The D2C Survival Guide CB 47 2022

2022
The D2C Survival Guide:

5 direct-to-consumer companies that faced
disaster — and what other brands can learn from
them about business models, culture, and scaling
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Table of Contents
Why D2C brands are turning to retailers as middlemen 7
Lesson #1: Figure out how you’ll turn a profit before 17

spending lavishly on customer acquisition (Casper)
Lesson #2: Hedge your bets when consumer 24

demand is in flux (Peloton)
Lesson #3: Don’t abandon your value proposition 32

when expanding (Dollar Shave Club)
Lesson #4: Novelty is no substitute for a 38

strong business model (Brandless)
Lesson #5: Don’t assume that company 43

culture won’t affect sales (Away)
THE D2C SURVIVAL GUIDE: 5 DIRECT-TO- 3

CONSUMER COMPANIES THAT FACED DISASTER
From overproducing expensive
bikes to spending millions on
acquiring customers for a product
only purchased once a decade, D2C
brands have experienced countless
growing pains in recent years. We
identify the lessons to be learned
from major D2C brands that dug
themselves into a hole.
Direct-to-consumer (D2C) brands have pulled off some amazing

feats.
Imagine getting shoppers excited about buying a plain white

t-shirt — or convincing customers to cheerfully post videos of
themselves unboxing a mattress.
These “digitally native” brands, typically made by and for

millennials, promised to invigorate tired industries and disrupt
giants by cutting out the middlemen: retailers. To achieve this, they
relied on lavish VC funding, robust digital channels, and potent
branding that included minimalist aesthetics, a friendly customer-
facing voice, and an obsession with details like packaging to
elevate the customer experience.
THE D2C SURVIVAL GUIDE: 5 DIRECT-TO-

CONSUMER COMPANIES THAT FACED DISASTER 4
The D2C narrative has captivated investors and consumers over
the past decade, resulting in billion-dollar valuations and record-
setting exits. For example, at just 5 years old, stylish yet affordable
eyewear brand Warby Parker reached a $1.2B valuation to earn
its unicorn horn. The company went on to more than double that
valuation prior to its IPO in 2021. In 2017, urban menswear brand
Bonobos successfully exited upon being acquired by retail giant
Walmart for $310M. And in November 2021, amid Covid-19-fueled
uncertainty, sustainable sneaker brand Allbirds went public via IPO
and raised more than $300M in the process.
But success is maintained, not achieved, and despite their early

wins, many D2C brands have grappled with losing valuation, failing
to turn a profit, or shutting down altogether.
This isn’t limited to smaller players either: even D2C powerhouses

have winced under the strain of weak business models and
difficult macro forces. Although Warby Parker went public in 2021,
it failed to turn a profit in the 3 years leading up to its public debut
— and as of the start of this year, this remains the case. Two years
after being acquired, Bonobos was losing money and was forced
to institute widespread layoffs. While Walmart decided to hang on
to the company, the other digital-first brands it acquired around
the same time — ModCloth, Bare Necessities, and Shoes.com —
weren’t so lucky and were sold off. Finally, at the time of its IPO,
Allbirds had yet to see a profit, and it recorded a 75% year-over-
year increase in net loss at 2021 year-end.

Below, we look at some of the underlying factors making D2C
life more difficult. We also analyze the struggles of 5 major D2C
brands to learn what can go wrong — and better understand how
to avoid the same pitfalls.

Why D2C brands are turning to
retailers as middlemen
D2C pioneers touted the fact that — as the name suggests — they
went straight to the consumer via digital channels, without going
through wholesalers and retail stores. They argued that by cutting
out those middlemen, they could give consumers more affordable
products and better experiences.
A near-decade of D2C business growth has shown that brick-

and-mortar retail and e-commerce approaches are not so black
and white.
D2C brands face tough competition, not only from other digital-
first businesses. Traditional CPG brands like Nike — as well as
retailers like Walmart and Target — that have created private
labels have become more digitally savvy and copied some of the
marketing strategies that helped make D2C pioneers successful.
These industry giants have a crucial advantage over their D2C

counterparts: scale. While D2C channels tend to have higher
gross margins than wholesale, D2C-only businesses have much
lower merchandise margins (a measure of profitability after
taking production costs into account) than those who derive
more than 50% of their income from wholesale, according to a
September 2021 study conducted by BMO Capital Markets. The
study analyzed 9 companies that have publicized their D2C and
wholesale margins. It noted that Michael Kors and Nike, which
have invested heavily in D2C channels, have actually seen gross
margins drop compared to brands that have been slower to
implement D2C.

BMO theorized that scale, as well as high margins from factory
outlets and international stores, contributed to the profitability of
wholesale channels.
And while e-commerce eliminates brick-and-mortar rent and

retailers’ fees, it comes with its own costs: heavy online marketing,
technology needs, fulfillment operation setup, and return
management. Digital advertising has even been called “the new
rent,” and it’s a huge reason why acquiring customers has become
much more expensive for D2C brands.
Online ads within the walled ecosystems of Google, Amazon, and

Facebook have become more expensive, especially in the wake of
privacy changes by Apple that have made it difficult to run cookie-
dependent campaigns.
Presence in retail stores — both online and brick-and-mortar —

also expands the consumer awareness and fulfillment options of
traditional brands. Lacking this exposure, D2C brands may have
to spend more on marketing to gain a foothold with consumers
— and some have even moved away from their digital-only
operations to open their own physical stores.
Established, profitable, cash-rich retail brands can and do bear

the lower margins of D2C channels because the model has unique
benefits. By skipping the middlemen, brands can craft and control
the entire customer experience — something Nike has been trying
out with unique concept stores around the world. (For more, read
our report on Unbundling Nike: How Direct-To-Consumer Retail Is
Being Disrupted.)

Retail giant-owned digital channels also yield a significant amount
of first-party data on shopping habits and consumer preferences.
Such information is useful for optimizing sales and marketing
campaigns as well as testing out new products and novel ideas
before spending big bucks to roll them out at retail stores.
With the demise of third-party cookies on iOS and web browsers,

along with the increase in online advertising costs, retailers and
brands will likely rely even more on first-party data to run effective
targeted ad campaigns. Nestle, for instance, aims to double its
first-party consumer data records by 2025, citing such data as
“critical” given the phaseout of third-party cookies.
In order to obtain the amount of data required to stay competitive,

D2C brands may find themselves in greater need of partnerships
with retailers that have a robust and widespread digital presence.
These factors — heightened competition, low margins, and

the rising cost of customer acquisition — are compelling more
D2C brands to adopt a hybrid model that actually embraces
middlemen. Even brands that have managed to avoid retailers to
date have found it necessary to dramatically adjust their digital-
only strategy in order to stay afloat.

The rise of D2C-wholesale hybrids
Some of the largest D2C companies have turned to traditional

retailers to improve their margins and reach more customers.
Amid the Covid-driven supply chain and logistics crunch, D2C
brands found critical partners in big-box stores that had strong
fulfillment processes in place and drew customers looking for
essential goods.
“Stores drive customer awareness and customer acquisition

organically,” said Santiago Merea, co-founder of organic baby food
brand Raised Real, in a story on Co, the editorial website of the US
Chamber of Commerce. He explained that the retailer also takes
on customer acquisition costs instead of making them the sole
burden of the brand.
The same report quotes Matt Kaness, a D2C investor and the
former CEO of online clothing brand ModCloth, as saying that
in-store conversion rates for apparel tend to be 30% compared to
3% for online, meaning that in-store shoppers are more likely to
actually buy something than their digital counterparts.
Walmart has welcomed D2C brands Quip (toothbrushes), Lola

(feminine care), Billie (razors), and Bubble (skincare), to name just
a few. Target carries Jinx (dog wellness), Casper (mattresses),
Stojo (sustainable homeware), and Reel (toilet paper), among
many others.

“There’s still a few notable holdouts, ranging from
newly-public companies like Warby Parker and Figs,
as well as Away, Everlane and Article. But the number
of startups that are able to build $100 million-plus
businesses while remaining direct-to-consumer is
getting smaller.”
— Modern Retail, March 2022
Soylent, the meal replacement drink company, grew its retail

footprint from 400 Walmart stores to 1,850 in just 5 months in
2018. As of 2019, its products were available in more than 20,000
locations across the US.
While D2C still makes up a significant portion of Soylent’s revenue,

revenue at “key retail partners” grew 60% from mid-2020 to mid-
2021. The company says it became profitable in 2020.
Your Super, a seller of superfood-based powder blends, achieved

$60M in revenue in 2021 through D2C channels. However, facing
investor pressure to turn a profit, the company says that it will
start selling its products in CVS, Sprouts, Target, and The Vitamin
Shoppe stores around the US. The startup hopes to become
profitable by the end of the year.

In exchange for opening up their shelves, retailers are better
placed to attract the D2C brands’ customers, which tend to
include those from younger demographics who may otherwise not
frequent big-box stores. Retailers also benefit from the cuts that
brands pay them.
Additionally, retailers can also obtain data about the preferences

and spending habits of the D2C market. They can use such data
to learn how to reach a new market segment by launching concept
stores or their own rival labels.
Target’s private labels Everspring and Brightroom — launched in

2019 and 2022 — show that it has adopted some tactics from the
D2C playbook. Both labels use bright backgrounds and Instagram-
friendly visuals, though they eschew the sans serif logo common
to many early D2C brands. They proclaim the values that D2C
businesses often build into their brands, using phrases like “down-
to-earth” and “cruelty-free.”

Exceptions remain
Some D2C brands have opted to retain complete control of their

customer relationships and have resisted a hybrid model that
incorporates retailers. Everlane (clothing) and Athletic Greens
(supplement powder blends) remain largely D2C–only operations,
and Warby Parker has also continued to circumvent retailers.
However, while these brands have demonstrated that they are still
capable of cutting out the middleman, some have had to adapt
their approach in other ways in order to fuel customer acquisition.
For example, both Everlane, which has not publicized its profits,
and Warby Parker, which was unprofitable as of Q1’22, have
moved away from their original digital-only model to embrace an
omnichannel approach that includes brick-and-mortar locations.
Warby Parker moved into physical retail in 2013, and by the end
of 2021, its sales were split about evenly between its digital and
physical channels. As of May 2022, it had 169 physical locations.
In addition to its eyewear, it also offers eye exams for consumers
at a number of its stores.
In a prospectus filed as part of a registration statement, the

company stated, “Our U.S. retail footprint has a long runway for
expansion. Based on analysis we conducted with a third-party
research firm, our retail footprint has room to expand in the U.S. to
900+ retail stores…We believe our retail stores embody the brand,
are efficient customer acquisition vehicles, and will generate
significant free cash flow over time.”

Everlane walked a similar path. Despite CEO Michael Preysman
stating to the New York Times that he would “shut the company
down before we go to physical retail,” the company opened its first
brick-and-mortar store in 2017. It now operates 9 locations across
the US.
In addressing the shift, Preysman stated, “It wasn’t an easy

decision. Being online-only has significant advantages. It’s
flexible, it’s lean, and it’s easy to scale. But it has two serious
flaws. Customers don’t get to touch or try the product before
they buy it. And we don’t get to have in-person — real-life —
conversations with our community.”
For such brands who want to keep using direct channels for
most, if not all, of their sales, some companies — like Figs — have
demonstrated that it’s possible to do so while also being profitable.
IMAGE SOURCE: FIGS

Healthcare apparel brand Figs was founded in 2013 and went
public in what was likely the first IPO led by two female cofounders
in 2021. It posted an operating income of $58M the year prior to
its public debut, and in addition to demonstrating its profitability,
it reported that its revenue had grown 138% to reach $263M.
Remarkably, the company had only raised $75M up to that point.
For comparison, in 2021, Statista reported that the median amount
of equity raised prior to an IPO was $174M, indicating that Figs’
growth was largely driven by the revenue it secured from selling
its scrubs and related apparel. Notably, the company continues
to lack a brick-and-mortar presence and largely only sells its
products via its own website, with the exception being a small
assortment that it has made available through Amazon.

5 lessons learned from unpacking
D2C stumbles
Many of the brands we discuss below were once high-flyers — but faced
big challenges that brought them down to earth.
Some recurring challenges run through these stories:
• Copycats sprang up and made it more expensive to acquire

customers.
• Online advertising costs rose while investors simultaneously piled on

the pressure to grow.
• Covid-19 either boosted or dampened sales, but as more people got

vaccinated and ventured outside their homes, demand swung the
other way while the supply side failed to catch up.
• Brick-and-mortar sales were embraced — either through their own

shops or on retailers’ shelves — but it was done too late.
The confluence of these and other factors led to costly mistakes, and the
D2C brands now face an uphill climb. Here are 5 lessons that D2C and
traditional consumer brands alike can take away from these scenarios.

Lesson #1: Figure out how you’ll turn
a profit before spending lavishly on
customer acquisition
Many D2C brands stake their value proposition on making a

single product very well. They compete to make the best razors,
sneakers, smart luggage, or olive oil, all while aiming to eat into
the market share of incumbents that have been in the business
for decades.
This core D2C strategy helps brands build cult-like followings and
get famous fast, but it can also cause them to spiral just as quickly.
It’s common for a company to spend millions developing and

marketing a core product. If this single product category is enough
to make a tidy profit — say from frequent recurring sales or from
plump margins — then the business is on firm ground, but if it
becomes a loss leader, then the D2C brand will likely try to hawk
complementary high-margin items.
A case in point is Casper, a startup that made $1M in revenue in its

first 28 days and has been losing money ever since.
Casper Sleep launched in 2014. By compressing a mattress into a

3.5-foot-tall box and delivering it to the buyer’s doorstep, it made
the process of buying a mattress convenient and exciting. New
Yorkers even had the added novelty of having their mattresses
delivered by bike. Suddenly, mattresses were cool.

IMAGE SOURCE: THE GUARDIAN
In March 2019, the company attained a valuation of $1.1B after

securing $100M in Series D funding from Target, Crate & Barrel co-
founder Gordon Segal, and other investors. But when Casper went
public via IPO in February 2020, it priced its shares at a valuation
of just $476M, a fall of more than 50%.
Co-founder and CEO Philip Krim appeared unfazed: “Valuations are

just moments in time,” he told CNBC.
But in this case, it indicated that Casper had failed to inspire much
confidence from public investors.

WHY CASPER COULDN’T CONVINCE PUBLIC INVESTORS
Casper’s IPO documents showed that the self-described “pioneer
of the sleep economy” was unprofitable. Not only that, but it also
didn’t expect to make money anytime soon, as it had to spend on
business expansion, including brick-and-mortar retail.
Sure, the sleep economy was huge — it was worth almost $80B in
the US and $432B globally, according to Casper’s filing. But people
don’t buy mattresses often, and Casper had failed to build much
demand for its other products.
In its IPO filing, Casper quoted the Better Sleep Council as saying
that the mattress replacement cycle in the US had accelerated by
14% from 2007 to 2016. What it didn’t mention was that, in real
terms, consumers had gone from buying a mattress once in just
over a decade to once in just under a decade.
With this long replacement cycle, Casper couldn’t count on many

repeat sales to boost its bottom line. It was spending money to
acquire customers who would likely just make a single purchase
with the company (even repeat customers would likely cap out
after equipping their guest rooms).
To cushion the risk of relying on a single product, many D2C

brands try to create an ecosystem of adjacent goods and services,
which is something that Casper attempted to accomplish. “We
never viewed ourselves as a mattress company. We always talked
about it in the broader context of sleep,” said Krim, quoted in a
November 2015 article in the New York Times.

Casper spent $28M on product development from 2017 to 2019
for mattresses and other items. The company expanded into
“pillows, sheets and duvets, bedroom furniture and accessories,
sleep technology, and related services,” according to its IPO filing.
Those ancillary goods likely contributed to the company’s overall
gross margin improvement from 2016 to 2019.
The brand also launched a “Sleep Channel” in 2019. Its videos

featured sleep-inducing sounds, bedtime stories, and advice on
how to get better sleep. They were emblematic of the proposition
Casper had been trying so hard to get its customers to recognize:
it wasn’t just a mattress company, it was a sleep company.
It didn’t just sell something to sleep on but also things that
enhanced your sleep, like a nap pillow and a glow light.
But few consumers seemed to take notice. From Casper’s

inception up to September 2019, only 16% of customers who had
made a purchase from Casper returned to purchase an additional
product. Among those repeat purchasers, most did so within a
year of first buying a Casper product, indicating that the return on
investment from its sky-high customer acquisition costs would be
strained over the long term.

TOUGHER BUSINESS CONDITIONS NARROWED CASPER’S
OPTIONS
The conflation of high customer acquisition costs, steep R&D
costs to make better mattresses, and low customer lifetime value
— in addition to factors beyond its business model — made Casper
bleed cash.
“Casper is not a great business. That said, it’s mostly

because it’s a good company in a bad business:
selling a durable product tied to housing makes
you vulnerable to the economic cycle, and the long
replacement cycle of mattresses makes it hard to
build brand loyalty.”
— Byrne Hobart, The Diff
These challenges were compounded by the rise of competition

from rival mattress-in-a-box startups, traditional mattress brands,
and even large retailers like Walmart and Amazon. Casper spent
millions to make mattresses a hot commodity, but this also made
it easier for competitors to cash in.
Casper’s business model also created lots of opportunities

for cash leaks. For example, to convince people to buy such a
personal, high-value item online without even knowing what it felt
like to lie on it, Casper offered a full-refund policy within the first
100 days of receiving the item.

This helped build confidence in buyers, but it also created risk.
Some tried to game the system by hopping around different online
mattress sellers — many of which copied Casper’s generous
money-back policy — and making a return just within the refund
period. Others were genuinely dissatisfied with its one-mattress-
fits-most approach to product design. The result was that for
every dollar Casper made in sales in the first 9 months of 2019, it
lost roughly 20 cents to refunds, returns, and discounts.
In April 2020, the company shut down its European operations,

let go of 21% of its global staff, and announced the impending
departure of its CFO and COO.
CASPER TODAY: WILL IT SPRING BACK TO ITS FORMER

GLORY?
Casper may yet turn its fortunes around.
It was taken private in November 2021 when Durational Capital

Management, an investment firm that also owns a poultry farm, a
restaurant, and a casino operator, bought it for $6.90 a share. The
startup also gained a new CEO.
But there hasn’t been much news on the company since. Its
website continues to promote steep discounts and freebies on
mattress sales and deliveries.

IMAGE SOURCE: CASPER
While there’s no customer-facing talk of its “sleep ecosystem,”

Casper is continuing to sell a broad range of sleep-related
products, like weighted blankets, sleepwear, and even dog beds.
It has also expanded its range of mattresses to include more
premium and tailored options — some of which sell for more than
twice as much as its original — as it tries to squeeze out more
cash from the customers coming for its most famous offering.

Lesson #2: Hedge your bets when
consumer demand is in flux
Entrepreneurs know that it takes a fair bit of luck — on top of all

their hard work, talent, and external support — to succeed. Several
D2C startups have experienced such good fortune for themselves
and seen consumer demand soar overnight (sometimes literally,
as in the case of Dollar Shave Club).
However, the scramble to fulfill a sudden surge in orders can make

it easy to neglect the bigger picture. In these situations, leaders
need to assess the cause and effect of their sudden fame, determine
whether the rising demand is a blip or a longer-term trend, and
figure out how to ride the wave without overextending themselves.
Peloton, which was founded in 2012 and IPO’d in 2019, found

itself in an unexpected situation when the Covid-19 pandemic
forced people to stay at home in 2020. Consumers were looking
for ways to stay fit at home without having to work out in complete
isolation, and Peloton met that need. Its home-friendly fitness
equipment comes with built-in screens connected to an app that
offers both live-streamed and recorded fitness classes, which
offers a sense of community as well as exercise.
I MAGE SOURCE: PELOTON

Peloton revenue and user count soared, roughly doubling year-
over-year in FY’20 (ending June 30) and then doubling again in
FY’21.
But even as successful vaccines were announced and restrictions

began to ease, Peloton bet that exercising at home would become
part of a new normal for many consumers.
Meanwhile, fitness studios restructured their classes, introduced

stricter hygiene practices, and prepared to invite people to return.
By November 2021, foot traffic to gyms had almost bounced back
to pre-pandemic levels.
In the face of that shift, Peloton cut its annual revenue forecast
for FY’22 by a billion dollars, sending its stock price plunging. By
the start of calendar year 2022, it had lost $40B from its market
capitalization year-over-year.
Peloton temporarily halted production of its higher-end bike in

December 2021 and other connected fitness products in February
2022, according to an internal presentation, a copy of which was
obtained by CNBC. The startup also hired management consulting
firm McKinsey to evaluate its cost structure and eventually
replaced its CEO and laid off 2,800 staff.

PELOTON SERIOUSLY MISCALCULATED SUPPLY AND
DEMAND
During the Covid-19 pandemic, Peloton couldn’t produce enough
machines to satisfy demand. This wasn’t exactly its fault — very
few could have predicted the pandemic let alone the sudden
lifestyle changes and supply chain disruptions it caused.
However, seasoned companies experienced the same surge in

sales and reacted with discipline. Clorox brought on contract
manufacturers, 3M added production shifts, and Procter & Gamble
refrained from permanently expanding its toilet paper factories,
according to The Wall Street Journal.
Peloton responded with what a shareholder would later describe

as “unbridled optimism.” It added a new factory in Taiwan in
December 2020 to help double its production capacity. It also
acquired Precor, a troubled manufacturer of fitness equipment with
factories in the US, for $420M.
But ports were congested and e-commerce businesses were

competing for space on freight ships, so even with more
production, Peloton struggled to fulfill orders. By June, Peloton still
had $230M worth of backlogged orders.
“For those of you who bought a Peloton Bike or Tread since last
March, you likely experienced longer wait times than usual, and/or
have had your delivery date rescheduled, which is obviously very
frustrating. For that, I sincerely apologize,” Peloton co-founder
and CEO John Foley wrote to customers on the company’s blog
in February 2021. Foley also announced a $100M investment to
expedite deliveries globally and that they would send equipment
by air from Taiwan.

In May 2021, Peloton said it would build a $400M factory in Ohio
and began building it in the summer. The US vaccination program
was well underway by then — 56% of US adults had received at
least one dose by April.
If Peloton’s response to the Covid-induced demand seemed

overblown, that’s because its leaders didn’t see the pandemic-
driven demand as an outlier. To them, it was just accelerating the
new norm.
In an earnings call in September 2020, analysts asked how Peloton

would manage the risk of overbuilding ahead of a period when
demand would normalize. Foley replied: “Overbuilding supply-
chain capacity — that’s a term that has never come up in the
Peloton senior leadership rooms or boardrooms… We feel like
there’s such a massive opportunity that we need to invest heavily
in the supply chain for years and years to maintain it. When you
say ‘normalize coming out of Covid’, we don’t see that.”
But as cities opened up and people started resuming their old

routines, Peloton found itself facing another supply-and-demand
mismatch. This time, it had a surplus of machines.
Demand for at-home workouts waned as more and more people

began returning to gyms and public sports facilities. Peloton
failed to anticipate this post-pandemic lifestyle shift and was left
scrambling to find new customers among those that weren’t even
convinced by long lockdowns to take the plunge.

“The primary question surrounding Peloton was did
the pandemic pull forward demand, or did it expand
the audience side? Based on all the data we had
been seeing throughout the pandemic, it seemed
like this was a pull forward. And the company, on
the other hand, viewed this as an expansion and built
accordingly,”
— Simeon Siegel, BMO Capital Markets analyst, in a Vox interview.
In February 2022, Peloton admitted it no longer needed its Ohio

factory. It halted construction and made plans to sell the plant.
Shareholders clamored to have Foley replaced and even have the
company sold. “Mr. Foley has made a series of poor decisions
relating to product, pricing, demand, safety, and capital allocation,”
wrote Blackwells Capital, an investor in the startup.
Barry McCarthy, the former CFO of Netflix and Spotify, stepped in

as CEO. He later criticized Peloton’s overproduction, saying the
drop in demand post-pandemic was foreseeable.
“I don’t care particularly why they thought that Covid was the new
normal, except insofar as to inform me who should be on the bus,”
he said in an interview cited by The Wall Street Journal.

SAFETY ISSUES AND ECONOMIC CONDITIONS
EXACERBATE THE DECREASE IN DEMAND
At the same time that Americans began resuming their pre-
pandemic routines, safety issues surrounding Peloton equipment
surfaced and further dampened demand.
The US Consumer Product Safety Commission announced recalls

of Peloton’s Tread+ and Tread treadmills in May 2021 following
reports of multiple injuries and a child’s death. On a related note,
The Financial Times found that Peloton had tried to conceal rust in
its bikes in 2021.
The company also became the victim of its own ubiquity. In

December that year, an episode of And Just Like That (the reboot
of Sex and the City) portrayed a character dying of a heart attack
after exercising on a Peloton bike. Peloton’s stock plunged by 11%
overnight after the episode aired.
On top of that, Peloton suffered a string of data catastrophes,

including a leak of users’ private account data and the exposure of
their real-world locations.
Price sensitivity and increased competition also weakened

demand for Peloton’s connected equipment worldwide, according
to an internal company presentation in January 2022. Rising
inflation and supply chain costs led Peloton to hike prices for its
bike and treadmill by a few hundred dollars. It started charging a
delivery and setup fee of up to $350 that month, whereas this cost
had previously been built into the total price of the equipment.

PELOTON TODAY: WILL A DIGITAL APP DRUM UP
PROFITS?
Before McCarthy joined the startup, Peloton had an inconsistent
pricing strategy. It slashed prices once in late 2020 when it
introduced a new bike model and again in August 2021 in response
to poor sales — only to raise them again less than a year later.
When McCarthy came in, he vowed to increase revenue by

focusing on digital app subscriptions for non-Peloton owners,
selling at retail stores, and expanding internationally. This meant
more price changes were in store.
To mitigate the resistance brought on by its price hike and attract
new customers, Peloton rolled out a new rental program in March
2022. It announced that customers could pay one monthly fee of
$60 to $100 to rent a bike and access the Peloton app’s workout
catalog and live classes. Customers were also given the option to
buy out their rental bike for a price dependent on how long they
had been renting the equipment.
IMAGE SOURCE: PELOTON

Before the rental program was launched, customers would pay
$1,495 for a Peloton Bike and $39 for a monthly app subscription.
But as The Motley Fool points out, this strategy reduces friction
not just for new signups but for cancellations as well. Peloton
has promised to take back the equipment if a buyer cancels their
subscription within a certain time period.
There’s also the question of whether or not Peloton can — once

again — cope with a sudden increase in demand. The company will
also have to figure out the logistics of repossessing equipment, as
well as what to do with the used bikes.
Adding to the confusion, Peloton again adjusted prices in

April 2022. It lowered the prices of its bikes and treadmills in
all markets. It also announced a June 2022 price hike for its
membership fee — it jumped from $39 to $44 in the US and from
$49 to $55 in Canada.
“We want more people to be able to afford our hardware. This is a

strategic decision to play for scale and increase market share,” the
company announced in a press release.
The company is still losing money and valuation, but McCarthy is

rallying. In a letter to shareholders in May 2022, he reported that
the equipment price reduction implemented in April had resulted
in a 69% increase in daily unit sales of hardware. However, it also
reduced gross margins. Subscription gross margin, however,
increased by 3.5 percentage points YoY.

Lesson #3: Don’t abandon your value
proposition when expanding
D2C founding stories typically start with a discontented customer

tired of big brands dictating the market rather than listening
to what people actually want and need. They find that many
consumers share their sentiments and take it upon themselves to
design a solution.
Sometimes the solutions cater to specific tastes or demographics

that were underserved. Large companies may have ignored those
demands either because they had a lack of rivals pushing them
to innovate or they didn’t think the concept would scale. But as
D2C startups begin to scale, they eventually end up facing many
of the same challenges as the big incumbents they disrupted —
the question becomes, how do you become big and still
differentiate yourself?
D2C brand Harry’s was disciplined in its expansion and retained

its core appeal to its initial customers who were tired of
“overdesigned” yet poor-quality razors. It began supplying razors
to barbershops and even opened some of its own. It built and
acquired complementary brands in adjacent grooming industries.
It embraced retailers. It got profitable. And today, almost 10 years
since its founding, it still sells only two kinds of razors.
Another D2C razor brand that launched around the same time as
Harry’s has had a wildly different trajectory.
Dollar Shave Club gained fame in 2012 with a humorous video that
mocked the complexity of razor choices for men. “And do you think
your razor needs a vibrating handle, a flashlight, a backscratcher,
and 10 blades? Your handsome-ass grandfather had one blade,”
co-founder and CEO Michael Dubin proclaimed.

I MAGE SOURCE: YOUTUBE
Dubin told viewers to stop paying for shave tech they didn’t need.
Then he promised to simplify and demystify shave choices by
offering a single-blade razor for $1 a month (in addition to $2
for shipping).
The video went viral, and within about an hour, Dollar Shave Club’s
website got so much traffic that its server crashed. In the first 48
hours after posting the video, the one-year-old startup received
12,000 orders.
Over the next few years, Dollar Shave Club went on to capture
around 10% of the US razor blade market — at the time, market
leader Gillette held 60%. In 2015, the startup saw $152M in
revenue and had raised more than $160M in funding to date.

Finally, in August 2016, it achieved an exit many D2C founders
have only dreamed of — an acquisition by a global CPG giant, in
this case, Unilever, for $1B. By that time, Dollar Shave Club had
become a “full male grooming business,” noted Unilever in a press
release. It sold hair styling products, beard oil, and toilet wipes,
among other things.
The acquisition was a win for investors. Venrock Partners, an early

investor, got a “10x” return, according to the New York Times.
Six years later, the deal was labeled a failure. Under Unilever’s
umbrella, Dollar Shave Club had not turned a profit. Dubin left
Dollar Shave Club in January 2021.
A BUDGET BRAND LAUNCHES PREMIUM PRODUCTS

Dollar Shave Club’s unique selling point attracted thrifty buyers.
As a result, it contended with low customer basket sizes — so low
that the startup balanced customer acquisition costs with how
much each customer would spend over 5 years. For comparison,
D2C brands typically look at one-year spend.
After its acquisition, Dollar Shave Club abandoned its original

value proposition and made a complete U-turn. By 2018, its
range had expanded to include over 3 dozen products across 6
categories, including fine fragrance and oral care. It now sells
4- and 6-blade razors like the incumbents it used to mock, at a
not-exactly-a-bargain monthly subscription price of up to $10.
The brand also offers a $9 starter set that includes a razor, scrub,
cream, and moisturizer, as well as a $10 subscription for two
razors with different handle grip colors and some refills.

Dollar Shave Club had launched the ancillary products to boost
revenue, but it either had the wrong ideas about its own market
or had decided to target a higher tier of customers. If its existing
buyers didn’t want to pay more than a dollar a month for a
commodity like razors, they likely wouldn’t have wanted to spend
much on luxuries like dry shampoo and moist wipes.
The product expansion doesn’t seem to have made a significant

impact on revenue. Dollar Shave Club’s average quarterly sales per
customer barely grew from 2019 to 2021. It stood at $25 in Q3’21
and was the lowest among 5 popular men’s grooming subscription
companies, according to Bloomberg Second Measure.
SOURCE: BLOOMBERG SECOND MEASURE

The same dataset showed that while Dollar Shave Club had the
lowest percentage of new customers from Q2’19 to Q2’21, it had
the highest mean retention rate over a similar period (Q1’20 to
Q3’21). While the numbers indicate customer loyalty, they also
reflect near-stagnation.
DIFFERING VISIONS AND INCREASED COMPETITION

FURTHER DILUTED THE BRAND
Unilever and Dollar Shave Club also disagreed about how to
distribute their razors. Before the acquisition, the brand had
wanted to open stores that were partly barbershops, like those
of Harry’s. But Harry’s move made sense because it promised
premium-quality razors and targeted men who were more willing
and able to spend on grooming.
Unilever instead opened razor vending machines in malls and

transportation hubs in LA, Minneapolis, New York, and San
Francisco. Instead of an option to buy a one-dollar razor, the
machines offered product bundles that cost $12. Dollar Shave
Club also entered Walmart and Target and slowly moved away
from its subscription model.
Meanwhile, more competition was brewing. In 2017, Gillette

launched its own razor subscription service, offering three tiers
ranging from $11 to $21. By Q2’19, Gillette was still struggling with
competition and losing market value, but its subscription service
had surpassed Dollar Shave Club in both percentage of new
customers and average quarterly sales per customer.

DOLLAR SHAVE CLUB TODAY: CAN IT FIND PRODUCT-
MARKET FIT AGAIN?
Unilever’s plans for Dollar Shave Club are unclear. As part
of Unilever’s sponsorship of the National Collegiate Athletic
Association, Dollar Shave Club announced an NIL deal with a
basketball star in March 2022. But the CPG giant made no mention
of Dollar Shave Club or razors in its Q1’22 trading statement.
Business Insider reported in February 2022 that analysts believed

that the acquisition was a failure. In response to an inquiry from the
publication, Unilever’s press office wrote, “We have been clear that
Dollar Shave Club has not delivered the results we were expecting.
The economics of the direct-to-consumer channel changed,
and we found it harder to unlock non-razor sales than planned.
Dollar Shave Club remains a great brand with an excellent product
offering, and we are fully committed to stepping up its growth.”

Lesson #4: Novelty is no substitute
for a strong business model
D2C brands have disrupted enough industries for incumbents to

take them seriously. Large, well-established brands now often
respond by directly acquiring D2C startups or by launching
copycat rivals.
One way D2C brands challenge industry giants is by taking a

fresh, contrarian approach to a product. Allbirds defied the flashy
sneakers trend and offered a minimalist alternative that focused
on comfort and sustainability. Bonobos made men’s stylish
trousers in a broad range of sizes. Warby Parker made chic yet
affordable eyewear.
Brandless tried to do the same, but it sacrificed profits at the altar

of its novel idea.
In 2017, Brandless launched with the promise to sell sustainable

staples, premium pantry items, and clean beauty products for only
$3 — and just $3. Whether it was something as mundane as toilet
paper or as niche as an Italian herb gluten-free pizza crust mix, the
price would remain the same.
The startup claimed it could sell items so cheaply because it

would do away with “brand tax” — the hidden costs like marketing
and design that can make products at least 40% more expensive
than the price Brandless sold them for. It positioned its goods as
alternatives to those made by large CPG brands and the home-
grown brands of Walmart and Amazon.
To do that, Brandless products came with the bare minimum of

packaging.

I MAGE SOURCE: BRANDLESS
When SoftBank Group CEO Masayoshi Son learned of Brandless’

business model, he was reportedly flabbergasted. But it wasn’t
entirely unfamiliar: Muji, a Japanese brand, sells household staples
with a very minimalist brand aesthetic, though not at low prices.
The SoftBank Vision Fund led a $240M funding round for

Brandless in 2018, raising the startup’s profile. But less than 2
years later, in February 2020, Brandless shut down.
Clarke Capital Partners and marketing firm Ikonifi bought the startup
— reportedly at a steep discount — and relaunched it in June that
year. It’s not yet clear whether or not Brandless 2.0 will succeed.

BRANDLESS STAKED ITS BUSINESS ON A NON-VIABLE
MODEL
Brandless’ strategy was problematic from the start. Ultimately,
it was an impractical idea that was difficult to execute in a
saturated market.
“The direct-to-consumer market is fiercely competitive and

ultimately proved unsustainable for [Brandless’] business
model,” said the startup’s board in a joint statement announcing
the shutdown.
Brandless’ commitment to a $3 price tag resulted in having to

overprice some products and underprice others.
Its pricing strategy also limited its margins, inflicting cash

constraints that severely hampered its ability to compete with
industry Goliaths. Seeing the company burn through cash too
quickly, SoftBank held back some of its investment until Brandless
could meet certain financial goals. It gave cash in installments
and had only provided a total of $100M in funding by the time the
startup closed.
While some customers were attracted by the cheap price, shipping

fees were expensive, as is typical with grocery products. At one
point, Brandless offered free shipping for orders worth at least $72
— or $48 for those who paid a membership fee of $36 a year.
Buyers also complained of low-quality goods despite Brandless’

claim to offer quality items. As one reviewer put it, “most items
that are $3 honestly looked like they were worth $3,” such as a can
opener that came with scratches on the surface and items that
broke during shipping.

The startup relented on its initial premise in January 2019, when
it began selling pet and baby products for more than $3. But it
was still failing to eke out a good return, heightening tensions with
its largest investor. Brandless CEO and co-founder Tina Sharkey
ultimately resigned in March 2019.
Her replacement, John Rittenhouse, the former COO of Walmart.com,

abandoned the $3 pricing strategy and vowed to place the brand’s
goods in the brick-and-mortar stores of major retailers across
the US. Adding to the company’s already broad product range,
Rittenhouse aimed to make Brandless a market leader in selling
cannabidiol (CBD) products. He lasted until December.
BRANDLESS TODAY: WILL A NARROWER SCOPE SAVE THE

BUSINESS?
After shutting down, being acquired, and relaunching in 2020,
Brandless is now back with a focus on selling items on its online
store. It gained a new CEO, Ikonifi founder Ryan Treft, who told
Business Insider that it might also sell goods on Amazon and at
brick-and-mortar retail shops.
But there are still signs of turmoil and confusion.
In December 2021, Brandless got yet another CEO — Cydni

Tetro, who previously served as CEO of 2 tech companies
and led the technology commercialization group of Disney
Research Imagineering.

In September 2021, Tetro told Utah Valley Magazine, “Brandless
doubles in revenue every six weeks.” She added that the company
now owns a manufacturer and has narrowed its offering down to 4
product categories: wellness and nutrition, clean beauty, personal
care, and green clean. The company raised $118M in August
that year to transform itself into a platform that would acquire
“mission-driven digitally-native brands” and help influencers build
brands of their own.

Lesson #5: Don’t assume that
company culture won’t affect sales
Companies that overtly align themselves with “millennial values”

need to have a clean house, otherwise, history has shown that
customers are more than willing to walk away. Even a combination
of a good product, strong marketing, and profits isn’t enough to
keep a company healthy if your audience finds out you haven’t
been walking your talk.
Glossier, an influencer-driven makeup brand, lost thousands of

social media followers after employees reported a toxic work
culture. Outdoor Voices, an Instagram-friendly brand selling
brightly colored athletic clothing, replaced its CEO, Ty Haney,
following reports of mismanagement and a work environment
that employees called emotionally traumatic.
The reports reflect a similar theme — young employees joined

these companies because they believed in their mission, related
to the brand, and admired the CEO. But the internal reality severely
contradicted brand image, which tended to be strongly values-driven.
For Away, a smart luggage brand, employee discontent proved more

perilous than the travel drought wrought by the Covid-19 pandemic.

I MAGE SOURCE: AWAY
For a while, it seemed like Away had won the D2C smart luggage
race. It turned profitable in 2017, around 2 years after its founding.
By May 2019, it had sold more than a million suitcases and was
on track to achieve $300M in revenue for that year. Its Series D
investors valued it at $1.4B.
But then, employees accused the startup’s leaders of failing to

provide safe working conditions, mismanaging its retail branches,
and creating a toxic work environment. The ensuing scandal led to
a leadership shakeup that continued well into 2021.
ALLEGATIONS OF TOXIC CULTURE SURFACE

The complaints first became public in December 2019 through
a report by The Verge. Former staff described being bullied over
Slack by top executives — including CEO Stephanie Korey — who
“brutally criticized” projects, mocked staff in private channels, and
demanded immediate replies even late at night and on weekends.

The employees also said that Away’s intense focus on customer
experience — enshrined in its core values as “customer-obsessed”
— led to a cutthroat culture that prioritized growth at all costs
and squeezed out profits at the expense of employee well-being,
health, and safety.
Following the first story by The Verge, Korey stepped down

as CEO in December 2019. However, the following month, she
returned and announced that she would share the CEO role with
Stuart Haselden, the former Lululemon CEO who had been hired
to replace her. Before that, Away had already recruited him as
president and planned to eventually make him the CEO to steer the
startup through an IPO.
“I honestly thought that people didn’t care that much about
the inner workings of Away. Who is CEO and who is executive
chairman — that wasn’t something that, at a private company
that’s less than four years old that sells travel products, I just
didn’t think would be news and people would care,” Korey told
The New York Times.
In July 2020, Away announced that Korey would be leaving

the company once again by year-end. In January 2021, the
company reported that Haselden would step down as CEO the
following month.
Finally, in April 2021, Away announced that co-founder Jen Rubio

— who had served as president, Chief Brand Officer, and interim
CEO following Haselden’s departure — would be the new CEO.

THE PANDEMIC PILED ADDITIONAL PRESSURE ON THE
COMPANY
Around the same time that Away’s scandal unfolded, the Covid-19
pandemic began to spread, which exacerbated existing challenges
for the company and created new ones. By April 2020, sales had
dropped by 90%. As a result, Away took a number of actions to try
to stay afloat, including closing 10 retail stores, freezing hiring,
furloughing half of its team, and laying off another 10%.
Discount events in September 2020 and March 2021 helped bring

in cash and reduce inventory. All in all, sales dropped by 55%
YoY in 2020, after rising 60% YoY the previous year, according to
Bloomberg Second Measure data.
IMAGE SOURCE: BLOOMBERG

AWAY TODAY: WILL RIGHTING THE SHIP HELP IT BOUNCE
BACK?
With pandemic-weary consumers eager to travel and a new set of
leaders at the company, Away is hoping that it has put the worst of
its troubles behind it.
Rubio has hired former executives from top retail and D2C brands
to fill C-suite roles and help move the company forward.
In a press release, the company announced, “Since as early

as the second half of 2020, Away’s key business metrics have
significantly outperformed initial pandemic recovery estimates,
with online and in-store conversion rates eclipsing that of pre-
pandemic levels and continuing to accelerate quarter over
quarter.” It cited “high buyer intent and pent-up travel demand”
as fuel for the startup’s growth.
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2022

The D2C Survival Guide:

The CB Insights platform

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Why D2C brands are turning to retailers as middlemen 7

Lesson #1: Figure out how you’ll turn a profit before 17

Lesson #2: Hedge your bets when consumer 24

Lesson #3: Don’t abandon your value proposition 32

Lesson #4: Novelty is no substitute for a 38

Lesson #5: Don’t assume that company 43

THE D2C SURVIVAL GUIDE: 5 DIRECT-TO- 3

Direct-to-consumer (D2C) brands have pulled off some amazing

Imagine getting shoppers excited about buying a plain white

These “digitally native” brands, typically made by and for

THE D2C SURVIVAL GUIDE: 5 DIRECT-TO-

But success is maintained, not achieved, and despite their early

This isn’t limited to smaller players either: even D2C powerhouses

THE D2C SURVIVAL GUIDE: 5 DIRECT-TO- 5

THE D2C SURVIVAL GUIDE: 5 DIRECT-TO- 6

A near-decade of D2C business growth has shown that brick-

These industry giants have a crucial advantage over their D2C

THE D2C SURVIVAL GUIDE: 5 DIRECT-TO- 7

And while e-commerce eliminates brick-and-mortar rent and

Online ads within the walled ecosystems of Google, Amazon, and

Presence in retail stores — both online and brick-and-mortar —

Established, profitable, cash-rich retail brands can and do bear

THE D2C SURVIVAL GUIDE: 5 DIRECT-TO- 8

With the demise of third-party cookies on iOS and web browsers,

In order to obtain the amount of data required to stay competitive,

These factors — heightened competition, low margins, and

THE D2C SURVIVAL GUIDE: 5 DIRECT-TO- 9

Some of the largest D2C companies have turned to traditional

“Stores drive customer awareness and customer acquisition

Walmart has welcomed D2C brands Quip (toothbrushes), Lola

THE D2C SURVIVAL GUIDE: 5 DIRECT-TO- 10

— Modern Retail, March 2022

Soylent, the meal replacement drink company, grew its retail

While D2C still makes up a significant portion of Soylent’s revenue,

Your Super, a seller of superfood-based powder blends, achieved

THE D2C SURVIVAL GUIDE: 5 DIRECT-TO- 11

Additionally, retailers can also obtain data about the preferences

Target’s private labels Everspring and Brightroom — launched in

THE D2C SURVIVAL GUIDE: 5 DIRECT-TO- 12

Some D2C brands have opted to retain complete control of their

In a prospectus filed as part of a registration statement, the

THE D2C SURVIVAL GUIDE: 5 DIRECT-TO- 13

In addressing the shift, Preysman stated, “It wasn’t an easy

IMAGE SOURCE: FIGS

THE D2C SURVIVAL GUIDE: 5 DIRECT-TO- 14

THE D2C SURVIVAL GUIDE: 5 DIRECT-TO- 15

Some recurring challenges run through these stories:

• Copycats sprang up and made it more expensive to acquire

• Online advertising costs rose while investors simultaneously piled on

• Covid-19 either boosted or dampened sales, but as more people got

• Brick-and-mortar sales were embraced — either through their own

THE D2C SURVIVAL GUIDE: 5 DIRECT-TO- 16

Many D2C brands stake their value proposition on making a

It’s common for a company to spend millions developing and

A case in point is Casper, a startup that made $1M in revenue in its

Casper Sleep launched in 2014. By compressing a mattress into a

THE D2C SURVIVAL GUIDE: 5 DIRECT-TO- 17

​In March 2019, the company attained a valuation of $1.1B after

Co-founder and CEO Philip Krim appeared unfazed: “Valuations are

In March 2019, the company attained a valuation of $1.1B after

With this long replacement cycle, Casper couldn’t count on many

To cushion the risk of relying on a single product, many D2C

The brand also launched a “Sleep Channel” in 2019. Its videos

But few consumers seemed to take notice. From Casper’s

These challenges were compounded by the rise of competition

While there’s no customer-facing talk of its “sleep ecosystem,”

Peloton, which was founded in 2012 and IPO’d in 2019, found

I MAGE SOURCE: PELOTON

Peloton temporarily halted production of its higher-end bike in

However, seasoned companies experienced the same surge in

Peloton responded with what a shareholder would later describe

But ports were congested and e-commerce businesses were

If Peloton’s response to the Covid-induced demand seemed

In an earnings call in September 2020, analysts asked how Peloton

But as cities opened up and people started resuming their old

Demand for at-home workouts waned as more and more people

In February 2022, Peloton admitted it no longer needed its Ohio

Barry McCarthy, the former CFO of Netflix and Spotify, stepped in

The US Consumer Product Safety Commission announced recalls

The company also became the victim of its own ubiquity. In

On top of that, Peloton suffered a string of data catastrophes,

Price sensitivity and increased competition also weakened

When McCarthy came in, he vowed to increase revenue by

There’s also the question of whether or not Peloton can — once

Adding to the confusion, Peloton again adjusted prices in

“We want more people to be able to afford our hardware. This is a

The company is still losing money and valuation, but McCarthy is

Sometimes the solutions cater to specific tastes or demographics

The acquisition was a win for investors. Venrock Partners, an early

After its acquisition, Dollar Shave Club abandoned its original

The product expansion doesn’t seem to have made a significant

Unilever instead opened razor vending machines in malls and

Meanwhile, more competition was brewing. In 2017, Gillette

Business Insider reported in February 2022 that analysts believed