In this Q&A, DTC Daily speaks to Stephen Aarstol (pictured below), founder & CEO, The No Middleman Project, to discuss how the business looks to drive the DTC ecosystem forwards, challenges facing all DTCs, and what these brands must do to stand out.
Can you explain why you launched the No Middle Man Project?
We started the project because we believe business has the power and responsibility to be a force for good.
It used to cost a lot to curate and operate a physical store. With e-commerce, brands stood up and asked “why are we paying stores 50% to sell our products when we can do this through online stores or our own site?”. Today, brands and consumers are slowly waking up to the additional reality that we are now paying Amazon and Google a monopolistic toll of 30-40% of nearly all online transactions. We’re going full-circle back to retail markups.
Consumers will always love brands they identify with, and these days they are only one click away from these brands. So there is no compelling reason for middlemen if consumers just have access to quality, trusted, and curated information on brands, that isn’t corrupted by money.
We launched NoMiddleMan.com to provide that platform. The next stage of the demonetisation of commerce is underway, and the future we want to build is direct-to-consumer everything. We are aggregating the DTC space for consumers to make one easy stop for them to shop for hundreds (and eventually thousands) of DTC brands, without paying a cut to any middlemen. We are laying the groundwork for a future where DTC brands can dramatically lower their customer acquisition costs and operating expenses, so the entire DTC ecosystem can thrive.
Which industries are you seeing driving forward the DTC revolution?
It’s not just one or two or a handful of industries driving forward the DTC revolution. It’s a very organic revolution that has started in hundreds of different industries. Sure, certain products are more suited to e-commerce but it’s really coming from everywhere. In general, more B2B sectors are lagging because businesses are less price sensitive, it’s a more middleman-heavy infrastructure to begin with, and it’s not consumer facing, so is less sexy to disrupt and less sexy to media.
We’ve broken down the universe of products and services of the DTC revolution into 16 categories, and our outline looks like this:
– Sports & Recreation – 19 DTC brands
– Health & Personal – 45 DTC brands
– Women’s Fashion – 52 DTC brands
– Beauty – 33 DTC brands
– Home & Garden – 41 DTC brands
– Food & Drink – 31 DTC brands
– Men’s Fashion – 35 DTC brands
– Electronics – 13 DTC brands
– Office & School – 8 DTC brands
– Toys, Pets & Baby – 26 DTC brands
– Fashion Accessories – 38 DTC brands
– Auto & Industry – 8 DTC brands
– Youth Fashion – 16 DTC brands
– Socks & Underwear – 21 DTC brands
– Shoes, Bags & Watches – 16 DTC brands
– Other – 42 DTC brands
How did the DTC revolution take off?
The early winners in DTC were going after the lowest hanging fruit. Anywhere there was monopoly power really throwing off the economics of marketplaces, that spelled a huge opportunity. Warby Parker is a good example because Luxottica has such a monopolistic marketplace position in the eyeglasses marketplace. In razors, you had a handful of huge brands that had oligopolistic power and Dollar Shave Club and Harry’s had great success there.
In nearly all industries, there are inefficiencies in distribution channels, production, and sales. In the DTC brand I founded in 2010, Tower Paddle Boards, there were three big brands and one factory that were working together to effectively fix prices on paddle boards – and we stepped in and had great success with a DTC model in paddle boards where we became the fastest growing company in San Diego.
This DTC revolution has been going on for longer than people conceptualise. Southwest Airlines only sells direct and they disrupted the airline industry. Tesla only sells direct and they’re disrupting the auto industry. IKEA has been at it for 75 years. And there are major things going on in the fashion world with brands like Zara taking over the world, and now online with services like Stitch Fix.
How can the direct-to-consumer business model continue to evolve?
There are three problems DTC brands face today, and if the area wishes to continue to evolve, these need to be addressed to some extent. The first is rising customer acquisition costs. Product search is dominated by Google and Amazon, both of whose monopolistic powers are steadily increasing. In the short term, this means customer acquisition costs for DTC brands will skyrocket, until a superior product search solution for consumers establishes itself.
If a DTC brand can’t solve their customer acquisition cost problem, they die. The solution is to develop assets they can own that generate customer leads, such as a strong brand, a robust social media presence, and ownership of their product category in an ‘everything showroom’ like NoMiddleMan.com.
The second problem is the Amazon, whose share of product search is increasing to the point where they are rivalling Google. That means that customers won’t see anything except what’s sold on Amazon. It’s a walled garden and it’s pay to play. The bigger the walls get the bigger the share of the pie Amazon can take because of their monopoly power. The other half of this problem is Amazon’s private label brands, which most consumers don’t know are Amazon-owned. These directly compete with, and undercut, brands in hundreds of product categories.
Finally, there is the issue of ‘findability’. If Google’s monopolistic power in search leads to path of them taking 30-40% of all commerce transactions, brands can no longer thrive or even survive using paid search engine ads. Then if Amazon’s monopolistic power leads to them take a 30-40% cut of all third party transactions on Amazon, while their owned brands pay nothing comparatively, then DTC brands can’t thrive or even survive selling on Amazon.
So the question becomes, how do people find DTC brands?
How can DTC brands stand out from one another?
The connectivity and transparency of the web means we’re heading towards more of a meritocracy. Brands can no longer have the biggest marketing budget and just bludgeon the competition like in the early days of TV. Brands can no longer just have the biggest company and enjoy a massive economy of scale advantage, because smaller companies can band together, and any company can buy SaaS relatively inexpensively. Brands and manufacturing partners can no longer price fix. You’ve got to be better to win. If you have an amazing product (think Google, Facebook, Uber, Netflix or AirBnB) you don’t even have to advertise it. Make something great and word spreads.
So the take away is focus on making great products and creating great value propositions for consumers. That’s where 90% of your focus should be in today’s world. Then keep your costs down so you can grow organically. It actually simplifies business quite a bit.
The alternative (while the VC money lasts) is to go out and raise USD$100m and use it to manufacture traction for a brand and test and iterate the product along the way to make something amazing.