Progress Update No. 05 - Changing My Business Model, A Necessary Evil (Part 1)

Business owners of all kinds have been hit over the last couple of years and DTCs are no different. 
Shifts in the economy mean some things that were a given for years have changed and the same rules don't necessarily apply. 

It's made it harder (although not impossible) to grow a bootstrapped DTC brand.  So rather than keep ploughing ahead with the same approach, I think the time is right to adjust strategy.

So what's changed?

Reason 1: Margin Squeeze

After about 20 years(!) of stable inflation, the UK has finally hit a patch of nasty double-digit inflation.  You have to go back to the early 90s for the last time it was this bad, meaning large parts of our population (myself included) have no memory or experience of what this is like. Low inflation is all we've ever known. 

Turns out, inflation kind of sucks (who knew). 

Prices have risen across the whole supply chain. Ingredients, manufacturing, transport, wages, warehousing, fulfilment etc etc. 
It's all up. 
Brand owners then face the gambit of taking the hit themselves or increasing prices and potentially losing customers to competitors who are holding theirs flat. 

Since price testing is notoriously tricky to do, coupled with the fact that sales can fall off a cliff if it goes badly, brand owners will typically take the pain of lower margins.  That is until it gets so bad that they're forced to increase prices out of necessity. 

In a bootstrapped business, each cycle of growth is funded by the profit generated by turning over the previous round of inventory. You can get a helping hand if your creditors are willing to get paid later (more on that in a sec) but eventually, the bills need to be paid with cash from your account. 
Slimmer margins mean less cash in the bank. This in turn means you have to be more cautious with stock orders, ad spend and everything else that drives growth.

If cash fuels the fire of your growth, then decreasing margins equate to it burning dimmer and dimmer or even going out completely. 

Reason 2: Cashflow

People bang on about how cash flow is always the silent killer you don't see coming. 
This is not untrue. 

And unfortunately in this case there's a double whammy on cashflow:

1. First whammy: longer payback period
Typically with a subscription DTC brand, you'll make a slight loss on the first transaction but as your customers keep buying you'll break even on your upfront costs and then move into profit. But with a lower margin, you need to rack up more purchases to get to breakeven. That means more waiting - during which time you have to plug the gap with your own cash for each customer you acquire.  

Yes, that's right - to get cash, you must first have cash. If your payback period is tiny or zero, then this catch-22 doesn't matter.  But with a long payback window, it can trap you...or bankrupt you (it's your choice at least!)

2. Second whammy:  suppliers become tight-fisted 
When the issues are macro, everyone is suffering. So quite rightly, your suppliers are looking at their own numbers and figuring out ways to shore up their business.  They'll be less likely to grant you favourable terms, extend you credit or let you pay them later. 

I.e. they want their cash sooner, which worsens an already crummy cashflow situation for you.

Reason 3: Alternatives Are No Longer As Attractive

DTCs over the years have had some nice alternatives at hand if they ever got into this kind of jam. 

First, they could borrow money (a.k.a debt) which could take the form of a  traditional loan - from a bank, say - or in more recent times, Revenue Financing. 
The latter exploded in popularity over the last few years. This model puts an interesting spin on debt as the brand can repay the loan flexibly depending on their revenue, which de-risks things significantly for them. 

But either way, debt is debt and there is the small matter of the interest rate. Rates have been near-zero for so long that we've forgotten what it's like when they're not. Recent hikes in the interest rate mean the repayment amounts have jumped up too. 

Alone, this may have been doable. But since margins are already squeezed pancake-thin by cost inflation, there's not much room to afford higher interest payments too (technically you could go crêpe-thin, I suppose).

Secondly, a brand could, of course, raise a lovely war chest via investment. 
Around 10 years ago the boom period for venture-backed DTCs began where there was every possibility that they could scale like SAAS companies and VCs were happy to fund that story. However, that chapter has mostly closed and a decade of trying has shown that DTCs generally don't grow and behave in that way. 

Investors will still back some companies but the interest has waned compared to then. They'll likely be under more scrupulous terms than in the heyday of generous valuations and lofty revenue projections hashed out amid the roar of government money printers. 

Changing Business Models - What's Needed?

I have to continually ask myself what's best to do. 

One of the wonderful things about a running business is that I have the freedom to change on any given day. The trouble is...what I just said. Every day is a chance to change so I need to actively decide whether I stick or twist (maybe you relate to this!)
Faced with all the above at once, I'm making the call that I need to adjust. 

What's needed?  Boiling it down, the adjustment needs to be: 

• Cash flow generative
• Self-fundable
• Low-ish upfront cash investment
• Leveraging my skillset
• Not constrained by my personal time
  

This rules out any B2C ideas. They will tend to all have the same cashflow issues I'm already facing! 
(Also out are: day trading, flipping NFTs and becoming an influencer of some kind). 

The best candidates that tick these boxes are in the B2B + e-commerce overlap. 
B2B models often generate positive cash flow from the get-go and don't require huge startup capital (esp. if the founders have prior experience).
I spend all day in the ecomm space anyway so it makes sense to leverage that to solve problems for other brands. 

Deciding on the New B2B Offering

I narrowed it down to two offerings.
Luckily I've worked for years brand-side and agency-side so I've got a decent handle on what life is like and what the problems are.
I wanted to solve my top two frustrations which were/are:

• getting new landing pages made
• ad creative production

Part 2 in the next post will be dedicated to a detailed rundown of these two options and the tests I ran to discover more about them. 
I also had a stab at coming up with an unconventional solution so I'll share how that went. 

Two Models: Yin and Yang

One good thing is that these two opposite models offset each other's weaknesses quite neatly. 

For example, DTCs eat cash like an insatiable monster - B2B generates it. 
B2B service models are harder to scale, selling products are generally easier.

There are several more.

Exploring this idea of how these two models could work in harmony can definitely be a dedicated blog post. There are a lot of positive reasons which is exciting.
The brief, and undeniably large, downside is that it's a lot more work!

Usually, pushing both at once would be madness. But due to my previous experience, I reckon I have a shot - albeit at a stretch. 

Coming Soon

Part 2 will follow in a few days where I'll share more details about the offerings and the work done on them so far. 

So stay tuned for updates on this (on top of the usual running-of-a-DTC-brand updates)

Update: here's part 2.

‍