Photo by Towfiqu barbhuiya on Unsplash

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Thanks to platforms like Shopify, setting up an online store has become a seamless process, ushering in a new era of entrepreneurship. However, the challenges of sustaining profitability in the DTC landscape have proven to be more complex than anticipated. While it’s never been easier to launch a brand, the subsequent journey towards sustainable growth and profit has remained an elusive goal.

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At the heart of the profitability problem lies the issue of balancing exceptional customer service with the costs required to provide an elevated service. Every DTC brand has strived to provide the same level of service that Amazon has established as the benchmark for customer expectations. This has proven to be an expensive and unsustainable approach. 

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Providing exceptional customer service at any cost is part of the larger “grow at all costs” strategy that defined the first generation of DTC brands. Previously, acquiring customers was seen as the biggest challenge facing DTC brands, but retaining these customers in a profitable manner has become just as big a challenge. In response, the industry is in the process of turning towards a more pragmatic approach that prioritizes sustainable growth over rapid expansion.

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Historically, DTC brands have grappled with three primary challenges that undermine profitability:

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1. Customer Acquisition Costs: Acquiring customers, particularly in a market with very little white space among brands, comes at a steep price. Brands have found themselves competing in a costly race for customer attention which strains their financial resources.

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2. Customer Retention: Even after successfully acquiring customers, retaining them and nurturing their loyalty requires ongoing investments. This might involve strategies such as offering free shipping, returns, and loyalty rewards to keep customers engaged and coming back.

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3. Operating Expenses (OPEX): The costs associated with fulfillment, shipping, and other operational aspects have risen over time, squeezing profit margins for DTC brands.

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Recognizing the limitations of the "grow at all costs" approach, the DTC industry has had to reckon with the false belief that scalability alone will guarantee profitability. The new mantra is to maximize profit from each customer interaction while optimizing costs. 

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Central to this evolving paradigm is the necessity of cost efficiencies. The "old way" relied on outdated software tools with fixed costs, often requiring long-term service contracts. The "new way," however, champions a pay-for-use model that offers multi-functional services. This shift not only reduces fixed expenses but also drives cost efficiencies by integrating features that make sense together. 

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So where can you begin to add some cost efficiencies to your business? The following quick wins will have you adding operating leverage to your business in no time: 

• Integrate your retention marketing tactics, like rewards programs, more fully into your customer touch points to ensure these benefits are always top-of-mind. Don’t just set it and forget it!
• Always negotiate your SaaS renewals for your essential services like product reviews, return apps, 1st party data collection and product recommendations. Better yet, look to the latest generation of vendors, like Onward, that charge only on usage and not fixed amounts.
• There is a race among SaaS providers to provide a suite of essential services. Look to combine services with one SaaS vendor for cost savings
• Model your business after Amazon and leverage a customer-sponsored service fee to subsidize benefits like free replacements for lost, stolen and damaged packages. Onward’s 1-click concierge checkout brings the same power of Amazon Prime to DTC businesses everywhere. 
• Look for managed services providers that are leveraging AI to bring down their cost structures and provide additional value. While self-service tools often appear to be more capital-efficient, you also need to factor in the labor cost for managing these tools.
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With funding capital more difficult to come by in today’s environment, it’s critical that every DTC brand gets their financial house in order. Cutting costs doesn’t mean you can’t still provide your customers with an exceptional product and service though. The brands that take advantage of the opportunities present to deleverage their balance sheets of non-value add expenses will be tomorrow’s winners.

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Related: 10 Ways to Improve Your eCommerce Average Order Value (AOV)

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