Why DTC Costs Are On The Rise - Markacy

Why DTC Costs Are On The Rise

With companies flooding into the e-commerce channel during the pandemic and many traditional off-shore supply chains experiencing disruptions, many DTC companies have seen costs continue to rise in 2022. 

As the pandemic began, many companies still relied heavily on retail storefronts. While they likely already had their five-year plans in place to slowly migrate to online models, they were unready and had to pivot quickly as retail revenues dried up seemingly overnight. 

Also, prior to the pandemic, many retail brands produced 100% of their products in China, India, or Indonesia. At different points during the crisis, factories in this region all but shut down production, ordering their workers to stay home. If you were lucky enough to get products made consistently, there were additional issues waiting at the ports such as increased inspections and safety measures. 

Many had products in US port warehouses awaiting inspection for many months. All of this changed cash flows; factories got paid but products sat unsold accumulating storage fees, loan interest, and taxes.

Increases in shipping prices led to additional cost increases. “Transporting a 40-foot steel container of cargo by sea from Shanghai to Rotterdam now costs a record $10,522, a whopping 547% higher than the seasonal average over the last five years,” Drewry Shipping told Deccan Herald. This is astounding since at least 80% of all traded goods are transported by sea.

And, because everyone flooded in from in-person retail channels to online due to the pandemic, there was also increased demand for consumer attention (i.e. available ad space), resulting in higher bids (online ad prices are determined by demand-based pricing.)

Here are some relevant trends that are happening now and what it all means for DTC companies going forward.

Increased Acquisition Costs

Customer acquisition costs were already steadily rising before the pandemic. “CAC is up across the board for both B2B and B2C companies due to competition and everyone and their mother having ebooks, paid ads, and most aspects of all the common marketing channels. While B2B CAC is slightly higher, both B2B and B2C are up roughly 60% compared to five years ago,” writes ProfitWell. For DTC brands, rising CACs are one of their biggest issues.

Early DTC brands had a very easy time acquiring customers through digital advertising with platforms like Facebook and Google but the sheer volume inevitably led so many brands to these channels that it increased costs. At the same time, DTC brands offer scale so many DTC brands can’t just completely leave. In recent months, startups have been relying more on other forms of marketing like partnerships and events.  

Lower CTRs

Click-through rates for all Brand accounts fell 17.2% since the new year as consumers began to increasingly prefer organic content over paid. The COVID-19 pandemic drove down social media advertising rates globally, also leading to declines in engagement with campaigns, according to recent research from Social Bakers. Engagement with social media advertising also somewhat declined, possibly since audiences are turning to organic content over paid especially in a time in which trust is everything.

Along with lower click-through rates, social media ad costs are also rising as consumer confidence returns. “Many direct-to-consumer advertising brands are pulling back on their advertising spend on Facebook and Google as they anticipate shoppers will tighten their wallets in the coming months,” says ModernRetail

Scarce Engineering (Developer) Talent

Because most companies accelerated their online investment plans overnight, high-value talent for ecommerce platforms became scarce and there increased in value and price. Simple supply and demand.

The last few years saw sharp increases in demand for developer talent as many organizations recognized they needed to focus on digital transformation in order to compete, especially in the “new ways of working.” In November 2019, CNBC News reported that approximately 920,000 IT positions stood unfilled.

“According to U.S. Labor statistics, as of December 2020, the global talent shortage amounted to 40 million skilled workers worldwide. By 2030, the global talent shortage is expected to reach 85.2 million. Сompanies worldwide risk losing $8.4 trillion in revenue because of the lack of skilled talent,” writes Forbes.

All of these factors, especially combined, suggest that DTC costs are expected to keep going up in the future, and that firms should plan accordingly.