Companies typically have to settle on strategies that align with their customers, employees, investors and regulators. The more they know about how the other side will decide, the clearer their own strategies become.
If regulators always prefer choice for consumers, then it is easy for a platform to allow multiple payment choices: Shopify allows multiple payment options from its partners, Apple doesn’t.
By regulatory intervention, it will have to now.
Nash equilibrium and Netflix time
Nash equilibrium is a fascinating, post-facto explanation for some of the interesting decisions you will often see in business.
In simple terms, Nash equilibrium states that if you have clarity on the other side’s decision, you can make yours without regret. In other words, there is no incentive to change strategy once each side knows what the optimal position of the other side is, in their combined transaction.
I see this playing out every weekend at home. I don’t mind reading a book alone or watching Netflix with my kid, but when I am available for Netflix and my kid decides to read a book, it is a bummer.
DTCs, DNVBs and game theory
In DTC, how companies decide their omnichannel strategy depends on how well they know what their customers’ choices are and what their ideal strategy will be. In many transactions, constraints are actually good forcing functions — they narrow down choices and help you arrive at an equilibrium faster and cheaper.
The marketing and public-market filing languages make for a fascinating read into the minds of companies.
When Warby Parker filed its IPO prospectus last month, the company referred to its digitally native status in the past tense. The model was effectively flipped in 2020, as its share of online sales to total sales dropped from 65% to 40%. Meanwhile, its physical store count increased from 126 to 145.
Allbirds, on the other hand, described its digital-nativity in the present tense (though it opened 27 stores). Unlike Warby Parker, 89% of its revenue still came through online channels.
There is a debate on whether we should refer to these companies as DTC or digitally native vertical brands (DNVBs). The debate is as old as the Dollar Shave Club YouTube video, but it has (not the video) resurfaced again among the DTC Twitter club.
If a DTC business is constrained to sell through physical stores sooner than later, they are a DTC business — as opposed to businesses that can continue to sell online without a forcing function that makes physical stores or channels unavoidable.
For Warby, 66% of their eyewear purchases happen when people do vision tests. Vision tests happen at physical locations and hence they have to move to these locations. Ergo, they refer to their digital native life in the past tense. Nothing stops Away from being an online-only company, because we don’t buy our luggage at the airport. Heck, we don’t need luggage for a while.
Smile Direct Club (SDC), on the other hand, is an interesting case. They generate 100% of their revenue online, but without their physical outlets, custom 3D-printed braces are just impossible today. So, the product experience is incomplete without a physical presence.
If a company’s customer acquisition, fulfillment and retention need a physical presence, no matter what percentage of revenue comes from digital channels, it is a DTC company (beyond digital channels).
But if a company’s customer acquisition, fulfillment and retention can happen without a physical presence, it is a DNVB.
Constraint versus choice
Presented constraints, like in the case of Warby and SDC, companies decisively move to Nash equilibrium state. There will be no argument against physical presence from day one. But in cases where the customer is not the forcing constraint, the move to physical channels is paced and phased to optimize for runway, profitability, TAM expansion and other such business reasons.
Can some of these DTC companies turn the dial back and return to being digital natives? What if vision testing can happen at home?
Thirdlove could well be a DNVB, but they understood body types better than anyone and decided to go retail even in Middle America. The constraint of product experience for the customer is their market opportunity and differentiator.
All physical products cannot escape retail, because ignoring retail means a smaller serviceable market. But it is a choice companies can make.
So, DTC or DNVB is not the question. Every DNVB will be a DTC brand. The difference is only whether it is out of constraint or choice.
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