How The D2C Revolution Helped Grow Specialty Brands

D2C, short for direct-to-consumer, is a retail segment that’s been thriving since the mid-2010s. eCommerce platforms like Shopify and BigCommerce commoditized access to the tech needed to set up, stock, and manage an online store.

The manufacturing industry, in turn, lowered the minimum order quantity (MOQ) bar and became more receptive to on-demand production. These two operational factors made it easier than ever before to launch small specialty D2C brands.

Today, over 22,000 D2C fashion brands operate in the US alone. Among them, 17 D2C companies are “unicorns” with a valuation of $1 billion or above.

This article will explain how the D2C market evolved over time, as well as what it takes to grow a new, specialty brand in 2022.

D2C Space (R)evolution: From From Unicorns to New-Gen Specialty Brands

D2C brands like Warby Parker, Nest Bedding, Casper, Harry’s, and Glossier launched the D2C movement. Each of them hit billion-dollar valuations (and IPO-ed) in a short span, thanks to a mix of strategy and serendipity.

Ben Lehrer, a Managing Partner at venture firm Lerer Hippeau, described the early days of the D2C as an environment:

“It wasn’t too hard to succeed as a smart person with a mediocre product in a big, sleepy TAM (total addressable market).”

And in the early 2010s “sleepy” TAMs were plentiful. Larger players like P&G, Nestlé, and PepsiCo, took the most space in retail chains with larger merchants — while smaller businesses mostly created local competition. Though social media was rapidly coming of age, traditional players saw networks as an opportunity to increase brand awareness, rather than sell products.

That proved to be an oversight. In 2013, Nielsen reported that consumers mostly discovered new brands and products via:

• 68% – Internet

• 61% – TV advertising

• 53% – friends and family

• 43% – in retail stores

• 36% – social networking websites

Traditional brands dominated TV and OOH advertising, but largely lagged behind in terms of digital marketing.

D2C entrepreneurs chose cheaper digital acquisition channels, and successes soon followed.

• Harry’s, one of the first D2C subscription razor brands, secured over 100,000 potential customers in a week by doing a pre-launch sponsorship campaign on Tim Ferriss' blog.

• Dollar Shave Club made a $4,500 YouTube promo video that went supernova-viral in 72 hours and led to tons of orders.

• Glossier was built on the base of the “Into the Gloss” blog of founder Emily Weiss, pulling over 1.5M unique views every month. It then helped her product line grow its revenue by 600% year-on-year.

In other words: early D2C brands excelled in locating, nurturing, and converting online audiences into customers and, oftentimes, into long-term brand fans.

The timing was also on the D2C side, as people were growing more comfortable buying products online.

• 2014: global eCommerce sales were a “modest” $1.33 trillion.

• 2018: global online retail market almost tripled to $2.9 trillion.

• 2022: the US eCommerce sales volume alone is set to cross the $1 trillion mark.

In the mid-2010s, consumers also switched their attention from TV ads and retail shelves to social media recommendations.

According to a 2017 US consumer survey, social media ads (51%) and search engine ads (47%) prompted more people to visit a brand’s website than recommendations from friends (38%) or TV/radio ads (35%).

D2C startups, in turn, got even better at running paid ad campaigns for customer acquisition, as evidenced in numerous Google case studies from that period.

In short, D2C brands won over customers with:

• Uncanny, transparent, and novel product offerings, paired with minimalistic, fresh branding (which sometimes bordered on "blanding", however).

• Publicly active, amicable founders and stellar brand storytelling put D2C in direct contrast with “faceless” retail corporations.

• Referral marketing, personalization, and investment in customer experience (CX). Every D2C promised to make shopping for mattresses/razors/suitcases a “better experience”.

In summation, a digital-focused customer acquisition machine was bringing early D2C players oodles of new customers at a relatively low cost.

However, customer retention proved to be a weak spot for D2C players. By design, this business model limits your product distribution capabilities to “owned” online channels — your website, social media accounts, or mobile apps.

In contrast, regular B2C brands benefit from wholesale distribution to retail chains, malls, and multi-brand online marketplaces.

As Neil Blumenthal, CEO of Warby Parker, noted in an interview with :

“It’s never been cheaper to start a business, although I think it’s never been harder to scale a business.”

Yet for several glorious years, D2C brands continued to grow by cheaply acquiring more and more new customers across markets with the help of investor cash.

However, the tide shifted around 2018. Under investors’ pressure, D2C startups had to double down on customer acquisition. Feeling threatened by competition, retailers upped their ad spending, too.

Since 2014, average CAC increased by 60% on average for B2B and B2C companies — much due to a rise in paid costs across platforms.

In 2021, Business Insider reported that in one year:

• Facebook ad costs increased by 89%

• Google and YouTube ad prices jumped by 108%

• TikTok ad costs went up by 92%

…and that happened just after an “unprecedented year” of soaring shipping costs, ongoing supply chain disruptions, and calamities in consumer spending.

Combined, these factors made a dent in mature D2C startups’ ambition, which in turn led to a “sobering” phase in the D2C space.

Mattress brand Casper had a lackluster IPO at the beginning of 2020, where it was valued at $600,000 lower than during the previous funding round. Furniture brand Wayfair reported a $78 million loss in the third quarter of 2021 after generating $173 million in net income in 2020. And the list goes on — many more D2C companies have shown less than stellar performance figures.

The New Era of D2C: Specialty Commerce and RetailTech Brands

Source: Pexels

To be fair, the D2C business model comes with unique challenges, such as:

• Low-profit margins

• Rising customer acquisition costs

• Limited retail distribution capabilities

Thus, many D2C players had to turn to new channels and reinvested funds in customer retention after exhausting "easy" ad-based customer acquisition.

Since 2018, a host of D2C startups have opened physical retail locations (once deemed ineffective) and signed wholesale distribution deals with bigger retail chains and online marketplaces to expand their reach.

But the above decisions raised a valid question among consumers and investors alike: Are D2C brands really just regular retail brands?

In a Retail Media article, Carle Stenmark, a partner at VMG Partners, explained that:

“There are some definitely real, legitimate arguments for (D2C startups) to be valued in a different way than a traditional consumer company if they’re actually providing unique personalization through the data that they are capturing, and thus delivering a better consumer experience.

“But if they’re using direct to consumer just as a distribution channel, which I think a lot was, then all of a sudden they’re just way overvalued because they’re not going to ultimately trade any differently than any other consumer brand.”

The good news? Booming online retail markets have room for everyone. Yet, we’ll likely see more proliferation and distinctions in the D2C space in the coming years.

Bigger consumer brands will continue to embrace D2C as a new distribution channel as companies like P&G, Nike, and Crocs, among others, already do. The first gen of well-funded D2C startups will be morphing into something closer to retail brands.

As Suzy Davidkhanian, an eMarketer principal analyst, notes:

“Well-known brands are looking to cut back on wholesale to increase their margins, provide more control over distribution, and create an element of exclusivity. Meanwhile, digitally native D2C brands need to go wholesale to get more eyeballs on their product”.

At the same time, we’ll also get to see the “second generation” of D2C startups who are leaning more on technology to offer truly unique shopping and brand experiences — like Peloton or Hims and Hers do.

Separately, more specialty brands will continue to emerge in the D2C space. Smaller, niche companies with a limited product range and strong customer audience rapport such as Huel or Just Spices. The latter category, in fact, already seems to dominate the US D2C space, where 75% of brands generate less than $1 million in online sales.

New entrepreneurs will enter the eCommerce space as entry barriers remain low and sales channels multiply. Hopefully, the newer generation will not chase sensational growth but rather play the long game of brand building.

Starting a Specialty D2C Brand in 2022: 3 Brand Growth Tips

After 2020, new audiences — Boomers and Millennials — flocked online, eager to experience the wonders of online shopping and digital-only brands.

Respectively, consumer goods companies saw 70% growth coming from D2C sales online and almost double the traffic in the last two years. Although marketing a D2C brand today is harder than ten years ago, there are still many underserved customer segments to activate and engage.

Below are our top three tips for that.

1. Look for Alternative Advertising Channels

Paid ads were game-changing for early D2C players. But growing ad costs and banner blindness among consumers warrant more creative brand marketing.

Explore slower, but more sustainable ways to acquire your target audiences — such as cultivating niche communities rather than building a massive social media following.

That's what successful specialty brands now do. Nadya Okamoto of period care brand August started building a community well ahead of the brand launch. On her TikTok, Nadya began to discuss an array of topics around menstruation, body issues, and women's health. In several months, her account grew to 3.4 million followers, providing her with a free advertising channel for her brand.

Yet, August’s true community of buyers and brand fans is on the Geneva app (a Slack-like social app) where some 2,000 members chat about all sorts of bodily issues, support one another through harder days, and share their experiences with August products.

Gefen Skolnick, founder of Couplet Coffee chose an even more creative D2C marketing strategy. She focused on carving our Couplet’s own niche in LA’s LGBTQ+ community through hosting queer art shows and poetry nights and is yet to spend a dollar on paid marketing.

The Takeaway: There are a lot of promising channels for connecting with your target audiences if you’re willing to dig a little — from private chatting apps and newsletters to Discord, Clubhouse, or even in-person events.

Our tip? Figure out what your most promising primary and secondary audiences are with brand monitoring software like Latana, then create a “space” for connecting with them.

2. Curate Product Choices

Though most of us are eager to discover new products, we’re also feeling overloaded with choices.

A 2022 study found that 48% of US consumers reported an overabundance of options in soft drink choices. At the same time, 51% of European consumers said they were seeking curated experiences tailored to their tastes.

D2C brands need to not only spark consumers' interest in mere seconds but also persuade them to actually consider using their products. To promote brand consideration, you should curate your product choices and communicate their value clearly.

Cosmetics brand Rowse handles product curation with skincare quizzes — an interactive way to help customers discover the best products for them. Rowse also smartly bundles up individual products into “Routines”, which increase order value and enable consumers to get a better taste of their brand.

Care/Of, a D2C vitamin brand, also uses a combo of quizzes and analytical algorithms to recommend the best vitamin bundle for users. Some 5 million shoppers have taken its core quiz since 2016. Because the strategy worked, Care/Of also made new quizzes for subsequent product launches like beauty ingestibles. In 2020, Bayer acquired a majority stake in the company primarily because of its unique customer data collection process and robust distribution capabilities.

The Takeaway: With fewer differences between attractive product options and more information available about them, making a selection becomes more difficult for shoppers. Customers may feel overwhelmed by choice if they’re unfamiliar with the products in the assortment.

Create engaging mechanisms for product discovery and recommendations using quizzes, personalized in-take forms, or in-person recommendations to improve your conversion rates.

3. Collaborate with Other Specialty Brands

High customer acquisition cost is the biggest barrier to growth for new specialty brands. Split the costs with other emerging players to cross-promote one another.

To amplify its reach during its launch, furniture brand Feather teamed up with a food subscription box Daily Harvest. The first 100 customers to rent its furniture in the summer received a complimentary Daily Harvest box. Both startups benefited from extra brand exposure for a low cost.

Kinfield cosmetics brand staged a bigger collaboration last November with some 50 BIPOC-led D2C brands. Jointly, they cross-promoted each other on social media and shared a universal discount code. One of the participating brands, Curie, saw a 1,000% increase in sales a week after the campaign went live.

Gravity, a weighted blanket brand, has been a long-time proponent of collaborations. The company now draws 20% of its revenue from co-branding and partnership deals.

At the same time, D2C brands can broaden their reach with retail and wholesale partnerships, which are also growing in frequency. Cued by consumer demand, “legacy” players are eagerly adding specialty brands to their range. For instance, D2C underwear startup Parade accessed new audiences thanks to a partnership with Urban Outfitters. Earlier, Parade also collaborated with Swarovski on a holiday-special product launch and floral designer Brittany Asch of Brrch Floral.

Specialty brands can leverage retail as a discovery platform — and use wholesale as an alternative to setting up expensive brick & mortar locations.

The Takeaway: D2C brands can’t scale if they focus on just one marketing and sales channel. Diversify your reach by engaging other players in the retail space.

The key to a successful co-branding partnership is selecting brands with similar core consumer bases, values, and sales goals.

Final Thoughts

D2C went from virtually non-existent to a mass-market business model in the span of a decade. During this time, we saw break-neck growth alongside painful pivots and unmet customer expectations.

Launching a specialty brand today remains relatively easy. But scaling it — not as much. Consumers aren’t just looking for more products (pitched as ads). They want to discover unique, creative, ethical brands that align with their values. And if you get it wrong, you could end up like former D2C darlings Made.com or Eve Sleep: in hot water.

To successfully grow a specialty brand in 2022 and beyond, prioritize your brand story over the number of SKUs on offer and conduct in-depth target audience research to better understand to whom, how, and where you should market your goodies.