A few insights on the development of this fascinating field, and our take on its various pillars.
Gatekeepers, DTC brands, and the attention bottleneck
(A previous version of this article was published on our Medium page under the title “Direct To Consumer Retail Goes On Autopilot“)
As a new Direct To Consumer retailer, It is wildly exciting to think that the entire world has just become your potential market. After all, the internet is limitless, its doors open to anyone.
Then reality sinks in: the same limitlessness could guarantee that your business dies in oblivion, buried in an ocean of impossible discovery/distribution. Or, at best, it could result in what others have called a “bonsai brand”, never really growing that much, never really dying. Nothing wrong with this, of course, unless it ends up sucking your life away.
As it happens, your potential customers are sitting behind the bottleneck of their own convenience, overwhelmed by such immensity. Said bottleneck applies to well-established consumer brands too, and it shows little room for more than four entry points:
- Search: Everyone needs to find their way around the internet, and retail is just one of its many possibilities.
- Social: Equally obvious, people need to connect with each other.
- Entertainment: With movies and music (intellectual property sustaining its value over time) mostly tied to subscription services, there’s growing consolidation around spontaneous occurrences, games, news, and other perishable content.
- Regular Shopping (or “fulfillment”): For whatever people need reliably delivered, as well as to find goods and services that could make life easier or more enjoyable. Superstores (Amazon, Alibaba), marketplaces (Walmart Marketplace, Doordash), and local grocery stores have mostly squeezed everyone else out of this space.
Different markets and cultures have produced alternative combinations of the above. Social can be a secondary feature of Entertainment (as in TikTok or YouTube) or Regular Shopping (as in China’s Pinduoduo). Entertainment is often a secondary feature of Social (the case in Instagram-Facebook, as well as in some gaming platforms).
A concentration of power around one or very few players within any particular entry point is mostly expected: they all get better with wider usage and richer data, and there are no safeguards in place to guarantee the interoperability of such data, or the portability of each individual’s social graph. To the desperation of antitrust authorities, such concentration (happening on the demand side) tends to result in a better or more compelling service, making it hard to intervene in favor of potential competitors — unless done in favor of national players and local control (the case in China or Russia).
This leaves DTC brands in the hands of a few ad-supported gatekeepers. Unfortunately, demand aggregation calls for an auction-driven system that translates cut-throat competition into very high acquisition costs. And so the game begins.
For the purposes of this analysis, we could say that DTC brands belong in the “Non-Regular” Shopping category. Not because they do not produce repetitive, even highly foreseeable periodic purchases, but because they cannot count on a specific “attention” allocation in people’s lives.
Of course, most DTC companies are hoping to translate an upfront investment in today’s entry points into yet another opening (their own!) in the convenience bottleneck. Alongside Search, Social, Entertainment, and Fulfillment.
Alas, human behavior is not so easily bent. While it certainly evolves, it does so over very long periods of time, in a parallel dimension of sorts. True, new kinds of spontaneous entertainment or social interaction are constantly being untapped (and whoever builds the audience or social graph on each of them first tends to rule over that particular interaction), but the predefined entry points remain in place, and there is little that merchants can do to profit from these micro-mutations other than being faster than their competitors to capture demand at a lower cost — before supply and demand find their balance again.
In the meantime, venture capital and general optimism guarantee a never-ending suicidal battle on all four fronts, ensuring that gatekeepers retain an even bigger cut while Return on Investment (“ROI”) remains elusive for most DTCs.
The minefield looks pretty much as follows in the US and Western Europe:
If willing to invest on a fully-rationalized, well-identified short-term need, Amazon (Regular Shopping) will get the DTC brand closer to actual sales than any other channel. But it will not really help it acquire actual “customers” — those remain Amazon’s. Needless to say, Amazon may also deem it too successful and replace it with cheaper suppliers, or products of its own making (written confirmation of this sits at the epicenter of the EU’s competition case against the ecommerce giant).
If it chooses instead to bet on automated (or “top-down”) discovery, Instagram-Facebook (Social) will target potential new customers surprisingly well. And the business will acquire those relationships directly (for whatever they may be worth). However, it will pay dearly for the luxury, to the point of rendering the model unsustainable unless its entire cost structure has been designed to absorb the toll’s variable impact.
As an additional caveat, automated discovery requires the sort of cross-site tracking and individual profiling practices that have gained platforms (and some advertisers) a terrible reputation and multiple regulatory challenges. Are such practices (eg., lookalike audiences requiring an upload of current customer lists) consistent with the declared social mission of the DTC in a world in which privacy and sustainability go hand in hand? Even worse, are these small players willing to risk a hefty fine?
Things look different when profiling and automation are replaced with bottom-up discovery, or so-called Influencer Marketing. These bets on sponsored “Second Moments of Truth” (resulting from the shared experience of a previous buyer) are a growing piece of both the Social and Entertainment puzzles. They do not require profiling or targeting, as it is potential customers who choose to follow a particular individual.
Needless to say, betting on declared intent (via Search) or brand awareness (via Social or Entertainment) are also available options subject to the same laws of supply and demand, their destiny firmly in the hands of the established gatekeepers. If only, individual profiling is not required for them to work, although a deep integration with onsite analytics (requiring intrusive cookies and valid consent) will be strongly encouraged by Google and other platforms.
All this said, it is clear that DTC brands come in many flavors, catering to different needs or appealing to different emotions. Extra points are always available to those who show a better understanding of their own value proposition.
But I digress, and here’s my point: There is no escape from the attention bottleneck, or safe passage through the four entry points that conform it. The house always wins.
I do believe that there is a way around it, though.
Escape from Alcatraz
Faced with an attention bottleneck, DTC brands should probably look for acquisition channels that do not require attention. This is the case with subscriptions and delegated purchases (or personal shopping services), which we could call “Autopilot” channels. Both of them are also highly intertwined.
Subscriptions establish a direct connection between a recurrent need and a source of payment. No efforts are required in terms of attention, discovery, consideration, intent, availability, or shared experiences. As I recently argued, most products can and will become subscriptions. Of course, platforms controlling the attention bottleneck are guaranteed to take a large enough cut of the margins to ensure that they remain the primary beneficiaries of the business’s success.
But that is where delegated purchases enter the stage. As the purest manifestation of Zero-Party Data or the customer’s control over her own preferences, choices, and data, tools for the automation of discovery and procurement tasks turn the DTC game upside down. While individuals spend little time in product searches or comparison sites for (mostly) rational purchases -well identified needs-, their “personal shopping assistants” -automated or human- will fetch the best choices in the market, and will ensure that existing subscriptions remain the most competitive for the stated preferences.
In anticipation of this new reality, DTC brands will need to both rebuild their business models around subscription services, and make their offerings visible (and available) to delegated shopping networks.
Will they all be able to find the ROI that the attention bottleneck has so far denied them? Probably not: Highly competitive spaces will always result in squeezed margins.