The Rise, and Fall, of the Direct-to-Consumer Model

The Rise, and Fall, of the

Direct-toConsumer Model

Rita McGrath

There was a brief period in the early 2010’s when a new business model – dubbed “direct to consumer” emerged and threatened to upend established incumbents. A decade or so in, the assumptions underlying the model are in tatters and we’ve come to realize, as we always should have, that Strategy 101 still applies.

Rita McGrath

Strategy 101 and the direct-to-consumer business model

Let’s start with strategy basics. In order to create a profitable business, you need to have customers who are willing to pay more than it costs you to create whatever they are buying. To scale and keep that profitable business, you need some way of staving off imitation and matching on the part of competitors, in other words, a barrier to entry, as Michael Porter told us decades ago. If you don’t have a barrier to entry, competitors can offer something similar, often undercutting your price, particularly if they didn’t have to make the investments in learning or R&D that allowed you to create the business in the first place. In novel circumstances, it’s easy to forget that this iron law applies.

Rita McGrath

But…

Many of the founders of these imaginative businesses failed to take into account that if it was cheap and easy for them to start up, it would be cheap and easy for competitors to do so as well. Further, that eventually, the cost of customer acquisition was likely to go up as more and more competitors flooded the markets, each seeking scarce attention from potential consumers. Moreover, that just because a venture capitalist thought your concept was awesome, that didn’t mean that customers would.

Rita McGrath

The cautionary tale of Casper

The Casper story, to me, captures the essence of the transient advantage phenomenon that the whole DTC concept has fallen victim to.

Meaning, a concept that is innovative, that emerges and scales, that enjoys its moment in the sun, but that eventually faces erosion of its original success formula, as I’ve written about elsewhere.

Rita McGrath

The Empire Strikes Back

Competition everywhere. Few entry barriers. Rising customer acquisition costs. And, interestingly, a resurgence has occurred among incumbent, traditional competitors who have learned how to operate direct to consumer themselves. After initially being a bit shell-shocked by the early success of Dollar Shave Club and Harry’s, among others, Gillette has regained its footing (although it did suffer a drop in brand value). Walmart has figured out omnichannel, sunsetting many of the sparkly DTC brands it acquired to prompt the transition.

We’re launching very cool software to help manage the innovation process. Next month, our on-line learning resources will publish. How else can we help?

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