The amazing growth of digital native vertical brands
Tweet Introduction As everyone knows, the usual buying process implies several steps. Take, for example, the purchase of a new mattress. First of all, you have to decide the right shop: is the one at the corner?
Or maybe the new one opened just three weeks ago? Moreover, you need time to physically go out from home, reach the shop, take your mattress and come back to home. When you finally find the shop and time…Look at the price. You clearly can’t afford it.
So, probably considerable time will pass before you will be able to buy your new, comfortable and spacious mattress. That was definitely true before the surge of companies who started selling specific category of products online focusing their business on online channels. In other words, digital native vertical brands.
As Andy Dunn, CEO of Bonobos (the 350-employee clothing retailer based in New York City) recently said, digital native vertical brands (from now on, called DNVB) are “brands born on and primarily experienced via the internet that feature a vertically-oriented business model which combines the margin of the retailer and that of the brand”. In the last few years, those kinds of brands have been expanding worldwide in a variety of categories, as eyeglasses, razors, mattresses and food, just to name a few.
Market features DNVB usually present four features. First of all, as the own definition says, a digital native brand was born online so interactions, transactions, and stories-telling to consumers are all provided via web and desktop only.
Moreover, the brand is totally vertical and strongly focused on customer experience that is a three-part bundle of physical product, web experience, and customer service. Finally, eventually the brand extends offline through its own experiential physical retail or highly selective partnerships.
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However, physical stores usually represent only a small part of total business and are meant as a “touch point” that integrates the online experience with an in-person involvement. As the purchasing service is mainly provided online, DNVB don’t consider intermediate distribution channels and cut cost that they usually imply.
The longer the distribution channel, the more costs can be cut and the cheaper the final product. That is why DNVB usually born in markets characterized by long distribution channels. Another particular feature of digital native vertical brands’ market is practically non-existence of entry barriers.
However, they have to take care of some matters as, for example, the need to aggregate production from different providers, especially in the case of multi-components products like some of the ones listed in the next paragraph. Moreover, due to their relatively young age digital native brands could meet some difficulties in scaling the market: think about a very traditional sector, as the shoe one, strongly populated by physical retailers who usually have long business experiences. Just think about Zalando, German-based fashion and technology company, originally created to sell shoes, that today has been transformed into a multi-service platform that just in 2016 has gained 2.547M euro , + 21,9% with respect to 2015.
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To let customers trust the brand and thus scaling the market, a great digital native brand’s team should have strong marketing and data analysis skills: efficient digital marketing campaigns and considerable business intelligence researches are pivotal for the company’s success. Now, take a look at traditional retailers. Why are they not launching a business as profitable as the DNVB one?
The answer is easy: if they did it, they would face some pricing issues and end up cannibalizing their own sales that take place through traditional distribution channels. Take, for example, the luggage market and a giant like Samsonite born more than 100 years ago.
Samsonite gives its customers the possibility to purchase online but prices are almost the same than in physical shops because if they were lower no one would go again in shops. Moreover, in order to fully develop an online channel, they might jeopardize solid relationships with their physical retailers. To evaluate the phenomenon’s scope, Medium - famous online publishing platform developed by Twitter co-founder Evan Williams – has created a compendium of DNVBs where every digital native brand with observes a $5M run-rate min can be collected.
Among these, you find also the U-Start Club Portfolio company Horizn Studios and ALOHA . The list currently counts 86 companies from different geographies, sectors, and sizes.
Successful stories As the compendium shows, the phenomenon of DNVB is showing up worldwide but some companies are more brilliant than others and have already reached great revenues. Here an overview of the most famous examples in the VC world: Warby Parker : founded by four Wharton classmates (Neil Blumenthal, Dave Gilboa, Andrew Hunt, Jeffrey Raider), Warby Parker is disrupting the eyewear industry offering affordable glasses to everyone who needs them. As the greatest business ideas, its project comes from a careful observation of reality, mixed with the will to act.
In the U.S. private health care system is really expensive and often people can’t afford medical therapies or devices. By selling vintage-inspired eyeglasses and sunglasses directly to consumers worldwide through its website and 10 brick-and-mortar retail stores around the U.S., the company can offer high-quality glasses for around $95 a pair and compete with the few large companies who have always controlled the market and kept prices for frames and prescription lenses artificially high. Launched in 2010 the company has raised $371.36M in 6 rounds from 24 investors.
They include First Round , Tiger Global Management , General Catalyst Partner and T. Rowe Price . Dollar Shave Club : LA brand of men’s grooming products born in 2010, it monthly sends razor blades, towelettes, shaving butter and hair-styling products to its 2 million subscribers.
An interesting thing about Dollar Shave Club is that it found a way to conquer customer’s trust and, so, scale the market: offering the first month of subscription free. Not bad right?
It also the strategy of huge online service providers as Netflix (video streaming service) and Spotify (music streaming service) and, the numbers speak for themselves, seems work. Moreover, customers can change monthly razors plan anytime and adjust shipment frequency as they don’t feel trapped in the umpteenth subscription service that maybe is not so necessary. Co-founded by Mark Levine and Michael Dubin the company has raised $163.5M in 5 round from 22 investors (among these TCV , Founders Circle Capital , Venrock and Kleiner Perkins Caufield & Byers ) has recently been acquired by Unilever .
Casper: online bed-in-a-box maker co-founded by Neil Parikh , Gabriel Flateman , Philip Krim , T. Luke Sherwin and Jeff Chapin , Casper produces the best mattress possible at an affordable price and deliver it quickly, for free, with a 100-day trial period.
Casper sells just one type of mattress, dubbed “The Casper Mattress” because prefers “to put all our energy into building the ideal bed rather than confuse you with tens (or hundreds) of models that all start to feel the same after a while”. That is probably one of the reasons for this production choice. The second one is, obviously, that producing just
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