by Taylor Ryan, Chief Marketing Officer Valuer.ai
As we make technological leaps as a society, the market must change to remain in line with consumer behavior, and their preferences for certain products and services. For many industries, the need for a physical shop is rapidly dissolving. The idea of a traditional brick and mortar store that encompasses the ‘one-stop shop’ mentality now seems somewhat antiquated.
For all those but the most highly differentiated products, customers no longer prefer to purchase products at a physical location such as a retailer. The need to see and touch a product before purchase has been significantly reduced as trust in internet services increases. According to a Delivery Matters report, 87% of retail purchases in the UK now take place online. This is part of a greater global megatrend, with Statista reporting an annual increase in dollars spent on e-commerce worldwide.
As one generation makes way for another, cultural norms change, and with them, so to do consumer habits. Members of Generation Z have grown up accustomed to the internet – they are referred to as digital natives. As such, they place significant importance on their online presence, and this is where digitally native brands come into play. Digitally native brands are those that began as solely online retailers, with a focus on leveraging social media platforms to attract customers.
Digitally native brands are characterized by the high level of interaction they have with their customers. All brand activities – marketing, product launches, sales channels – are designed with customer experience in mind.
Despite some making some of the routine mistakes made by startup founders, digitally native brands are rapidly growing in both number and overall market share, and represent a disruptive force for both on- and offline retailers. The following presents a brief description of several digitally native brands leading in their respective markets, followed by tips for the eager investor.
Top 5 Digitally Native Brands
Digitally native brands are present in a wide range of industries, and an increasing number are gaining brand name recognition, as consumers become familiar with their online marketing activities. The following represents just a few of the top digitally native brands right now.
Mattress retailer Casper has blossomed into a powerful brand, reportedly considered for a $1 billion buyout by Target, who instead decided to invest. Having received a total of $240 million in venture capital so far, Casper has plans to branch out of the online space and launch concept stores in cities across the US. Casper’s innovative practices have ensured its position as a category leader for the foreseeable future.
Advertising itself as a lifestyle/luggage brand, Away has achieved huge growth in a short space of time. In a span of just three years, the brand has managed to generate $81 million in venture capital funding. Initially popular with a millennial demographic via its strong social media presence, the brand is looking to diversify beyond its core customer segment and become a disruptor within the market.
Allbirds is a footwear startup popular for its use of natural materials. The brand recently achieved Unicorn status, being valued at $1.4 billion according to the Wall Street Journal. A new round of Series C funding is expected to fuel the brand’s ambitions of dominating the Asian market.
Founded in 2011, Everlane is an apparel brand adopting the direct-to-consumer model coveted by millennials who value convenience. Championing ‘Radical Transparency’ and ethical sourcing, the brand has built a niche for itself with consumers concerned about the environmental and social issues caused by the fast fashion industry. The company recently opened two stores in the US in the hopes of expanding further.
This women’s apparel startup made a name for itself focusing on the platform of body positivity by catering to women of all sizes. The brand has seen growth by focusing marketing efforts on several of the tactics mentioned in this article: a heavy social media presence and collaborative collections that remain faithful to the identity of the brand. With the plus market growing at twice the rate of the standard apparel market, Universal Standard looks set to capture the market with its innovative techniques.
Investor Expectations of Digitally Native Brands
As a relatively new concept that is not widely understood, (and is still evolving as an industry), digitally native brands can be tricky for investors to manage. Owing to the newness and novelty surrounding such brands, it can be difficult to adapt your thought process beyond your understanding of traditional business practices. Managing expectations in such situations is crucial.
Investors often underestimate the true nature of the digitally native business model. Many investors equate these brands with small startups with an enthusiastic PR. In reality however, these businesses don’t just advertise their products online, they exist online. They project their brand, shape their image, and carry out all sales functions, within the online space.
These brand marketing campaigns are considerably more nuanced than those of traditional retail: renting a billboard or running a TV commercial. Furthermore, for these brands, profits and ROI’s rely solely on long-term strategies. This is because their business model does not allow for significant profit from a first-time purchase, and instead relies on Customer Lifetime Value (CLV) to generate profits. Due to their online advertising model, reaching new customers requires a much higher ad spend than retaining them, and as such, there isn’t a lot of money to be made by simply profiting and scaling up.
Environment Around the Brands
The most successful digitally native brands all employ a similar tactic. These brands do not focus on simply selling their products at face value, rather than trying to develop a relationship with the customer. This means the business is more of a ‘slowburn’, observing slower initial growth and maximizing profitability over time by nurturing a roster of returning customers. Investors cannot expect an immediate return on their investment in a digitally native brand.
The concept fueling these brands is the perception that customers are buying into a lifestyle, rather than simply a product. This relates to the brand personality of the business, and how it is portrayed through the brand’s activities online.
Customers have a high emotional investment in brands adopting such strategies, and this is the motivating factor that urges customers to return for multiple visits. If the customer feels that the brand has captured the essence of their needs, they will develop brand loyalty. As such, investors should expect a significant portion of a brands budget can be spent on marketing, especially at the beginning.
When considering the finances of a prospective investment, it is important not to rely on the methods of evaluation of traditional retail. Whilst the products themselves have a larger profit margin than that of brick-and-mortar retail or even e-commerce, this doesn’t imply greater success by simply focusing on more sales.
How to Grow the Brand
Digitally native brands represent huge growth potential, and for the wise investor, there is an abundance of brands with the fundamentals for healthy growth. Growth however, is an active process that requires careful resource management to attain a high level of success. Here are some ways you can grow your business effectively.
Understand the Mindset of the Business
When considering a prospective investment, be sure you understand the value proposition and what the brand offers. A common mistake investors make with digitally native brands is to conflate them with e-commerce brands and tech companies, but whilst these industries are somewhat similar, they are not direct comparisons.
These brands are beyond a retail business with an online PR presence: they embody an innovative new business model. When assessing the investment potential of a digitally native brand, you have to consider how the business functions and where the areas of potential growth lie. Remember, it’s a novel business model with novel strategic issues requiring novel solutions. Be willing to think outside the box when looking for growth potential.
Enhance Customer Experience
A brand that relies heavily on customer loyalty hinges on the customer experience, but in an effort to increase customer satisfaction, investors can insist on activities that feel inorganic or disingenuous. These are not brands that can benefit from strictly enforced best practices.
Customer interactions should always remain faithful to the brand. If the brand’s personality represents simplicity or trendiness, this should be reflected in their sales and communications strategies. This approach is rooted in the classic marketing policy: know your customer. Understanding the target customers preferences will lead to positive customer interactions, building the brand. Tailoring customer experience is about having the foresight to make the overall experience less frustrating and more enjoyable by focusing on UX design. This means different things to different customers, and therefore, different brands. For example, Dollar Shave Club limit their product range to a few product lines that change seasonally. This removes the possibility of overwhelming customers and makes the purchasing process streamlined.
For investors, effective UX design should be a significant factor to consider. This can be indicated by the brand’s web analytics. What is the Click Through Rate (CTR) from their advertising? Does the landing page have a high bounce rate? How long are customers spending on the website, how many pages do they visit, and on what pages do they frequently leave? Most importantly, do they have a high instance of shopping cart abandonment?
Targeting the Right Market
The target demographics are crucial for any business, but they have a much bigger impact on digitally native businesses. An understanding of who your customer is and what they want is fundamental online. They have to understand how the customer base will react to a certain product line or promotional activity.
For the investor, a careful examination of the brands business plan will reveal their current segmentation and targeting efforts. A brand with extensive knowledge of the market overall, and who their customers are within that market is essential. The segmentation of these customers, and how to target them individually must be understood for a digitally native brand to be successful.
Events and Collaborations
Digitally native brands often consider themselves trendsetters or thought leaders. As such, an investor may be surprised to find a portion of the brand’s marketing budget is spent offline on activation events or ‘pop-ups’. These events often have the goal of generating earned media online, and buzz among customers, converting them into brand ambassadors.
For example, Emily Weiss made a name for herself as a thought leader in the beauty industry producing content for her blog ‘Into The Gloss’ in 2010. A few years later, she founded Glossier, a makeup brand operating online. In order to facilitate the brand’s online sales, Glossier opened pop-up shops in Soho and San Francisco, allowing customers to come closer to the brand.
There is also a focus on getting the right people to promote the brand. For digitally native brands, these usually take the form of social media influencers. The choice of social media influencer should reflect the brand’s identity and there should be overlap between the brand’s target customer and the influencers following.
Collaboration with similar brands is also common, and one-off collaborations between digitally native brands can result in a significant crossover of customers between the brands. Historically, fashion brands have used this tactic to promote their products to an audience outside of their own customer base. This promotes sales and helps achieve greater brand recognition.
For the investor, the presence of such marketing initiatives is positive, so long as the brand has been thoughtful in their choices. For customers, digitally native brands are aspirational, and an inappropriate collaboration can devalue the brand.
As traditional retail becomes an increasingly risky market and brick-and-mortar stores continue to close down, investors are accepting that digitally native brands will lead the future of retail. Though it can be tempting to hurriedly invest in an effort to get ahead of the trend, it is recommended that investors consider their options carefully.
While the market is rapidly growing, there are brands that fail to ever see profit. When selecting a startup to invest in it is important to know the brands, and in order to truly understand these brands, it is critical to understand how they function. The traditional retail models for success simply do not apply for brands existing solely in the digital space.
This article provides insight into some of the core competencies a digital brand needs in order to be successful, but do not forget to look out for some of the fundamental business practices of your prospective investment as well, specifically the business acumen of the entrepreneur.