Think Tank: What Traditional Retailers Can Learn From DTC Brands
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Remember the days when a direct-to-consumer brand could launch a Shopify store and ride a 1 percent Facebook lookalike audience to $5 million in annual revenue basically overnight? That was fun while it lasted.
Rising online media costs have essentially made this a thing of the past. While this presents challenges for newcomers, it represents a clear opportunity for traditional retailers. It hasn’t always been easy, but those that have weathered the DTC storm now have the ability to learn from what made digitally native vertical brands so successful, and adopt some of these tricks — along with leveraging their own resources — to beat them at their own game.
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In working with dozens of brands in each of these camps, we’ve seen firsthand the advantages and disadvantages that both have going for them. While it can be more difficult to affect change in a large omnichannel organization, traditional brands can definitely use the weapons at their disposal to create an advantage for themselves. They just need to know how. Below are some of the most impactful changes these companies can make to maximize their piece of the pie.
Use stores of capital to carve out budget for testing and channel expansion
One of the biggest advantages that traditional retailers have over their venture-backed DTC counterparts is that, simply put, they tend to be profitable. While start-ups are deploying capital to fuel hyper-growth through Facebook and Instagram ads (and fancy espresso machines), traditional retailers can weaponize their cash more patiently and strategically.
Rising costs on Facebook and Instagram make a robust media mix crucial, but “cracking the code” on other channels can require a methodical approach. Very often, the supposedly more “nimble” start-ups will simply repurpose their top Instagram ad for every other marketing channel. But creative is typically the key that unlocks performance on new channels, and making them work sometimes requires developing creative and messaging specifically for each platform. The ability to invest in creative testing and devote resources to rigorous channel expansion plans puts established brands at an advantage when diversifying.
Lean in to customer lifetime value
This is perhaps the biggest lesson that traditional retailers can learn from DTC brands. Companies that grew up on digital have been more willing to adopt long-term profit as a success metric, as opposed to monthly top-line revenue or return on ad spend, or ROAS. There are likely two reasons for this: 1) Improvements in customer data quality have made it easier to track consumers throughout their lifetime with a brand, and 2) rising media costs have encouraged optimizing for metrics over a longer time horizon to justify higher customer acquisition costs. Either way, the truth is that leaning into LTV — adjusting customer acquisition cost tolerance by cohort based on differing repeat rates, AOVs, etc. — is the best way to maximize profit in the long run.
The challenge in making this shift often comes from the fact that there are so many stakeholders who are used to judging success or failure based on overall revenue, or ad spend as a percentage of revenue. And changing this requires commitment and patience from everyone involved. Even if the “boots on the ground” get it, the board and chief executive officer need to understand that success shouldn’t be judged on those metrics, because when shifting to an LTV strategy, ROAS will go down. Expectations must be clearly set and managed, but when done correctly, shifting to LTV can have a huge impact in transforming a business for the better.
Leverage brand equity to expand product mix
Established retail brands have an advantage simply in the fact that they’re established. They’ve built up consumer trust, and can typically rely on a baseline level of customer affinity when expanding their product offerings. A great example of this is Sephora’s subscription box launch a few years back. Brands like Birchbox and Ipsy had emerged as potential disruptors in the beauty industry, where Sephora was clearly established.
Launching their own subscription service allowed them to enter that market without having to establish themselves from scratch, as the newcomers did. Even without the first-mover advantage, they were able to build a business unit on the back of their existing brand equity.
Use existing infrastructure and distribution channels to connect the online/offline experience
During the peak of the rise of DTC, we heard a lot about the “retail death spiral.” Fast forward a few years and pop-ups and showrooms from DTC brands are everywhere. Digital natives have learned the impact that a physical location can have on the customer experience.
Similarly, retailers with many brick-and-mortar locations can leverage these in conjunction with the online experience to help improve the overall conversion rate. Offering a buy online, pick up in store, or BOPIS, option is one of the best ways to accomplish this. By bridging the gap between online purchasers and in-store product retailers are able to impact their bottom line with higher conversion rates due to less cart abandonment from unexpected, high-cost shipping and unlocking the always challenging opportunity for upselling.
It’s suspected that more than 50 percent of current BOPIS shoppers end up making additional unplanned purchases while in store – this makes the incremental foot traffic to your stores incredibly valuable. Finally, one other advantage that cannot be forgotten is the brand loyalty that comes with a fast and convenient customer experience – the ability to get the product quickly and in an environment where you can easily return the purchase if it doesn’t meet expectations can make it hard to shop elsewhere.
Take advantage of digital channels to inform merchandising decisions
This one requires a little creativity, but can pay off with massive ROI when done well. Social channels like Facebook and Instagram provide brands with a direct line to their customers. And while they’re incredibly useful for fielding complaints about late shipments, or promoting new product launches, they can also be used almost as incredibly cheap focus groups for guiding future decisions.
One cool way we’ve seen this used is to run carousel ads featuring options for products that a brand is considering launching in future seasons. By measuring engagement on each carousel card, the brand can source public opinion to make the decision on which products to prioritize, and may decide to scrap a planned product altogether due to lack of interest. This information can also help to inform merchandising depth, to ensure the most popular colors are the most well-stocked.
Retailers can even take this a step further by having these ads run to a customized landing page where a user can sign up to be informed when the product they voted for is available, in order to drive actual sales.
Joe Yakuel is chief executive officer of Agency Within.
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