Scaling your direct-to-consumer brand is a race to the bottom in terms of cost—but it’s not as simple as minimizing all of your ecommerce expenses. Sustainable growth requires keeping costs low without sacrificing scalability for the sake of penny pinching.
That said, DTC brands fail when they over-invest in certain elements of the business. In this post, we’ll review some costly spending mistakes and how they can be optimized or avoided.
There are seven ecommerce expenses that brands tend to sink too much cash into:
Conventional wisdom says that it’s best to vertically integrate your business operations wherever possible—but this only applies when keeping those operations in-house will reduce your ecommerce business expenses. For example: Rothy’s achieved huge product margins by using owned 3D printers to manufacture its shoes with recycled plastics.
But for most brands, the overhead associated with manufacturing, distribution, and order fulfillment is too high to justify. The fixed costs associated with real estate, upkeep, and headcount are enormous—not to mention the startup costs of purchasing or building the infrastructure. (Even Airhouse employs this strategy: our managed warehouse network allows us to invest infrastructure cost savings into more robust technology and better customer support.)
“Airhouse could support all of our channels, had technology that made integrating our ecommerce store fast and easy, and on a going-forward basis, we’re spending less money to get that functionality." – Patrick Mahaffey, president of Good Life
There was a time when the DTC model was so disruptive, success followed a very simple formula: launch an ecommerce store, advertise on social media, and watch the sales roll in.
But in the last few years, marketing a DTC product has become much harder, in large part because the cost of advertising has skyrocketed. PipeCandy, a market intelligence platform with insights on over 1 million ecommerce and DTC brands, reported that pay-per-click budgets increased as much as 10-20x between 2017 and 2019.
In response, a lot of DTC brands have responded by marketing harder, not smarter—they jacked up their advertising and marketing budgets to do more of the same, even though the status quo is no longer viable. Airhouse research found that one such brand spent as much as 43% of its revenue on marketing—that’s $1 for every $3 in revenue—when the average, according to a 2019 Gartner survey of 342 marketing executives, is 10-12%. As a result, the company is still struggling to achieve profitability eight years after its founding.
Don’t make the same mistake: instead, focus on these two strategies:
Customer acquisition isn’t just ads—it’s also content marketing, sponsorships, retail partnerships, and the strategic use of online marketplaces like Amazon. Of course, there are risks that come with selling your product through third-party retailers, too.
Retail partnerships are a great means of acquiring new customers by putting your product in front of a new audience. The hurdle most DTC brands face when expanding into retail is underestimating the complexity of wholesale fulfillment.
People who aren’t deeply knowledgeable about fulfillment tend to assume—incorrectly—that B2B is simply another sales channel, but wholesale shipping comes with a laundry list of compliance and technology requirements that vary from retailer to retailer with virtually no standardization. Getting up to speed on how to package and ship B2B orders and relay information to the retailer can take weeks. Fail to meet these requirements and you’ll be hit with chargebacks—or worse, you could ruin your business relationship with the retailer.
Investors recommend focusing on just one or two strategic retail partnerships until your brand has grown to the point that it can manage a highly complex omnichannel fulfillment strategy. It might seem counterintuitive to say no to a retail opportunity, but keep in mind that in many cases, the retailer needs the brand just as badly as the brand needs the distribution.
The reality is that if a retailer is interested in carrying a product today, they’ll still be interested when the brand’s revenue has doubled or tripled, and the company has scaled to the point that it can manage the retailer’s demands.
Let us paint a picture: Sales are up. New customers are visiting your website all the time. You just capped off a huge fundraising round. How many new hires are you going to bring on board?
For a lot of DTC brands, the answer is too many. When projections are promising and there’s money in the bank, it’s easy to justify a hiring frenzy; but that can lead to a bloated or top-heavy company structure. And we’ve all seen what happens when a company hires based on its future needs before the market takes a turn.
When growing your team, consider not just the salaries you’ll be paying, but the costs—both monetary and opportunity—of conducting a talent search, onboarding, and time for the employees to ramp. Even though they’re more expensive, it’s often better to hire more experienced talent that can take responsibilities off the founder’s plate and help lead the company in the right direction—at least in the early years.
You should also consider what roles can be outsourced. For example, Airhouse acts as an extension of our customers’ operations team, meaning most brands that use Airhouse as their 3PL need only one or two operations employees, rather than an entire team to manage logistics.
"A lot of warehouse management software is archaic to say the least, so having Airhouse as a layer between makes it really easy for us and allows us to utilize Airhouse's team to get things done at the warehouse without a lot of follow-up. It's almost like having another member of our team dedicated to warehouse management." – William Hicks, president of Magic Mind
The majority of DTC brands launch their business with a lone hero product: Shoes. Candles. Sunscreen.
There might be multiple SKUs—varying colors, styles, and sizes—but the core offering fits within a single product category. In fact, Airhouse research found that 25% of DTC brands haven’t expanded into any additional product categories at all.
When sales of the hero product take off, many brands see a 1:1 relationship: introduce more products, make more sales. Of course, it’s a lot more complicated than that, and many brands make the mistake of overwhelming customers with a plethora of products that they didn’t ask for, losing money in R&D and manufacturing costs in the process.
Andy Dunn, the co-founder of Bonobos, explains it like this:
“Make one thing great. Get one thing right. That earns you the right to go from product one to product two. Take as much time as you need to get product one right, and to prove it—because if you don’t, no one is going to be waiting on pins and needles for product two.”
Focus on strengthening your technical moat and building a loyal customer base before you invest in developing and launching additional products. And when you do decide to roll out a new product line, be sure to use your customers’ feedback to inform your product roadmap—in retail, it’s easier to meet demand than generate it.
Demand forecasting is a critical component of business planning, but just as important is recognizing that forecasts are just that—forecasts. They’re predictions, and just like the weather, they’re always subject to change.
Exponential growth is never sustainable, whether it’s the product of a global pandemic or newfound brand awareness from an influencer campaign.
Take Peloton’s cautionary tale: When the pandemic hit, the company saw sales double twice—first in 2020 and again in 2021. Peloton’s leaders bet big on a new normal that would see consumers choosing to workout at home indefinitely and invested heavily in infrastructure and inventory, announcing plans to build a $400 million new factory, acquiring a manufacturing company for $420 million, and spending $100 million to expedite global deliveries.
Then vaccines became available, and people went back to the gym. By March 2022, Peloton had halted construction on the factory and raised prices. The company’s fiscal fourth-quarter earnings, reported in August 2022, showed revenue had fallen by nearly 28% from the same period the year prior.
The moral of the story: always hedge your bets against massive growth. This can be tricky. You’ll want to strike a balance between meeting demand and avoiding backorders and steering clear of overstock. If you see a significant uptick in orders, you may want to increase restock frequency rather than order size until you’re certain the demand is sustainable.
When DTC brands were rolling in venture capital, many adopted a grow-at-all-costs mentality, primarily for one of two reasons:
For the most part, this era of DTC has closed—successful companies can easily be acquired by bigger competitors if they demonstrate promising revenue growth, and venture capital is harder to come by for DTC brands.
Even so, a lot of DTC brands still take a fast-and-furious approach to scaling by throwing money at every problem they encounter.
Sales are stalled? Buy more ads.
3PL had a bad month? Time to switch vendors.
Inventory management hiccup? Double the next restock order.
Let’s be realistic: throwing money at problems rarely solves them—at best, it delays the reckoning. Companies that spend, spend, spend can rarely support themselves in the end, and eventually, they crumble under their own weight.
Instead, business leaders should focus on creating repeatable, scalable solutions. Your growth may be slower, but it’ll be sustainable, and it will make for a healthier company with much greater longevity.
Airhouse’s fulfillment, logistics, and operations network empowers high-growth brands to scale seamlessly. Learn more by scheduling a call with our fulfillment experts today.