(Article originally published on Forbes.com)
It’s no surprise, direct-to-consumer (DTC) brands have taken traditional retail by storm. From Peloton to Purple and Dollar Shave Club to Warby Parker, DTC brands have snubbed classic channels by using data to build deep relationships directly with their customers.
These marketing darlings, the progeny of digital audiences and algorithms, grew their niche customer bases while managing strict controls over their cost per acquisition (CPA) and return on investment (ROI) performance targets on digital platforms like Google, Facebook and Instagram. As a result of their successes, their elder "direct response" aunts and uncles took notice and began moving advertising dollars from TV to digital channels in droves. In 2017, digital advertising surpassed TV advertising for the first time.
But the precision marketing strategies that earned them praise and admiration won’t be able to take them to the promised land of scaling profitability. According to one study, this was cited as the top challenge for DTC brands, which spend a significant percentage of annual revenue on marketing. The media that can help these young bucks achieve scale is one that has been around for 71 years: TV advertising. I'm not talking about the fancy OTT and CTV advertising you keep hearing about, we’re talking old-fashioned, "Classic Coke"-style linear TV advertising. In fact, 125 surveyedDTC brands increased their 2018 TV spending by 60% over 2017 for a total of $3.8 billion. And 34% of surveyed DTC brands say they planned to increase their programmatic TV investment in 2019.
On the heels of the Spring 2019 TV Upfront, an annual meeting of networks, advertisers and agencies to share programming and lock in primetime advertising inventory, three key themes emerged. These themes, revealed to me through industry conversations and post-event coverage, are important for all advertisers to pay attention to but especially important for DTC brand advertisers:
Theme No. 1: 'Performance' isn’t just for DTC brands (or direct response advertisers) anymore.
Performance measurement of TV media is no longer the domain of DRTV advertisers and the legacy media arrangements that hawked Ginsu knives and the Pocket Fisherman. Performance is now mainstream, with brand advertisers demanding to know how their TV advertising is creating value for them, whether that be via website traffic, direct revenue or even retail sales.
The 2017 shift in advertising dollars that propelled digital over TV played an unintended role in this new reality. You see, after advertisers moved budget dollars to digital, they grew accustomed to this new level of precision analytics. Unfortunately, many other advertisers moved budget dollars as well, increasing the cost of digital inventory. This, coupled with a reduction in TV-driven lift and digital’s inherent lack of scale drove advertisers back to TV in 2018, where they demanded both the scale that TV advertising had to offer and the performance measurement that digital provided. As a result, the once specialized performance data that DTC brands (and direct response advertisers) would generate for themselves as a competitive advantage was being supplanted by sophisticated measurement systems that the networks themselves would provide. Some cable networks are even offering "performance guarantees" -- just look at what A&E is doing.
Theme No. 2: Even in the face of 'shrinking ratings,' broadcast media costs are increasing.
You might think that "shrinking ratings" for TV networks would mean lower advertising rates during this year's Upfront. This may sound like common sense, but the reality is different. Much like watching an episode of Shark Tank, where startup founders get clobbered on price as fewer and fewer Sharks remain interested in investing, the same is happening as prized content is controlled by fewer and fewer companies. Comcast and Disney now hold a virtual duopoly on U.S. network television. As a result, networks are seeking CPM increases of as much as 18%, even when they only achieved rate increases of 10% to 12% last year.
Another reason for the increases could be attributed to good old fashioned loyalty or lack thereof. Between the digital defection of 2017 and the increase in upstart DTC brand advertising, the disruption or lack of long-standing business relationships have emboldened networks to refrain from offering discounts and scaling rates as they realize the value of their scalable audiences.
Theme No. 3: The retailers DTC brands have excluded from their business model are becoming media networks themselves.
DTC brands have historically viewed retailers as margin-sucking middlemen picking the brand’s pockets disproportionately to the value they provide. Whether this is the case or not, retailers have grown -- and stronger. First, they discovered "private label" products, where they could use purchase data to predict the features and price points consumers would need to switch from national brands. Then, mostly due to the success of Amazon, they developed sophisticated e-commerce engines and online marketing tools to retain and grow revenue. Now, retail giants like Target and Walmart have learned how to monetize their massive customer base and have begun monetizing traffic to e-commerce sites (and mobile apps) by selling advertising. Amazon has set the bar in generating revenue from advertising: It reported $10.1 billion in 2018 from advertising and is expected to grow 50% per year through 2020.
This new (highly profitable) revenue source gives retailers immense resources to spend on customer acquisition, which is especially challenging to DTC brands as they struggle to achieve profitability at scale.
DTC brands (of all varieties) need to face this new reality head-on and use the strengths that earned them their accolades -- customer insights and data-driven marketing -- to win. By looking beyond single-channel behavior to multi-channel behavior, DTC brands can flex their data muscles and activate the lift their TV advertising generates in the digital domain rather than passively observing it. By both looking to the past and seeing the future, DTC brands (in fact, all direct response advertisers) are uniquely poised to overcome scale issues and achieve predictable, profitable growth.