How Much Can You Increase Profits by Going Direct?

We have seen companies generate profit margins 3x higher than the competition by selling direct through creators. And yes, they have done it at scale.

Happy Tuesday Friends,

There is a general rule of thumb in the tech world that if you develop a technology or system that can reduce costs by 50%, you can provide 25% of the cost savings to your customer and you as the technology provider or platform keep the remaining 25%. If you develop a technology or system with these economics, it can scale and disrupt a market.

So, what does this have to do with the creator economy?

We believe this type of margin capture is possible when companies build a system selling direct to their customers and sourcing directly from their suppliers. This is actually what Going Direct is all about. Today, we are going to discuss selling direct through creators. Next week, we will talk about sourcing directly from suppliers.

Traditional Retail

It is widely understood that if you are selling a product into big box retail, you must work with specific distributors or a network of brokers and sales agents to get on the shelves. This wholesale distribution model was built around the previous industrial revolution and our large, centralized systems of production. It has been highly effective and has largely remained the same over the past several decades.

If you are selling a product into this world, you will lose around 60-65% margin all-in between the distributor, paying brokers/sales agents, and other chargebacks and stocking fees the retailer charges. So, if you do not have at least 75% - 80% gross margins on your product, it is difficult to make traditional retail a sustainable and profitable sales channel. Not to mention, retailers pay their suppliers anywhere between 30-90 days (sometimes longer) after receiving the product.

But, What About Amazon?

When Amazon and other e-commerce retailers started to capture market share, it provided third-party sellers another avenue for distribution and to capture substantial margin they previously lost through traditional retail. But, this is no longer the case. Once Amazon achieved monopoly-like power, they started to squeeze third-party sellers on fees and created a pretty powerful mouse trap (note: there is a pending FTC lawsuit against Amazon about this). The referral, fulfillment, and advertising fees have steadily increased over the years and the economics for sellers are now somewhat similar to traditional retail for many product categories.

To be more specific on the mouse trap - it is estimated that on Amazon advertised products are 46x times more likely to be clicked on when compared to products that are not advertised. So, as a third-party seller if you do not pay, you do not get the clicks. You get the idea.

It is now reported that third-party sellers now pay somewhere between 50% - 65% of gross sales in Amazon fees. A few companies we have angel investments in now make similar margins when selling through big box retail stores like Home Depot and Amazon. We have found there is still a small margin advantage selling through Amazon, but as e-commerce continues to commoditize, margins will continue to be competed away and suppliers will continue to be squeezed.

Creator Margin Capture

Over the past few years, we have seen first hand how creator-led distribution can lead to substantial margin capture for companies selling a physical product (actually a service as well, but not the point of this post). Each situation is a bit different, but we have outlined a simple example of how much margin can be captured by selling directly to customers.

Let’s take the example of a company selling a cleaning product to Home Depot. For every $100 in sales, the profit to the supplier is about $10.

Now, let’s look at when they sell the cleaning product through Amazon FBA (fulfillment and warehousing). For every $100 in sales, the profit to the supplier is about $15.

Now, let’s look at the potential margin capture by selling direct through creators. For every $100 in sales, the profit to the supplier can be closer to $45.

It is much easier said than done to pull off direct distribution like this. In reality, the supplier will have some sort of additional marketing or operational spend to build this (😉😉 there is where creator equity comes in). The point - with an appropriate creator-led distribution strategy, there is a much more margin to work with to support both the creators and the company. It is possible to capture 3x-4x more margin if you create an effective system for Going Direct.

We have seen businesses with $50+ million in annual revenue with 30% EBITDA margins selling directly through creators vs direct competition who have EBITDA margins of less than 10% selling through traditional retail. This is a game changer. Of course, none of this matters or will work unless you build a product people love.

Other Considerations

There are many other considerations that companies must take into account when selling directly through creators. We will not address them in this piece, but worth mentioning:

• Market Saturation: most DTC companies enter traditional retail and go omnichannel once they start to see direct sales starting to flatten out. This makes sense as 80%+ of global retail spend still takes place in bricks and mortar stores.

• No Creator Shortcuts: hiring a bunch of creators or getting a celebrity on-board to promote your company or product is not a successful strategy. There are many items that need to be taken into account - incentive alignment, product category, price point, and competitive dynamics to name a few. A substantial amount of time and energy is required to build an intentional strategy and system for creator-led distribution that can work at scale.

When designed correctly, creator-led distribution can lead to substantial margin capture. But, where it starts to get very interesting is when you combine selling direct with your customers and sourcing directly from your suppliers. We will dive into that next week.

Giving 30 Creators & Celebrities Equity to Build Direct Distribution ↗️ 

Hard Kombucha brand JuneShine granted equity to 30+ celebrities and creators in exchange for helping them promote the brand. 🍹 

🍿 Synopsis: In the past, most creators and influencers were fine promoting a brand for free product or a small fee. Nowadays, creators are charging big $$$ to promote brands and their products. As a result, many companies can’t afford to do influencer marketing. For those that can afford it, they are seeing much of their margin disappear due to high marketing costs. Enter hard kombucha company JuneShine. JuneShine has agreements with 30+ creators & celebrities that regularly promote the company in exchange for a small equity stake. Their creator roster includes Evan Mock, Whitney Cummings, Diplo, Cody Ko, ASHE, Ashley Harris, and many more. But, it’s not just about promoting the company. JuneShine knew these are some of the most passionate and creative people on the planet. Why not let them use their creativity to design their own flavors? JuneShine has already created 7 limited-edition flavors with a few of their creator shareholders.

📚 Learnings: By compensating creators with equity, JuneShine is able to work with many large talents they could otherwise never afford. As a result, JuneShine can promote its product directly to large audiences and hopes to scale distribution at a quicker pace. The company is also able to increase margins because they are cutting marketing spend they would otherwise pay on hiring the creators. Yes, they had to sell a % in the company, but it creates a long-term incentive alignment with the creators to continuously promote and be involved with the brand as they are building value for themselves. JuneShine has also found a creative way to get the creators involved in the product development process by creating limited-edition flavors in collaboration with them. This creates a deeper emotional connection between the creators and brand that results in a higher level of engagement.

👀 Learn More: check out why Gossip Girl star Evan Mock wanted equity in JuneShine in exchange for promoting the company:

Physical Retail is a Different Ball Game ⚾️ 🧢 

Going from DTC to retail is a completely different ball game. Just ask the Gymshark founder.

🍿 Synopsis: Ben Francis started Gymshark in 2012 in his parent’s garage and has built it into an athleisure powerhouse valued at $1.4 billion. Gymshark was a 100% DTC-brand that relied heavily on social media and influencers to promote the company and generate sales. In an effort to expand beyond direct distribution, Gymshark opened its first retail store in 2022. But this wasn’t easy. According to Francis, the move from DTC to omnichannel was “really, really difficult”. Francis compared what they have built at Gymshark to a Formula One car. They are really good at going around the track (DTC), but you wouldn’t take a Formula One car off-road. It is a completely different ball game. When a company makes the move to omnichannel, they also have to make sure that there is no friction between the e-commerce and retail experience - they must compliment one another. An interesting statistic to note - Gymshark saw their profits decrease close by 40% in 2022 partly as a result of opening up its first retail location and discounting their clothes. The company has announced they are opening a second physical location in London, which suggests it seems to be working.

📚 Learnings: The vast majority of retail shopping still takes place in physical stores. DTC-native brands like Gymshark that build their customer base online through social channels are often forced to look at physical retail to maintain growth and continue building the brand. It is important for any DTC company to have a sound understanding of how extending into physical retail will enhance the customers’ experience and connection with their brand. Further, if a DTC company wants to move into bricks and mortar, they must think long-term and have the financial strength to handle the required investment to build out physical space. If you are really really good at one, it doesn’t mean you are good at the other. Only time will tell if the move to physical retail works for Gymshark, but as Ben Francis mentioned it has been very hard.

👀 Learn More: Check out what the first physical store of Gymshark looks like here:

Have a great week and remember to Go Direct!

Build with love,

Jordan & Scott