New DTC toolkit   //   August 5, 2019

‘It’s relatively easy to build a $1 million business’: Why DTC brands expand to services

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About seven years ago, industrial designer Simon Enever found himself in a dentist chair. He was getting a routine checkup, and instead of talking about toothaches he ended up talking with the oral health professional about industry pains. The dentist, Enever recalled, explained that most of his patients got fundamental things wrong — brushing techniques, frequency. It planted the seed for his company Quip, which most recently raised a $40 million Series A late last year.

When Quip first launched in 2015, it was a digitally native toothbrush company. Enever told reporters at the time that VCs were looking for a “toothbrush play.” The base service worked by selling customers an electric toothbrush base ranging between $25 and $40, and then offering a subscription plan for a replacement head and toothpaste every three months for $10 a pop. Last January, the company announced that it had more than 1 million subscribers.

Now, Quip is expanding beyond products; it wants to build out an entire oral health empire. Last month, Quip introduced its newest venture: dental insurance. After acquiring a dental insurance startup earlier this year, the company launched an offering called Quipcare in New York City. Though localized to one geographic region, there was a clear path in mind. Quip intends to transcend beyond traditional products and go into services.

Enever told Modern Retail this expansion has always been the plan. “For us, it was there from the very literal beginning,” he said. “We built Quip to solve the pillars of good habits for maintaining oral health.”

Quip provides an example of a popular DTC strategy to scale. For many fledgling businesses, it’s no longer enough to simply sell one or a few products online — they have to find a larger market that will transform it into something bigger. The first wave of DTC expansion was transcending from a singular hero product to a suite of offerings that made much larger lifestyle brands. Now, founders are looking beyond the very product categories into less tactical terrain.

It’s likely thanks to a quandary many entrepreneurs face, especially when coupled with VC pressures. It’s hard to launch a successful product; it’s even harder to transform that standalone item into a $100 million business. As a result, the way many founders are trying to spin their businesses is by offering something that’s not physical. To some it seems like a smart pivot, because it doesn’t require the mounting investment for physical products — in a sense, it’s easy revenue. But it moves once-easily categorized products companies into new areas — like insurance — which requires a completely different set of expertise.

For Quip, the economics were clear. Enever explained that the overall market for dental products is between $10 billion and $15 billion. Conversely, the dental insurance industry is at about $130 billion.

Other have followed similar paths. Warby Parker, for instance, began offering eye exams in 2017. Last year, co-founder and co-CEO David Gilboa explained to Digiday the rationale behind this outward expansion: “Eye exams alone is a $6 billion market that really hasn’t seen any innovation for the digital world so we see that as a really big opportunity,” he said. “We also see opportunities to innovate on things like vision insurance.”

It’s a clear playbook for DTC brands looking for scale, or at least a scale plan to tell investors. To go from being a small-to-medium-sized online product business to a multi-billion dollar company, founders have two options: Launch more products and expand globally, both of which require hundreds of millions dollars of investment — all while maintaining a growing core customer-base. Or, launch services that, hopefully, are still true to the original mission.

For companies like Quip, the expansion makes some sense. For others, it may require some mental gymnastics. Yet it’s become the scale strategy du jour. Many popular DTC businesses out there initially launched with just one standalone product that people glommed on to. There’s Away, which offers lifetime guarantees for its luggage, the initial value proposition to customers is that it will make only one sale. These companies are receiving higher and higher valuations from investors — Away, most recently, was said to be worth $1.4 billion — forcing them to figure out new paths to scale. At first, the question was: How do I build a core customer base who likes my product? Now the question is: How do I actually get to $1 billion in revenue annually? What’s resulted, said DTC strategist Marco Marandiz, is a melding strategy of both “CPG companies and tech platforms.”

Indeed, Away’s co-founder Jen Rubio recently announced it was expanding beyond suitcases into the broader “travel” space; “Everything is related to making a travel experience better,” she told the Wall Street Journal.

This isn’t necessarily new. Early digitally-native brands like Bonobos differentiated themselves by offering a services component. Bonobos’ differentiator was its showroom-style stores that let customers come in, try on clothes, get fitted, and receive fashion advice from staff — all without buying anything. The company was offering a suite of fashion-adjacent services to build out a core audience. In 2013, founder Andy Dunn explained it: “We think service is more important than instant gratification,” he told USA Today. “What’s the benefit of walking out of the store with a bag of two shirts and some pants if it’ll be on your desk the next day?”

According to Marandiz, this is a twofold strategy. Yes, it makes business sense to have plans beyond your standalone core product, but it also makes the fundraising much easier. By billing yourself a grander services provider, he said, it’s easier to raise money. What venture capitalists want is quick scale — the go-to move is to think like a platform. “There’s always a category definition that the product you’re launching with is just a wedge.”

But this makes for a double-edged sword. Many fledgling brands need capital to help bring their product to fruition, but they risk hitting a ceiling. In order to raise more money they may need to ramp up the company’s ambitions — and, in turn, make promises to investors — that were never thought of from the onset. “It’s relatively easy to build a $1 million or $2 million business,” said Marandiz. “It’s harder for $10 million — significantly harder for $50 million.” And even then if you launch a successful product, it’s likely your company could get bought by one of the behemoth brands. “There’s a limit to how big you can get until the retailers start to own you,” said Marandiz. Smaller brands, then, are setting their horizons beyond the products themselves, or facing finding they’re not able to raise money to grow significantly.

DTC brands are faced with two options: Raise only a modest amount of money and be content with a medium-sized business, or opt for more grandeur and continue raising more money while making bombastic promises to investors. “What we’re going to see in the next two to three years,” Marandiz said, is an increase of “companies that have raised money but won’t have an exit.”

Enever understands this anxiety. While he’s insistent that Quip’s expansion is in line with the company’s overall vision — and has been on the roadmap since day one — he also recognizes the pitfalls of this thinking. “There’s a pressure,” he said to prove out a “long-term vision of the company.” He went on, “I can 100% imagine that’s happening — kind of like it did with subscriptions.”

For him, what it comes down to is if all of the components of the business work in concert with each other. He pointed to content as a great example. “A lot of brands do content because they’re told they should it,” Enever said. “Everyone has a blog.” For Quip, its various content programs — from blogs to guides — all go toward educating its customer about oral health, he said. “Ultimately, it’s extremely important.”

His, however, is just one example. Quip is part of a group of growing brands which believe their services work in tandem with the physical object being sold. For other companies, it may be a different story. “There are many products where it stop at products,” said Enever. “We will see products that don’t need a service behind them.”