We’re told that growth is the be-all, end-all of DTC. But not all growth is good for the long term health of a business.
Growth: VC’s are hungry for it. Martech vendors claim they can deliver it via “one simple trick”. Thought leaders caution that without it the competition will eat you alive. And your boss demands it, no excuses.
As DTC marketers and operators we’re told to pursue any growth we can get at any cost. But these messages are misleading: not all growth is profitable, and not all growth supports the long term health of the business. Here are a few examples of harmful growth.
Most brands achieve product-market fit because they nail a system for selling their product in a specific channel. That channel could be big box retail, Facebook Ads or QVC. The brand structures its teams and processes around this channel as it grows. Maintaining channel performance becomes essential to maintaining the profitability of the business.
Eventually the brand reaches a local maxima in its key channel. Management decides to expand into a new channel to drive the next phase of growth. But this decision needs to be made strategically. Ideally, the skillset and resources required to succeed in the new channel closely mirrors the core channel.
Imagine a DTC startup’s first foray into wholesale. Even if the brand is hot and potential partners come to you, the existing team needs to adapt to an entirely new vocabulary and set of processes to launch in wholesale. Often, small brands don’t have the resources to hire a dedicated team member for the new channel until it’s a confirmed success. In the meantime, performance of the core business suffers due to divided attention and reduced resources.
Growth That Isn’t Profitable Enough
Let’s assume that a given brand is, on average, profitable on their first order. Their key customer acquisition channel is Facebook ads, and they spend enough to pay via Net 30 invoice instead of credit card. They’re also fortunate to pay their manufacturer on Net 60 terms and typically receive stock within 15 days of ordering it.
This means that on average, this brand has cash in hand for each product sold before they are required to pay out the associated expenses. This is great! It means the brand is less likely to require outside funding, or find itself struggling to meet unexpected expenses. (It’s also a highly unrealistic scenario that represents an ideal).
Now let’s say this same brand wants to pour some gasoline on their growth. They decide to double daily marketing spend and, in the process, trade greater scale for higher acquisition costs. Now the brand breaks even on its first order, and it takes an average of six months for a new customer to yield a profit.
So this brand now has more top line sales, but less cash on hand. Forecasting and purchasing inventory become higher stakes exercises. The brand may even need to seek outside funding to cover the gap between purchasing inventory and getting paid back. This puts the brand in a more vulnerable position in the future.
Growth That Dilutes The Brand
If you’ve ever been to a failing department store or an off-price retailer like TJ MAXX, you’re familiar with this one. These retailers are stuffed full of brands that once had a luxury reputation and commanded premium prices, but are now frequently relegated to the clearance rack.
If you’ve worked to build up brand desirability and perception, there is inevitably a flood of untapped growth that you could unlock by lowering prices. These lower prices could take the form of promotions, diffusion lines or “made for outlet” product. But if you lean on these channels for the majority of your growth, eventually the business will struggle to sell anything at full price, and the brand itself may become irrelevant.
There is another hidden pitfall to opening the floodgates of the off-price channel. After the initial surge in demand you get from reaching a new audience, you have to grow your off-price business like any other line of business. For example, if your off-price channel drives $20M in new sales in year 1, you can’t expect $40M in year two. You’ll need to invest in acquisition to keep growing.
Is your new growth initiative capturing incremental sales, or simply shifting existing demand into a new channel? No new growth initiative is ever going to be 100% incremental. But some ideas certainly have more incremental potential than others.
Take wholesale expansion as an example. If a snack brand launches DTC only, then gets distribution at a national grocer, the uptick in purchase frequency will probably offset any sales cannibalization from the website.
But what if an apparel brand launches via an eCommerce site, then expands into wholesale? The wholesale accounts will often siphon away customers from eCom without increasing frequency. Especially if the brand sells on the wholesaler’s eCom site.
The key to evaluating cannibalization risk is understanding how consumers interact with your category when they shop the potential partner. People visit the grocery store weekly, and it’s a venue for habit formation. But they visit department stores (maybe) 2-3 times per year. And they typically use department store websites to comparison shop brands for the lowest prices.