The Direct-to-Consumer Checklist

25 questions that DTC entrepreneurs should ask themselves before scaling customer acquisition

Roger Chen

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9 min read

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Mar 26, 2019

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So you run a direct-to-consumer (DTC) brand. You just spent a few thousand dollars on advertising and your paid customer acquisition cost (CAC) numbers tested well relative to your best guess for customer lifetime value (LTV). Great!

Before you start dumping money into customer acquisition, you’ll want to make sure that you’re prepared for all of the issues that can arise. To help with that, I’ve created a non-exhaustive list of questions to serve as a lightweight reference sheet for any new DTC entrepreneur. I frequently see promising startups with a great product and strong initial economics hit a wall due to the piling up of problems relating to these questions, or what I like to call the ‘DTC death by a thousand cuts’.

While you don’t need to have answers for all of these questions before you launch a new brand, you should at least be aware of each of these points and have some perspective on them.

Here are the ‘25 Important Questions That DTC Entrepreneurs Should Ask Themselves’:

1. Will the unit economics work at 2X the CAC? What happens at 3X? 5X? All else being equal, the incremental cost of acquiring the next customer will always be higher than the last. Being overly reliant on Google and Facebook is a recipe for significant CAC increases over time.
2. Do you plan to regularly refresh your marketing collateral? Related to the last question, one of the best ways to keep paid CAC under control is to continuously test new ad copy and visuals. Have you tried testing user-generated content? What about appealing to a certain lifestyle category? Don’t be afraid to try completely new campaigns with different brand language and color schemes.
3. How will you take advantage of SEO and SEM? Even pre-launch, there’s work you can do here to differentiate yourself. For an emerging brand that most people haven’t heard of, you can build trust with potential customers with high search ranking and having relatable content available.
4. How will you effectively utilize influencers? Influencers will come with different levels of credibility and cost, even when they have the same number of followers. Many influencers just want the appearance of being sponsored and will also make posts that look like ads in exchange for just free product. For low dollar cost products, be somewhat liberal with sending product to influencers. A great Instagram post can be re-used in an ad, reposted on your own Instagram page, or on Stories. Bloggers are especially valuable in the early days when consumers are looking for actual reviews that are searchable. There’s a certain amount of weight that website content carries that is missing on the more ephemeral or attention-based social platforms.
5. Have you identified a contact at Facebook or Google? You’ll usually get assigned a contact in the ad sales organization at Facebook or Google once you start spending big bucks. In the meantime, figure out which of your college buddies works there or network your way to someone who does. They will be your best friend when things go unexpectedly wrong with the channel or when something breaks. (And something always breaks.)
6. When is the right time to diversify your paid marketing mix? You should have a perspective on the right time to go beyond Facebook and Google. More mature DTC brands are finding success with a broad range of marketing channels — paid influencers, podcasts, out-of-home advertising, direct mail, newsletters, brand partnerships, TV, etc. It would be smart to have a plan for diversifying the marketing mix sooner rather than wait for your CAC to get out of hand.
7. When is the right time to diversify your sales channel mix? Most DTC brands launch with Shopify and maybe Amazon. If you aren’t on Amazon, is there a good reason why? There are also specialty e-commerce platforms, physical pop-up stores, brand partnerships, hotels, airports, traditional retail, etc. You may have heard that increased CACs have led a lot of brands to retail. This is still in the minority of cases and my view is that it isn’t a strategy for everyone. Attacking retail requires an entirely separate go-to-market team and will take time (large retail chain refresh cycles are annual or bi-annual). For the reader of this blog that owns a young digitally-native brand, my guess is that retail isn’t an actionable part of the strategy yet and you’d be better served optimizing DTC for now.
8. Are you overly reliant on discounts and free trials? These strategies can be useful in increasing initial conversions from your ads and website traffic, but offering large discounts too early in the life of the company will lower your gross margins and CAC, both of which will affect your unit economics and future financing conversations. Discounts too early can also have the adverse effect of diluting a brand when targeting a more affluent customer segment.
9. Are you prepared for continued investment in customer service? The expectation around customer service these days is very high, especially for brands that are heavily leveraging Facebook and Instagram communities. Being able to staff your customer service team to respond quickly to customers, often directly on these social channels, will increase retention and repeat purchasing and also serve to drown out negative feedback. You’ll need to invest more here than you think.
10. What is the typical return rate in your product category? The high expectations around customer service also extend to ease of returns. Therefore, you should be prepared for a certain number of orders to be returned and factor this into your margin and unit economics analysis. Do your homework about what to expect relative to peers in your category. Something else to think about: are your products reusable or recyclable after being returned?
11. What is your intervention plan for an unhappy customer? This is related to the last point. You might consider having your customer service team touch the customer before accepting a return. For subscription businesses, you should definitely have a pre-cancellation intervention strategy in order to prevent churn. Consider providing the unhappy customer with a future discount, other product options, or a new subscription frequency.
12. Have you instituted a referral program? This is a no-brainer for any DTC brand. In general, you are doing well so long as the value of the reward for the referrer is below your target CAC and you have referral purchase attribution. For the reward, consider giving away low-cost product or gamifying using points with some real world equivalent value. Instituting some sort of reward for the top referrers and nada for everyone else is a bit cheesy in my opinion, but can work for more lightweight programs such as email list referrals.
13. Have you instituted a gifting program? Products from hip new DTC brands can be great gifts. A lot of your customers will be buying products for their friends and family anyway, so you might as well have a deliberate gifting page for the extra nudge and the SEO.
14. Do you have a system to track detailed customer cohort data? Make sure you are collecting and reviewing your customer cohort data on a weekly basis. Important metrics to track include customer count, average order value (AOV), retention or repeat purchase rate, ad spend, paid CAC, weighted average CAC, rolling LTV estimates, and more. This serves as the tracking tool for unit economics — don’t scale customer acquisition without it!
15. How are you tracking churn? For subscription businesses, you will need to closely monitor churn and set up a feedback loop with your customers to track the reasons for churn. This should also feed into your cohort tracker. As you start to collect data, you’ll be able to identify the core reasons for churn and develop an action plan for churn reduction across each of these buckets. Losing track of churned customers as you scale will have dire consequences. Be warned!
16. Does your model account for credit card errors? Credit card errors can have a meaningful impact on gross margins and, for subscription businesses, churn. You’ll want to familiarize yourself with involuntary declines and fraud so that it doesn’t take the business by surprise. Many DTC brands eventually hire someone to specifically focus on reducing the impact of credit card errors.
17. Will your sales follow seasonal or cyclical trends? Certain products have natural seasonality in sales— e.g. swimwear — and others have natural cyclicality — e.g. cars — so make sure you know whether your product falls into one of these categories. Prepare for the peaks and troughs in sales accordingly.
18. Does the customer segment that you are targeting have a predictable lifespan? Many products have natural expiration dates so consider this in your LTV calculations. Some products have very short lifespans — e.g. wedding gowns, which are purchased once — , others have longer lifespans — e.g. children’s picture books, which parents will purchase for several years of a child’s life — , while some are lucky enough to have lifelong relevance — e.g. eczema lotion. This may sound obvious, but it is an important factor in figuring out what is a reasonable LTV and CAC.
19. How well do you understand your margin structure? When you think about your gross margins, you need to consider many variables — product costs, packaging, forward shipping, fulfillment, merchant fees, discounts, resellers/partners, credit card errors, returns shipping and processing, etc. These add up very quickly. One thing worth considering is that your gross margins will tell you whether certain distribution channels are viable — for instance, success at Costco requires a particularly high margin type of product. Always have a concrete plan for margin expansion.
20. How scalable is your current fulfillment strategy? Not every 3PL is designed for the speed of DTC so make sure that they won’t be the bottleneck as your brand starts to scale. If you want to add personalization to your product, 3PLs will often become too expensive and you’ll need to think about bringing these operations in-house.
21. Are you overly reliant on a single supplier? This is an obvious one for anyone that has worked in supply chain, but it isn’t an early consideration for many new brands. To be very clear on this — it is a serious risk not to have redundant supply. These days, geopolitical diversification isn’t a bad consideration either.
22. If you’re manufacturing in China, have you considered alternatives and trade-offs? Related to the previous question, we live in an age where global politics and economics can impact anyone’s business. Is China still the cheapest option when you add a 25% tariff? Have you thought about how potential IP theft would impact your business? Also, if you are doing business in China, don’t forget that everyone will be off the grid for two weeks around Chinese New Year.
23. Will you ship internationally? Most DTC brands do not ship internationally. The cost and complexity of fulfillment and returns make this a challenging proposition no matter the scale. There are a few 3PLs and agencies that specialize in distributing overseas, but if you are based in the US, the market is usually big enough for you to grow into without feeling capped.
24. Have you accurately modeled out working capital requirements? Raising too little capital for scale is an easy trap to fall into within DTC. Many new DTC entrepreneurs will raise just enough to successfully launch their brand and show brand-market fit, but as they start to scale customer acquisition, they aren’t prepared for the massive costs associated with keeping enough inventory in stock. It is very important to establish the finance function of the business before dumping money into ad spend. Unfortunately, debt financing for DTC is still somewhat nascent.
25. Where can I find funding for my growing DTC business with strong unit economics? Many of the venture capital firms that have historically invested in consumer tech have now branched into direct-to-consumer brands. Given the number of emerging brands that are seeking to raise capital, it’s important that you craft a compelling narrative that explains your unique positioning within the market and outlines the path to a major exit. Keep in mind that exit multiples for consumer goods are a lot lower than software on average so the expectations around revenue growth will naturally be higher than your SaaS peers.

At Silverton Partners, I’ve been leading the charge on our investments in fast-growing DTC brands. If you’ve reviewed all of the questions above and are up for the challenge, I’d love to learn more about what you’re working on. Feel free to shoot me a note at roger@silvertonpartners.com. If we aren’t a fit, I might be able to point you in the right direction.