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.
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.
As Leonard A. Schlesinger, Matt Higgins, and Shaye Roseman tell us in the Harvard Business Review, the direct-to-consumer, or DTC business model took the world by storm in the early 2010’s. After decades (literally — 1923–1983!) in which major retail categories were sustainably dominated by just a few brands — such as Gillette in shaving — a new approach became viable. Cheap and variable-cost computing power let startups run Internet operations and operate web sites with low investment. No need to buy servers or hire developers — all that stuff was readily available on open markets. Social media channels such as YouTube, Instagram, and Twitter made getting the word out about your business inexpensive — no need for expensive TV ads. Facebook let you identify and sell to specific target consumers, the ones most likely to buy your products, without expensive salespeople. And so on.
Entrepreneurs took note. So did venture capitalists, drawing on seemingly endless pools of investment capital. Buzzy startups began sprouting in every category imaginable. As Schlesinger et al note, “Over the next two decades, a new class of startups emerged. From Warby Parker (eyeglasses) to…