If you look at the majority of venture backed DTC brands in the market today, they all could benefit from diversifying their revenue streams. As this cohort scales and eventually becomes omnichannel (since that’s the playbook most are following), gross margins will inevitably suffer. When startups expand into new product categories it’s still often challenging to get >50-60% landed margins if you’re selling physical products. This is where services come in.
What’s attractive about services is that they are typically very high margin >60%, there’s little to no inventory risk, they can increase your brand halo and offer true incrementality, in addition to not cannibalizing your existing products.
Extended Warranties & Product Protection Plans:
There’s a new trend called embedded insurance or embedded finance. This refers to a new model that lets brands and retailers offer lending and insurance products to their consumers via a streamlined UX. Love em’ or hate em’ consumers buy extended warranties and protection plans. Traditional retailers, automotive companies, and the travel industry have sold them for years and now DTC brands are starting to add them. If a customer is purchasing a large ticket item (say a $1,000 sofa), research shows that they will often want to protect that purchase and are comfortable with paying ~10% of the purchase price ($100) to buy the warranty. That $100 MSRP plan maybe only costs the brand $30 to buy from an insurance company leaving a $70 profit and a 70% margin. That can even be a conservative figure as traditional retailers are often known to markup their plans to achieve 90-100% margins. Depending on the category and how the offering is merchandised in your checkout flow, you can assume 5-15% attachment rate. I suggest checking out a new breed of SaaS startups offering this service that can integrate seamlessly into your e-commerce platform (Mulberry, Clyde and Extend). Taking this one step further for home furnishings brands, you could offer outsourced cleaning services bundled in with the protection plans. There’s a great deal of concern around brand control when you start bringing partners into your customer decision journey, but if you work closely on implementation and merchandising it can feel organic.
White Glove Delivery:
While most DTC brands that sell durable goods offer white glove delivery either for a charge or gratis, they often don’t make any money on the program and approach it as a pass through cost. There’s price elasticity to play here and ability to create a customized white glove offering for profit by working with companies like XPO to create a truly exceptional experience that customers would pay a premium for. I feel many young companies just want to get the offering off the ground, but consider doing an RFP here and finding a partner who can build a truly unique white glove experience.
Design Services:
If your startup is in the home furnishings or fashion sector, consider offering upsells for interior/personal design service at checkout. This not only can be a profitable initiative, but it can also drive larger basket sizes as the designer recommends other products from your company. Wayfair does this with their design trade program. To set this up, consider an affiliate partnership with companies like Modsy.
Financial Services:
If you want to offer financing to your customers and you’re a B2C startup outside of consumables, you’re likely going to work with Affirm or Klarna. These tools might as well be marketing tactics than profitable revenue drivers because in many categories you’ll see brands offer 0% financing. This isn’t a charity event from the bank; the startup is covering that cost. That means the brand is losing ~$.12 on the dollar to subsidize the customer’s loan. Once one company starts the promotional offer, all will follow and it’s a race to the bottom. As an alternative, consider partnering with traditional firms like Citizens bank that are interested in getting into the D2C space and could create some type of rev share deal or play around a bit with pricing and promotional offers to eek out even just a few points of margin. Lastly, you’ve probably seen where Amazon sometimes lets you pay for your purchase in installments with no credit check; startups can now do the same thing. Look at abandoning the term loans altogether and consider Buy Now, Pay Later (BNPL) players like After Pay and Splitit that offer (4 easy payment schemes) who will hit your marketing expenses less and also open up the potential market to include a larger swath of potential borrowers. For reference, BNPL products cost ~2-4% for merchants. I believe the risk is consumers see financing as a commoditized product with no brand affinity. Shopify can (and is) turning this product on for their customers giving it a large pipeline. Affirm and Klarna could also easily add this capability. My bet is one of the incumbent fintechs (Visa, Amex, etc) makes an M&A play here. Let’s also not forget Covid has increased adoption of these products and when the dust settles and brick and mortar comes back, how do these players fare with an offline strategy.