'We'd rather be a sushi knife than a Swiss army knife': How ad agencies are responding to the DTC boom
Ryan Seit
- As hundreds of new brands crop up to upend industries by selling directly to consumers using digital media, a new wave of ad agencies is making inroads in the direct-to-consumer space.
- While some, like Decoded and Azione, are incubating their own DTC brands, others like YellowHammer and Diff are upending traditional fee models.
- Still others, like Derris and creative agency Gin Lane, are increasingly opting for stakes in their clients' businesses.
- Bigger agencies may be threatened, but they aren't taking the threat lying down.
In February, business partners Addie Conner and Matt Rednor sat down to brainstorm business ideas. Conner was convinced she had encountered the next big thing in wellness while on a recent trip to Mexico: eco-friendly yoga mats and equipment made out of cork.
Nine months later, 42 Birds was born.
But the e-commerce brand, which sells its products on its website as well as on Amazon, isn't just another direct-to-consumer (DTC) startup. Conner and Rednor started it - and incubated it at Decoded, the independent ad agency they run - because they wanted to understand what exactly it takes to helm a successful DTC brand.
"We wanted to start out own DTC brand to build our expertise in e-commerce from the ground up," Rednor told Business Insider. "We could pretend to be experts, or build the expertise ourselves. In order to talk the talk, we wanted to walk the walk."
Decoded has a unique approach at cracking the DTC trend, but it isn't alone. The cofounders of PR firm Azione, Leland Drummond and Michele Thomas, are partnering with The Coveteur to launch The League, a new active intimates DTC brand next year, based on what they've learned working with DTC brands over the years.
More broadly, as hundreds of new brands crop up to upend virtually every industry by selling everything from mattresses to makeup directly to consumers using digital media, a new wave of ad agencies is making inroads in an area where traditional ad giants are still finding their way.
"Big agencies are not equipped to work at the pace and in a manner that matches the needs of a digitally native vertical brand," said Mike Cassidy, partner at private equity firm August Spark that funds small businesses including e-commerce agency BVAccel. "You have to be experts at retail, e-commerce, and digital - which is a specialty few can master."
A roster of new agencies have emerged around the needs of digitally native brands
The DTC revolution has spawned a roster of agencies over the past decade that have positioned themselves around the needs of digitally native brands, from creative and performance marketing, to media buying, as well as strategic planning and communications.
These agencies, from Gin Lane and YellowHammer Media, to Derris and BVAccel, to name a few, all pride themselves on having a nuanced understanding of the space and personalized ways of working. Many of them work exclusively with DTC brands, but differ in the ways they approach the space and actually structure their relationships with them.
Some are upending traditional fee structures to cater to DTC brands
While Decoded has incubated its own DTC brand, others are upending traditional fee structures and retainer agreements to offer more flexibility to DTC brands.
YellowHammer, which specializes in performance marketing, for instance, operates like an extension of its client's businesses, which include hot-sauce subscription seller Fuego Box and luxury sheets retailer Boll and Branch. And instead of traditional retainer fees, the company gets paid on the basis of the brands' growth. So the more sales it drives for its ad partners, the more money it gets.
"We have managed to create a service infrastructure that really allows us to be a part of their team," Sam Appelbaum, YellowHammer's general manager, told Business Insider. "Direct-to-consumer marketing is essentially outcome-based marketing, and our thesis is that's where all of marketing is eventually going to go."
Similarly, e-commerce agency Diff offers flexibility to its clients, solving for a string of different problems that its clients may be facing depending on the stage of their growth, according to CEO Ben Crudo. And unlike big traditional ad giants, these services don't come with a hefty price tag. A budget between $20,000 and $50,000 could get a DTC brand a pretty decent-sized team, he said.
An early stage startup that has just finished raising money on Kickstarter, for example, would probably benefit most from a sleek new website that could be put together by pooling in strategy, UX, and front-end development resources. But a more mature DTC brand may need more help on its back-end operations to improve shipping.
"Brands are built not just through nifty marketing, but also by filling holes that appear in the business," he said. "We solve for the biggest problem at every stage of maturity for a DTC brand, bringing both technical and business savvy and cutting through the red tape."
And others are offering their services in return for a stake in DTC brands
Meanwhile, firms like PR, branding, and content agency Derris and creative agency Gin Lane, have a different approach, and often end up taking a stake in startups in return for helping them craft their business and marketing.
Derris, for example, has been taking a small ownership stake in most of its DTC clients for years. But last year, it also raised a $10 million fund to invest in future clients by launching a separate wing called Amity Supply. So now, the firm invests money into the startups on top of the stake it already gets for its services.
"Put simply, we needed an economic model like the ownership stake approach in order to justify working with early-stage brands," founder Jesse Derris told Business Insider.
Similarly, Gin Lane, which works exclusively with DTC brands and has developed creative identities for brands including Hims and Ayr, has also started asking for equity in companies like Quip and Smile Direct Club, in return for its services. After all, there are downsides to working with these kinds of brands.
"Working with early-stage businesses that you're trying to get off the ground is very different than working with a large brand -and its very difficult to be really good at both," said Nick Ling, Gin Lane's CEO. "But we'd rather be a sushi knife than a Swiss Army knife and be really good at one thing versus average at everything."
Larger agencies aren't taking the threat lying down
DTC brands are fundamentally different from larger, more traditional brands. They are digital natives, own their first-party customer data, and rely heavily on performance marketing on digital channels to scale their businesses.
"The problem with the ad world is they work from the outside in - they are looking in on product, trying to get your attention to connect the product to a consumer's ephemeral craving," said Gene Liebel, founding partner at Brooklyn shop Work & Co. that focuses on product as much as it does on marketing.
So DTC brands are increasingly opting for specialist agencies like those previously mentioned, rather than larger, bigger ad companies.
"When we're navigating things for the first time, they're either willing to jump in and figure it out with us, or they've already done it countless times before with other DTC brands," said Rithvik Venna, co-founder and COO at OROS Apparel. "This is a special skill set that is not so readily available at a more traditional agency."
"In order to grow, we have to constantly do new things hinged on new areas of opportunity while continuing to do what's working efficiently," added Jonathan Newcomb, CMO at eyewear startup Felix Gray. "That's the reason we look for specialists that are accustomed to the kind of goals we have."
This has started to put bigger ad companies under major pressure. But they aren't taking the threat lying down.
Full-service digital agency Huge, which set up its own coffee shop in Atlanta three years ago to double up as a retail R&D facility, is now working on a new vending machine tied to a direct-to-consumer offering set to launch in 2019.
And media agency R2C has set up its own proprietary software to track its clients' marketing efforts on a CPA (cost per acquisition) basis. It has also established a separate company called Leavened, which offers a platform and tools specifically for DTC companies.
"DTC brands have a high expectation for accountability of their marketing spend, including offline," said Jane Crisan, president and COO at R2C. "We have made heavy investments over the last 6 years to create a suite of proprietary tools designed for this."
