8 tips on building a D2C brand | by Ganesh Balakrishnan | Co-Founder of Flatheads
Common misconceptions that D2C founders often have around marketing, distribution, logistics, advertising & fundraising.
We sat down with Ganesh Balakrishnan recently to chat on D2C space and his experience while building Flatheads, a D2C footwear brand. An hour-long scheduled discussion stretched to nearly three, and we were, to put it simply, blown away!
While you can read a detailed analysis of Flatheads by Startups Unplugged here, this article talks about some of his key learnings running Flatheads and common misconceptions that founders often have. It is undoubtedly no halwa starting a D2C brand, it seems!
Think marketing is easy? Or the lower price is the best price? Think D2C is all about supply, not so much about GTM?
1. Marketing is not cheap
Everybody assumes that Amazon, Myntra RoAS [Return on Ad Spend] is the same for new brands.
Spoiler alert: Marketing is VERY expensive for a new brand.
In the beginning, brands need to figure out some hack to make sure the ad spends work. In the early stages, ad spends are significantly higher. But it gets easier down the line as the brand starts getting recognized.
Learning: Whenever you create a business plan for your D2C brand, take your marketing estimate and 3x it [atleast]. 😰😰
2. Getting into distribution channels is no piece of cake
If you are building an FMCG or a personal care brand, you should have somebody in your team [co-founder or a founding team member] who understands brands and channels.
It is all about the shelf space. If you are not on the shelf, your coffee or shampoo brand won’t become as big as you think it would become. Ultimately, there is only limited shelf space out there in modern retail stores. Hence if you don’t have the right connections and the right way to demonstrate your differentiation, it’s very hard.
VCs understand this and can help you get on the shelf. They’ve figured this out.
3. You don’t get too many chances to get things right
As opposed to an app or tech product, you don’t get many opportunities to get it right. People are not very forgiving with a consumer brand. They will compare you to Nike and expect an Amazon-level service from day 1.
Make sure that you do enough research and work on the product & customer experience before you launch. It has to be better than what they are used to in some aspect.
If you screw up, be transparent & admit your mistake. But you can’t screw up big time. You just can’t sell an inferior product since it will tarnish the brand’s name. Flatheads had to reject a couple of production lots because what they expected vs. what they got from the manufacturers was unsatisfactory.
Cutting corners while trying to build a differentiated product in a D2C space is very hard, so that strategy is best avoided at all costs.
4. People will always push you to lower price points
People will always push you to lower price points. VCs want growth, which happens at lower price points. Customers want discounts, which again leads to lower price points.
Between a mass shoe and a premium shoe, there is a significant difference. The price difference between premium [5000 INR] to luxury [10,000 INR] is mainly about the brand premium. Brands need to figure out a sweet spot for pricing and stick to it.
Anybody can sell at a lower price point. Remember, if you are in the D2C space, you are a differentiator, not a trader. Trading was e-commerce 1.0 [marketplace model], D2C is e-commerce to the next level i.e. differentiation.
5. The time is now; logistics makes economic sense
Delhivery, Bluedart, DHL, and Ecom Express make it possible to ship across India economically. This was a big problem in 2013, not now. D2C is easier to build now because the delivery costs are lower. Shipping a pair of shoes to a customer in a metro city costs within 70–100 Rs.
There are aggregators for 3PL [3rd party logistics providers] like Pickrr and WareIQ, which provide warehousing and logistics. A lot of D2C brands have scaled up their operations using such aggregators.
6. Marketing — Communicate the right value proposition
You need to communicate the right value proposition to the right audience. For the early adopter group, “I stand for your individual self-expression, passion and personality” was the positioning of Flatheads.
For the next set of customers, who are more inclined to technical specifications of the shoe [engineers & techies], “this shoe has all the engineering specifications that are supposed to make you feel comfortable 12 hours a day”.
For a designer, “here’s a shoe brand, led by design.”
If you communicate the right message to the right audience, customers will listen to you.
7. Use case-based ads have worked better
Awareness ads depicting use cases such as a biker wearing Flatheads or the everyday commuter commuting in Flatheads worked well to get the audience’s attention.
In the consideration phase, you have to explain why you are better than the other shoe. At that stage, ads like “shoes lighter than a glass of water” worked well. Exaggeration to make your point works in this stage. “Ridiculously comfortable” is the slogan for the next campaign.
In the conversion stage, if the customer isn’t buying, you can push an extra limited-time discount to nudge the buyer to purchase.
8. What do Venture Capitalists look for in a D2C Brand?
VCs like subscription businesses. They come with experience from what has worked in the global & western markets, and the subscription model in most industries has been a roaring success. Higher marketing spends to acquire customers is justified due to high LTV. This McKinsey report talks about “subscription e-commerce” in detail.
However, Ganesh has a slightly nuanced point of view on subscriptions in the lifestyle business.
T-shirts are bought every 3–4 months, often bought impulsively, and are at a lower price point. Innerwear & beauty products fall in the similar category of high repeat purchases. Such low-ticket items, large catalogs with low returns work very well on subscriptions. [jo dikhta hai wo bikta hai].
VCs love food brands such as SleepyOwl, beauty products such as MamaEarth because repeat purchases are high.
However, D2C shoe brands work a bit differently. You don’t need a vast catalog. Large marketplaces need 50–100 products to display; modern trade outlets need a minimum of 50 items to display on the shelf.
But a D2C brand’s core proposition is a niche offering [classy and not massy]. Flatheads started with 12 shoe styles &, after one year, still has 12. If you have a compelling brand storyline, a vast catalog is not required.
Instead, as a D2C entrepreneur, what you need to work on is —
- Is the customer sticky enough to come back and talk about your product?
- Did my buyer become an evangelist?
- Is he telling four more people about my product? And will those four people come and buy from me?
If you can solve these three as a D2C brand, no one can stop you from going to the moon. 🚀🚀
[BONUS] Revenue Based Financing — Alternative source of capital for D2C Brands
Flatheads recently raised growth capital from GetVantage, a revenue-based financing firm.
Revenue-based financing [RBF] finds its play in between equity and debt financing. It is growth financing where repayments are a percentage of revenues. Revenue-based financing enables a company to share a fixed percentage of future revenues with an investor in exchange for capital.
It’s different from equity financing [angel investment or venture capital] as the business does not have to dilute any of its equity in exchange for capital from RBFs.
GetVantage, Klub, & Velocity are some prominent players in the RBF space in India.
So, how exactly does RBF work?
Let’s say you run a business with monthly revenues of Rs 50 lakhs on average.
You opt to raise Rs. 1 crore for your growth needs, be it marketing, inventory, or capital expenditure. Let’s say this comes at a revenue share of 10% [the revenue share is usually between 2%-15%] and a cost of capital of 12%.
In this case, you make your repayments to the investor at a revenue share rate of 10% — this means that 10% of your monthly revenues are owed to the investor — till you have paid back Rs. 1.12 crore to the investor. Once you have paid back Rs. 1.12 crore, the investment is over! [No collateral, no equity dilution].
The amount you can raise from RBF firms depends on your gross margins [i.e., strong unit economics], revenue profile, month-on-month growth, and capital needs.
RBF is useful only if capital is needed for recurring needs — marketing, inventory, capital expenditures — in a way where capital input has a correlation to the output. This also implies that RBF should NOT be used for salaries, R&D, or product development — these don’t guarantee month-on-month revenues since there is no input & output correlation.
RBF is excellent for D2C businesses! Since sales volumes can be unpredictable in a D2C business model, RBF fits in perfectly with its revenue-share aspect. You pay more in the good months and less in the lean months, thereby escaping the risk of committing to fixed repayment amounts, as compared to a bank loan where you have to pay equal monthly installments [EMIs].
If you liked this article and would love to read our next one, please subscribe to our newsletter on Substack.