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Digitally native vertical brands: How to build one & 5X profit margins

Only check the following boxes if they’re undeniably true of your brand:

  • You were born on the internet and commercialize an eCommerce channel yet that channel is not your core asset
  • You’re vertically integrated from factory to consumer, control where and how your product is sold, and use data to inform and personalize strategy
  • You’re differentiated by the customer experience you offer, the proprietary merchandise you sell, and the unique way you bundle the product with service

If you checked each of these boxes, congratulations!  You’re a digitally native vertical brand (DNVB)- an eCommerce 2.0 phenomena better positioned to compete with Amazon and earn significantly higher profit margins than typical eCommerce brands. If not, use these tenets as guideposts to build a DNVB.

But what exactly is a DNVB and why is caring crucial to your future?

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Got soul?

With global eCommerce sales forecast to top $4.8 trillion by 2021, the impact on brick & mortar is significant and permanent as the rate of multi-billion dollar U.S. retail bankruptcies notched a six year high in 2017 in what some call a pandemic that’s not over yet. But there’s more to this trend as a new wave of eCommerce brands- now part of what some call eCommerce 2.0- are innovating differently, executing according to a new set of criteria, and growing faster and more profitably than their eCommerce predecessors.

These DNVBs have soul that isn’t easily quantifiable according to Andy Dunn, CEO at Bonobos. Dunn coined the term DNVB and defines it as:

“Digitally native vertical brands are maniacally focused on the customer experience and they interact, transact, and story-tell to consumers primarily on the web.”

In addition to the boxes you did or didn’t check at the top of the post, DNVBs are different from their eCommerce predecessors in the following ways:

  • eCommerce companies are often commodities whereas DNVBs offer something proprietary
  • eCommerce companies are channels while DNVBs are genuine brands that control their destiny because they control every aspect of their business

Vertical integration isn’t new.

But here’s why it can be especially lucrative for digital natives.Digitally Native Vertical Brand Tortoise

The tortoise with 5x larger profit margins

The theory underpinning the notion that DNVBs are more valuable than typical eCommerce companies is that the tortoise (DNVB) beats the hare (typical eCommerce) in the long run.

The argument against typical eCommerce companies is that they rise and fall with the commodities they sell. While they’ll dazzle investors and the world with hyperbolic top line growth when times are good, they’ll burn out just as fast as they aren’t vertically integrated or focused on the right objectives.

Conversely, the DNVB can’t initially grow sales fast as it’s focused on methodically building out a vertically integrated infrastructure that positions it to be narrowly focused on building cult brand monotheism that results in superior profitability down the road. Creating unique products, controlling how they are made and where they’re sold, and obsessing over a niche audience are genuine points of differentiation.

In an analysis of 75 major DNVBs, Internet Retailer discovered:

  • They grew 44% YoY and generated $8 billion in sales in 2017
  • They now account for 2% of all online sales in the U.S.
  • DNVBs are growing 3X as fast as the average eCommerce brand

Likewise, Dunn argues brands engaged in vertical commerce rather than eCommerce ultimately perform significantly better:

  • Vertical commerce yields 2X product gross margins vs eCommerce
  • Contribution margins 4-5X higher than eCommerce

How DNVBs innovate

To capitalize on the profound difference in performance, exploit the following trends:

Trend #1: Direct sourcing & simple design

By sourcing materials directly DNVBs can slash their cost of goods sold by 2-4-percent and pass the savings onto customers. Intimate relationships with manufacturers also allows for rapid iteration via efficient feedback loops and enables the DNVB to market the relationship- and its benefits- as a point of differentiation. For example, Boll & Branch, a leader in the luxury bedding space, touts its relationship with Indian farmers who supply the company with organic cotton.

Simplicity is often built into the products DNVBs work with factories to create:

  • Casper generated $100 million in sales by limiting the number of mattress options
  • Dollar Shave Club received more than 12,000 orders in the first two days by offering one simple razor to consumers overwhelmed by choice

Casper Essential MattressTrend #2: Enhanced end-to-end brand experience

Bundling the manufacturing of product with the customer journey and post-purchase service result in a brand identity often driven by user generated content (UGC) that positions DNVBs to compete on customer experience instead of price.

In lieu of traditional marketing, which millennials often don’t believe, UGC offers social proof that is perceived as authentic, builds trust, and results in higher conversion rates. It also organically amplifies the brand experience. In many cases, DNVBs leverage content to inspire and build an audience before trying to monetize the audience which is ultimately seen as a community to be nurtured rather than customers to be sold.

DNVBs are also fanatical about using data to inform procurement, product, and marketing techniques that build the brand and offer an ultra-personalized experience customers can feel.

Trend #3: Multi-channel alternative distribution

Besides selling direct, DNVBs understand that 94-percent of retail sales still occur in brick & mortar stores. To complement the mobile buying experience they offer, maturing DNVBs extend distribution offline by forming exclusive partnerships. Offline distribution is also highly experiential:

  • Pop-up stores that blur the digital and physical worlds, and create 3D customer experiences that are attended by customers living hundreds of miles away.
  • Immersive online-to-offline experiences or events that connect a brand’s community with the influencers they idolize to fuel commerce.

The DNVB paradox

While building or becoming a DNVB can be significantly more lucrative than a typical eCommerce brand, it’s also more complex. Managing product from creation, to warehouse, to distribution while simultaneously offering a differentiated customer experience requires the touch of a skilled and experienced operator.Neil-Blumenthal_WarbyParker

The top performing DNVBs- brands like MVMT, MM.LaFleur, and Warby Parker- all have robust technology stacks they use to manage and optimize the total customer experience. Crucial to that experience is intelligently integrating order processing, inventory management, and customer relationship tools.

These are the seeds from which a compelling customer experience grow.

It’s also one reason DNVBs are more profitable. By accurately forecasting demand, flexibly routing orders to ship from warehouses closest to the customer, and automating the supply chain, DNVBs uniquely position themselves to earn something rare; lasting customer loyalty.

The future of retail is yours to shape.

Your approach- and the tools you use- will largely dictate the outcome.

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