The Rise and Inevitable Fall of the Digitally Native Vertical Brand

By:
Rakuten Super Logistics
Dec 5, 2019

It may not seem like it, but It's actually not that long ago that consumers had no option but to visit an actual store whenever they needed anything. Fast forward to today and consumers can shop for anything without ever stepping foot in a "real store", even while on the go!

This has been a much-embraced change, a factor that has seen global eCommerce sales grow dramatically— and projected to reach $6.54 trillion by 2022. Even though sales are high, competition among eCommerce retailers is growing along side it, leaving brands with no option but to find new strategies to break through the clutter.

One approach, the Digitally Native Vertical Brand (DNVB), rose to the top and shook the retail industry as a whole. However, recent criticisms point to the inevitable fall of the DNVB in its current state.

What Exactly is a Digitally Native Vertical Brand (DNVB)?

The term DNVB was coined by Andy Dunn, the founder of the company, Bonobos. Also known as a web-based brand, a digitally native vertical brand is an online direct-to-consumer entity. Simply put, it's a business that was born online, and controls the entire consumer experience from conception to delivery. To operate as a DNVB, you ought to:

  • Be a purely online business— that is, you interact and transact with clients directly via the web. (Hence the term, "digitally native".)
  • Eliminate the middleman.

Note, just because a DNVB is born online doesn't mean it can't extend into a brick and mortar store. Most brands operating under this model are slowly opening up physical extensions, to transform the online clientele experience into a tangible one.

A Look into the Rise of the Digitally Native Vertical Brand

The DNVB concept took a while to catch on but is now one of the fastest-growing concepts in US e-commerce, with a 44% sale growth increase. This success so far can be attributed to:

Obsession with Personalization

All entities operating under the DNVB model have one thing in common; they are maniacally obsessed with customer experience and capitalize heavily on personalization. They also focus on creating unique products, often requiring careful consideration with manufacturing, which is why they require control over their supply chain and operate on a direct-to-consumer basis. Popular mentions of DNVBs include: Casper, AdoreMe, and Allbrids.

Easy Access to Data

As brands that manage their supply chain and boast direct to consumer access, these web-based brands have first-hand access to the massive amounts of data they generate. They then use it to make data-driven decisions, which facilitate better marketing strategies and, consequently, growth.

The Fall of the DNVBs?

At this juncture, there is no denying that DNVBs are giving eCommerce giants like Amazon a run for their money. However, these brands may also face an imminent fall in the long run... Here's why:

Better Quality, Lower Prices

While affordable prices for quality products are the main selling point for most DNVBs, this is also a weak point for a sustainable business model. How? Well, as mentioned earlier, these brands invest heavily in personalization, which create higher production costs.

By selling at prices lower than their traditional retail competitors, they are unable to generate a decent ROI that makes up for the higher production costs. This, in turn, causes significant losses.

That is why a brand like Wayfair reported an increase in market share but also experienced a $272 million loss. It's also why other popular DNVBs such as Glossier, Casper, Bonobos, and Chewy continue to experience market share growth in leaps and bounds, but incur losses at an alarming rate.

Higher Marketing Costs

Another reason why major DNVBs might end up closing their digital doors is due to their over-investment in customer acquisition and retention. In a bid to keep up with significant eCommerce brands like Amazon, these entities end up spending exorbitant dollars on marketing. This further increases their production to profit ratio and consequently causes losses.

Also, in a bid to target local customers, many brands are now extending their operations into brick and mortar stores. This further adds to overall spend, and as a result, widens the production to profit gap.

If these brands do not take any action to change these practices, investors will soon realize that there are no foreseeable profits in DNVBs and cease funding.

What Aspiring Digitally Native Vertical Brands Can Do

As noted, the primary reasons why major DNVBs are facing a fall is their overspend and low ROI. As an aspiring DNVB, you can still start your business under a model focused on the customer experience and be successful.

A highly personalized experience and customized product will always attract a certain level of consumer, but brands must price products accordingly for a successful long-term strategy. Generating a positive ROI as early as possible is critical for any business as to not rely on investment dollars to keep the business afloat. Lastly, by focusing on the best possible experience for customers, rather than just the lowest cost, brands can get creative with marketing strategy to rely less on higher spend.