Earlier this week, we spent time talking with a brand founder about their distribution strategy.
These types of conversations are our favorite, and this one probably ranks up there. Part of the reason was this nugget:
The brand’s DTC customer, the founder said, is usually new to the category. That means more educational content, but it also means, for them, less price sensitivity. In other words, through education and pricing, they can anchor the category price point for this new customer.
The brand’s Amazon customer, the founder said, is usually familiar with the category, and has previously purchased alternatives. Education isn’t as necessary, but the customer is more sensitive to price, given how they were previously introduced to the category.
For early readers of this newsletter, you might recall how, awhile back, we discussed our views on distribution as a market expansion strategy. Perhaps we should have used the phrase “category expansion” instead, because this so closely relates.
In it, we wrote about the then-news of NUGGS significant distribution deals (national Target, Walmart and Sam’s Club deals nearly all at once):
But here’s the thing about NUGGS. They’re not just taking its product, as packaged for DTC, and shipping it to its new retail footprint. NUGGS has shrunk the box and shrunk the price point for retail—while increasing the minimum order size online (from one 50-pack box to two).
What to make of this?
Well, let’s review NUGGS DTC offering: You may or may not be able to afford or want to pay $45 for 100 NUGGS at a time. You may or may not eat them frequently enough to justify the size. You may or may not want to stuff your freezer full of simulated chicken nuggets.
If you’re a “not” to any of those answers, you were outside of NUGGS’ market—until these changes.
In many ways, what we covered in that newsletter is the packaging aspect of the positioning problem this brand founder called out earlier this week.
For many of us, DTC is attractive because of the pragmatic benefit of the channel: The economics are better.
There are other benefits, to be sure, like the relationship, the data, the possibility to grow community and better optimize for retention and loyalty. But it’s the margins and the cash flow that are most attractive to most folks.
Now, hey; we get it: Free cash flow is an unfair advantage and DTC can more readily deliver that. And there’s a challenge to going big on distribution.
But that positioning problem?
That gets easier when you educate both customers—the new category customer and the existing category customer. The challenge, of course, is that the education is a bit different.
For one customer, it’s why investing in the category is beneficial. For another customer, it’s why investing in the product—at a higher cost—is beneficial.
One takes more time than the other, of course, and can seem less attractive in the near-term, given the increased effort and required patience.
The upside here, though, is that, like in the case of NUGGS, the market expands when you embrace reaching both types of consumers. And while that might look unattractive from a margins perspective today, it won’t later.