The Book of DNVB
What is a DNVB?
I have spent the last ten years of my life figuring that out. I don’t know everything about it, but here is what I know:
- It’s primary means of interacting, transacting, and story-telling to consumers is via the web. The digitally native vertical brand (DNVB), is born on the internet. It is aimed squarely at millennials and digital natives. It doesn’t have to adapt to the future, it is the future. It doesn’t need to get younger customers. It starts with younger customers. When we launched Bonobos in 2007, somebody asked me who had done this before. I said no one. The history of innovation is the story of ideas that seemed dumb at the time.
- The DNVB is a brand, and that brand is vertical. The name of the brand is on both the physical product and on the website. The DNVB requires the commercialization of an e-commerce channel, but that channel is an enablement layer — it’s not the core asset. VC’s sometimes think these should be valued like technology companies. Some of the valuations still reflect this misguided notion. These are retailers, not tech companies. They cannot spend 10% of sales on technology and 30% of sales on marketing forever.
- The profit losing nature and small scale of the DNVBs leads most traditional retailers to ignore or underestimate these little tadpoles. Then Unilever bought Dollar Shave Club for $1 billion. Smart people woke up. The reality is the brand of the future is a DNVB, but the future is not here yet. It’s in the corner. Give it a couple decades to take over the room.
- Some big companies now believe they can make these brands themselves. There is some hubris to this notion, though it probably will happen in some exceptional cases. The general rule is that entrepreneurs need the fear of their brand’s demise to make it magic. It is too safe to do it as a corporate subsidiary. Unless that corporation treats the DNVB upstart like a start-up in terms of staffing and resources. That is hard to do.
- It is not e-commerce, it’s vertical commerce. The product gross margins are at least double that of e-commerce (e.g. 65% versus 30%). The contribution margins can be 4–5x higher (e.g. 40–50% versus 10%). This radically transforms the economics of the vertical commerce compared to e-commerce. Vertical commerce can make money. E-commerce, not so much. Bonobos is now a breakeven business. It took us a decade. I am not proud of that, it takes a fair amount of scale, a wonderful team, and lots of learnings along the way to turn the corner. “Pioneers get the arrows, settlers get the gold.” Turns out it takes ten years to build a brand.
- The digitally-native vertical brand is maniacally focused on the customer experience. There is no precedent for this in most categories, as these are bundles of two businesses that normally standalone. When we started Bonobos, our first angel deck said this is Ralph Lauren x Zappos. It’s a physical products brand and strong service experience at the same time.
- The digitally-native vertical brand drives a lot more customer intimacy than it’s competition. The data is better because every transaction and interaction is captured. You don’t have to combine data across businesses, because it’s all one business. You are not blind to your wholesale business, because you don’t have a big wholesale business. It’s one CRM. It’s one store, where everybody knows your name.
- Here is what most DNVB entrepreneurs get wrong. The world doesn’t care about your DNVB if you aren’t delivering a better product and service bundle than traditional competition. The world doesn’t need your DNVB — unless your product as foundation is differentiated. For Bonobos, fit personalization. For Warby Parker, price and cool factor of the lowest price. For Dollar Shave Club, price and convenience of subscription. The product, web/mobile experience, and customer service collectively become the brand in the consumer’s imagination. Deeper data on the consumer drives enables the DNVB to stay closer to the customer than its brick and mortar driven peers, and the ownership of the brand end-to-end fuels more affinity for a vertical commerce brand than even the best e-commerce experiences.
- While born digitally, the DNVB need not end up digital-only. This means the brand can extend offline. Usually its offline incarnation is through its own experiential physical retail, or pop-up strategy, or highly selective partnerships. In nearly all cases of partnerships with third parties, the brand controls its external distribution versus being controlled by it. Any offline retail is not about warehousing product, it’s about marketing the brand and delivering great one to one customer service. It may be pop-ups. It may be permanent locations. It may be installs at existing retailers. You know who figured this out first? Steve Jobs. The Apple Store was the first scalable, experiential vertical retail concept. Lululemon isn’t bad either, though with inventory, the spirit of it is different.
Too often the DNVB is compared to a typical e-commerce company. If a typical e-commerce company is a frog, at birth the DNVB does look a lot like a tadpole. But it doesn’t end up as a frog. The difference is profound, and it requires an appreciation the role brand plays in inspiring people, speaking to them, shaping their choices, and a sharp understanding of how different the economics and growth trajectories are.
It requires investors to look more closely at the downstream math of a DNVB versus an third-party e-commerce purveyor. That differences in the unit economics and the contribution margin cohorts are profound — apples to oranges. Cohort analysis is only part of the story. Brand matters. These brands have a soul that is not easy to quantify at first. The e-commerce stories are flashier at first on the top-line (more brands!), but the long run winning strategy may well be DNVB (cult brand monotheism). The e-commerce businesses are often commodities that rise and fall (Fab); the dream for the vertical brands is to endure for a century or more (Bonobos, Warby Parker).
The e-commerce company is a channel; the DNVB is a brand. The e-commerce company has low margins; the DNVB has high margins. The e-commerce company can grow unbelievably fast; the DNVB can’t grow as fast, but it’s more valuable in the long run because it’s about more than just price.
While third-party e-commerce requires you to compete against a grizzly bear called Amazon, creating a DNVB gives you an opportunity to combine the growth of being an e-commerce company with the margins of being a brand, and with proprietary merchandise where you control distribution and your own destiny. When done right, when there is some differentiation in the core physical product itself made possible by the vertical commerce nature of the model, as the DNVB can provide a better overall bundle of product and service than the competition.
The DNVBs are just getting started; only recently are people beginning to realize how big they might be at scale. Their strategy creates a brand loyalty impossible to create in the commoditized world of channel, and as traditional vertical retail dies a slow death, the DNVBs rise to take their place.
In the history of DNVBs, it’s incredibly early. The net promoter scores are off the charts. There is still a lot to prove still on profitability. We are in the first decade of a century long shift where retail is re-organizing from the automobile (the 20th century) to the smartphone (the 21st century). Vertical brands were a huge part of the brick and mortar driven era of retail (Zara, Ikea, Trader Joe’s), and their digital reincarnations become the driving story in the future of retail.
Next up: the encyclopedia of DNVBs.