the overall enjoyment of the evening.

This simple scenario demonstrates how even everyday decisions can be analyzed through the lens of game theory and Nash equilibrium.

DTCs, DNVBs and Game Theory

The omnichannel strategy adopted by Direct-to-Consumer (DTC) companies is heavily influenced by their understanding of customer preferences and the identification of an optimal approach. Often, limitations can be beneficial, streamlining decision-making and accelerating the attainment of a stable outcome at a reduced cost.

Analyzing the language used in marketing materials and public filings provides valuable insight into a company’s strategic thinking.

Warby Parker, in its IPO prospectus, notably referenced its previous status as a digitally native brand. A significant shift occurred in 2020, with online sales decreasing from 65% to 40% of total sales. Simultaneously, the number of physical stores expanded from 126 to 145.

Conversely, Allbirds continued to emphasize its digital origins, despite opening 27 retail locations. A substantial 89% of their revenue still originates from online channels.

A continuing discussion centers around the appropriate terminology: DTC or digitally native vertical brand (DNVB). This debate, originating with the Dollar Shave Club’s initial YouTube campaign, has been recently revived within the DTC community on Twitter.

A DTC business is defined by the eventual necessity of selling through physical stores, differentiating it from those capable of sustained online sales without such constraints.

For Warby Parker, a majority – 66% – of eyewear purchases are linked to vision tests. These tests inherently require physical locations, thus necessitating their expansion. Consequently, they now describe their digitally native phase in the past tense. Away, however, faces no such compulsion to establish a physical presence, as luggage isn’t typically purchased at airports, and immediate need is often absent.

Smile Direct Club (SDC) presents a unique scenario. While generating 100% of revenue online, their custom 3D-printed braces are currently impossible to produce without physical outlets. A physical component is therefore essential to the complete product experience.

If a company requires a physical presence for customer acquisition, order fulfillment, and customer retention, regardless of the proportion of digital revenue, it qualifies as a DTC company operating beyond purely digital channels.

However, if these processes can be entirely managed without a physical footprint, the company can be accurately categorized as a DNVB.

The Distinction Between Necessity and Option

When faced with unavoidable limitations, as exemplified by Warby and SDC, businesses invariably gravitate towards a Nash equilibrium. Resistance to establishing a physical storefront is absent from the outset.

However, when the customer doesn't dictate the need for physical locations, the expansion into brick-and-mortar channels is carefully managed. This phased approach prioritizes factors like financial stability, potential market growth, and overall profitability.

Is it feasible for some direct-to-consumer (DTC) brands to revert to their digital-only origins? This possibility hinges on innovations like at-home vision testing.

ThirdLove, while potentially a digitally native vertical brand (DNVB), demonstrated a superior understanding of body types. Consequently, they proactively pursued retail expansion, even into less urban areas.

For this company, the need to enhance the customer’s product experience represented both a market opportunity and a key competitive advantage.

Ultimately, all businesses dealing with physical goods cannot entirely avoid retail. To do so would inherently limit their potential customer base.

However, the decision to embrace retail remains a strategic choice for companies to make.

Therefore, the debate isn't about whether a company is DTC or DNVB. Every DNVB will, by necessity, operate as a DTC brand.

The crucial distinction lies in whether the move to physical channels is driven by constraint or by deliberate choice.