Many successful direct-to-consumer (DTC) brands became relevant during 2013–2017 through Facebook and Instagram. This was the golden era of DTC brands—since then the competition has increased exponentially, changing the auction dynamics.
Next-gen brands entering the market now will find it difficult to achieve economical advertising and direct response (DR) metrics that DTC brands once had. They might achieve components of it in the early stages, but it’ll be hard to sustain once they increase ad spend. They will have to actively think of unconventional ways to become top of mind for consumers.
Performance marketing, particularly Facebook and Instagram, should be amplified and entrenched by the “brand.” Marketers need to build relationships with their customers and make memorable impressions. Circa 2013–2017, a staunch growth team could’ve scaled a DTC brand, without too much focus on the “brand.” It was about maximizing cost per acquisition (CAC) or return on ad spend (ROAS) intraday. Everything else was secondary.
After influencing $250M+ in ad spend on paid social, we’ve noticed that DTC brands that see hyper-scale now have a few things in common:
- Price elasticity and high-profit margins
- High average order value (AOV)
- Retention focused business model
- Simple cross-border activation
- Consumable and impulse buy products
Price Elasticity and High-Profit Margins
Myriad metrics factor into each business decision, but the most commonly neglected metric is price elasticity. Price elasticity is a measure of the relationship between the change in demand for your product to its price fluctuation. Brands should establish whether or not they can take a premium position. Next-gen brands are steering away from promotions but are ultimately forced to offer them because that’s what consumers have come to expect. Without a robust assessment of price elasticity, promotions can damage brand value.
Strong profit margins must be built into the pricing strategy to first, cover the cost of promotions, and second, create a buffer in case raw materials become more expensive, and your customer is unwilling to pay more.
- 70%+ gross margins (Varies across sectors. Beauty is 80% while food and beverage is 30-40%.)
“Recently brands such as P&G, Coca-Cola, Whirlpool and Colgate Palmolive have all said their prices will need to increase due to rising costs of raw materials; they will need to be exploring ways to encourage their consumers to be more elastic on price.” – Warc
Most brands measure success by ROAS and/or CAC on Facebook and Instagram, and there is nothing wrong with that as long as brands do it responsibly and don’t lose sight of profitability.
Along with high-margins worked into the pricing strategy, brands with high AOV see healthy revenue growth on paid social. If your product is a cost-efficient, then utilize cross-sell and upsell strategies to increase AOV.
- $100+ AOV (non-subscription)
- Conversion rates (CvR) onsite (all traffic in Google Analytics): 3%+. (Note: High AOV items don’t often see 3%+ CvR. There are cost and volume trade-offs.)
Retention Focused Business Model
New customer acquisition can get expensive. Consumers are not loyal—they don’t go shopping; they’re always shopping. Brands need to prioritize retention and have a solid program in place.
Make every interaction with your customers memorable. Have a conversation through each touchpoint and don’t stop the conversation after they have converted. Focusing on retention makes brands profitable faster—it continues to ensure a strong lifetime value (LTV) to CAC ratio and impacts the payback period (PB).
- Retention (subscription): 1M is 85%+; 6M is 50%+
- LTV/CAC: 4X+ (Identify your PB. Marketers love LTV but rarely discuss PB.)
Simple Cross-border Activation
On the Q2 earnings call, Facebook shared that global revenue is increasing at a similar rate to the U.S. and Canada.
Facebook’s revenue increase from Q1 to Q2 2019:
- U.S.and Canada: ~11%
- Europe: ~13%
- Asia Pacific (APAC): ~12%
- Rest of the world: ~13%
Its user base in Europe remained flat to the prior quarter at 286 million daily active users (DAU). DAU rose from 186M to 187M in the U.S. and Canada, 600M to 615M in APAC, and 490M to 499M in all other countries combined.
With the fastest percentage of growth of DAU in APAC and the rest of the world, there is a massive opportunity for brands to expand across borders.
Having worldwide distribution facilities and smaller products that are easily sent overseas help diversify against single-channel market risk.
Facebook Case Study: Vincero
Vincero partnered with SocialWithin to help them expand their global reach. Our strategy resulted in a 50% higher ROAS, 43% reduction in CAC, and 54% cost per add to cart.
“Cross-border targeting started out as a test with a controlled budget, but after seeing success on Facebook, we implemented a robust, multi-layered campaign strategy. As a result, Vincero entered brand new markets across the globe, increased sale targets in existing markets and surpassed the expected return on ad spend.” -Huidana Baig | Director of Marketing at SocialWithin
Consumable & Impulse Buy Products
Keep the customer journey in mind and aim for a shorter sales cycle. If the consideration phase is long, you end up investing more in the education of your consumers, which increases your marketing cost. The simpler your product or service, the easier it is for a customer to convert.
Additionally, attribution could be easier if your consideration phase is shorter because a conversion can happen within a 1-day click window vs. a 30-day click window.
The above metrics are not benchmarks. There are plenty of great brands that don’t have those numbers and were able to achieve success on paid social by expanding into different categories, having retention programs, and launching into new markets, among other strategies.