The DTC story reminds me a lot of the 2008 financial crisis.
In 2008, the economy was brought to its knees after years of financial recklessness.
DTC experienced a similar roller coaster over the past 6 years.
Let's take a look...
In 2012, Shopify gains momentum, and a multi-year DTC bull market was born.
In 2013, Instagram had been recently acquired by Facebook, and organic social media was crushing.
In 2015, Facebook paid ads became a money printer.... It was like taking a $1 bill, folding it into a paper airplane, throwing it into the universe, and seeing it come back as a $5 bill.
By 2018, the $1 dollar paper airplane now came back as a $20 bill. Generating revenue from FB ads became so easy, the obsession shifted to instant click and conversion, and less about real brand building.
In 2020, Covid triggers massive demand for online goods. Thousands of new brands launch every week.
Covid also fuels an era of cheap money. Fed slashes rates stimulating access to capital. Government hands out boat loads of free money.
Free money
+ Artificially inflated consumer demand
+ Cheap CAC
+ Departure from business fundamentals
________________________________
= A FROTHY bubble in DTC
Remember in 2006, when a Cheesecake Factory waiter could qualify for a $1 million mortgage? And everyone quit their day job to flip houses or become a broker?
The same happened in Ecom. During lockdown, everyone quit their job, and started an online brand. 2 million new brands were born overnight.
The PEAK of the DTC market was Summer 2021.
Then... iOS 14 happened. Customer acquisition costs shot up. Plus, post-Covid store reopenings triggered a pullback in online demand.
“But wait, I thought this era of free money, low CAC, and artificially inflated Covid-induced consumer demand was going to last forever?”
The WAKEUP call began. 30% of brands did not survive the first 9 month spike in CAC, going into 'zombie' mode.
THIS is when founders had to learn how to REALLY run a business. You know… where profits actually matter.
But the problem…
No one knew how. With so many shortcuts taken to fuel growth, business 101 felt like a foreign language.
2022 was brutal. Cash crunch and layoffs blitzed the sector. DTC darlings that had IPO'd, became penny stocks.
2023 felt like a trough. Finally, there was mass acceptance that the "go-go days" were behind us.
Now in 2024, while the environment is still hard, it's viewed as the "new normal." Pipe dreams of exponential growth have evaporated. The focus is on fundamentals and sustaining profitability, instead of a "growth at all costs" mindset. And as a result, brands are finally seeing business stabilize.
THIS is why it's safe to call 2024... THE BOTTOM.
And there's only ONE way to go from here.... UP.
It’s also time to congratulate all the brands that have weathered this rollercoaster. If you made it this far, it’s a testament to your tenacity and ability to adapt.
Brighter days are ahead. 💪🏼
Chief Customer Officer of RevScience
6moCouldn’t agree more! It’s wild the number of brand owners I’ve spoken with that want to run a 20% sale on a specific product or collection (or even site-wide) without true understanding of the impact to their margin / whether their current margins can even sustain such a discount without degrading net profitability. Others will say it’s fine to ‘take a loss now’ in hopes of those customers coming back & purchasing more (higher margin products).. but then operate with no tracking of customer LTV. Especially when discounting, a close / real-time understanding of these financial metrics is crucial.