11 Rules For Creating a Winning DTC Brand

In addition to my agency, I own a number of direct-to-consumer (DTC) businesses. I've also helped to invest into many of them.

That’s why I decided to create 11 rules that if you follow them, you’re going to win almost every single time when starting a DTC brand.

Yes, they might seem a little extreme in some cases, but you're going to win if you follow them.

So let’s dive into the 11 key principles to either starting or buying a winning DTC business:

Rule #1: The product must solve a problem for customers.

You have to solve a problem for a customer by promoting an OUTCOME. People often mistakenly place their focus on talking about the problem, but you actually want to be able to promote an outcome.

So when you're looking at a business, you have to analyze it and ask yourself, “what is the problem that this business solves, and what is the outcome when you do solve it?”

Because the outcome is going to be how you do most of your marketing. So again, many people will market down line. They’ll focus on the problems they’re trying to solve. As a result, they only talk about the problems, but people want to envision themselves in a better tomorrow.

Let me give a couple examples.

Does your product help them with finances? Your outcome is you're going to be focused on becoming wealthier, not having as much stress, etc.

If it's about health, the outcome is you're going to be fit, you're going to look good, you're going to feel good, you're going to be more attractive. Those are outcomes.

So whatever you do before you buy a business or start a business, you need to consider how strong the problem is that you’re solving. If it's not really a problem for people, I would walk away more times than not. But if it's a big problem and you have a big solution, then you've got a massive winning company, and everything kind of falls into a spectrum in between. But evaluating that problem can be one of the most important things you do before buying or starting any business.

Rule #2: The product should have a minimum gross margin of 80%.

Gross margin is key. What you really want to understand about gross margin is you need to have a low cost of goods sold.

Ideally, your product COGS should be no more than 20% of your revenue. That is one of the most important things to look at as you scale, and even once you’ve reached scale. So whether you’re selling five of these a month or thousands of these a month, what is your product cost? If your product cost is more than 20% of your revenue, you might want to think twice about it.

But what if you have a more expensive product? Let’s say you’re selling thousand dollar photo equipment, then perhaps your COGS can creep a little higher. But generally you never want to go above 30%. That’s especially true if you have a product that’s anywhere in the zero to $150 range, you do not want to go above 20%.

What’s the reason for that? It just takes up too much of your budget, especially in the marketplace today where you've got rising ad costs, you've got all kinds of different processing fees, etc. You need to have that room for growth, have that room for inventory, and allow yourself to have the margin to be able to make money.

Otherwise, your COGS are going to be dead in the water before you even get going.

Rule #3: The product should be able to be shipped with reasonable shipping costs.

My third rule is that you need to be able to ship the product for a reasonable cost.

What's reasonable? Probably somewhere below $10. In most cases, if you can get it to $3, $4, or $5, you're right in the zone. But if you're going to be more than that, then you’ve got to have more margin inside of your product to do it right.

So you’re in trouble if your COGS are high and you’ve got a high shipping cost. Because most people are not going to spend more than $2.99, maybe $3.99 on shipping. It’s just typically not going to happen at scale and at profitability. This is where Amazon has really come in and changed the game on what people are willing to pay for shipping. Raise your product price, not your shipping.

But this is what’s kind of blurred everybody's reasonable efforts. Which is why we see stores trying to charge $10 to ship a book, and it's just never going to work. Or $10 to $20 for a heavier product, and people are just rarely going to spend that. So you have to take the difference in your shipping cost vs. what you can charge.

Let’s say you're paying $10 for shipping and you're going to pass on $3 to the customer, then you've got a $7 margin you need to add to your COGS really to understand what your new percentage is in terms of cost of goods sold.

Although I know that's not a direct COGS, the problem is that if you don't plan for your shipping as a margin eater, you could end up in the negative very, very quickly.

Rule #4: The product must be one that people rarely return.

My fourth rule has to do with the return rate of your product.

You might not know this, but for instance, women's jeans I've seen companies have return rates of 40 to 50%. It's a very, very difficult industry to be in because you're always having to deal with exchanges.

This starts to eat into your shipping costs. It eats into all kinds of different margin for you. And the problem is that it's really difficult to be able to replace those purchasers or those customer acquisitions at scale with good planning in your media buying.

Because let's say for instance, you go into a holiday season and you've got a product that has a 25% return rate. Then all of a sudden you run this promotion and it jumps to 35% or 40% for a given period, and you were working at a 15% margin. Well, now you've lost a ton of money.

So if you're in a business where most people don't return products, that’s a place where you can really, really win. And those can be personal products, consumables, books... people don't return that stuff very often. Of course, there's always going to be returns, but it's not a high return category.

So eliminating high return category products is key. Do your research and it’s going to save you a lot of headache down the line.

Rule #5: The product must have a fairly large market.

My fifth rule deals with the total addressable market (TAM) for your product. But really all you need to know is the potential number of people that would want to buy your product.

I’ll give you an example. Let's say I want to create a dog food brand, but it's only for elderly female golden doodles. That’s a smaller demographic than if it was for all dogs. So if you look at your TAM, ask yourself if you can acquire a 10% market share then how big is your business going to be? If you look at that and realize there's only a million potential customers, that means you can only acquire a hundred thousand people.

There is something to be said about niche products. I'm all for niche products, but typically those businesses stay pretty small. So if you're trying to hit a home run and have a really good, strong, DTC business, you've got to be able to have scale to be able to grow into. And hopefully some of these reasons might make more sense than just saying, yeah, we want to have a larger market. But in reality, if you're capped at how high you can grow, it's going to be very difficult in the long run.

Rule #6: The product should generate a minimum average order value of $80.

My next rule has to do with your average order value (AOV). In other words, how much does somebody on average spend with you when they buy?

You typically want to be north of $75 to $80. There are some businesses that you can do well at the $50 to $60 mark, but what I'll tell you is that’s typically going to curb your scale.

Why? Because the more and more you spend in advertising, the lower your margin rate is going to become. It becomes residual over time. Maybe you can spend $100,000 at 2.2 ROAS, $150,000 at 2.1 ROAS, and so forth. So there is a marginal amount because you're pushing deeper into audiences that are targeted with certain creative. If you have a larger AOV, you're going to absolutely have more margin that's inside of your product and be able to create a longer and deeper relationship with a customer to create greater LTV.

But if you have a really low priced product, it can be very difficult and you can come into cashflow issues. Because you might be having to acquire customers at a loss to then make up the money, like a subscription would, when you’re three to five months down the line. So you'll be much safer if you have that $75 to $80 AOV.

Rule #7: The product should provide the ability to keep SKU count low.

One of my favorite rules is related to your SKU count. Many people think you've got to have a ton of different products. That’s usually wrong. The idea is really to keep a low SKU count.

Now, as you grow and scale and expand, and you're doing $100 million, maybe you're going to blow that up. But if your business requires you to have tons and tons of inventory, what you have to consider is how much of that inventory you're going to create for every variation.

So look at an apparel company. If you have 50 pairs of outfits, you've got to have it in maybe seven different sizes. That means if you’re going to carry 10 of those, now it's 10 x 70 x 50, and it just starts to get exponential.

Also, you don't really know what's going to drive the biggest amount of growth through your brand. In fact, with most companies it’s 2-3 SKUs driving 80 to 90% of their total revenue. The better plan is to really focus on those SKUs, optimize the messaging that customers are responding to, and really productize the small binds and add-ons that you can do with that specific product. Do that and you'll really nail it.

Ridge Wallet is a great example. Now they have a lot more SKUs because they've expanded, but when they got started they really just focused on the wallet. They committed to nailing it by really focusing on that one product vs. spreading themselves thin across tons of different products.

Rule #8: The product should be one that has a high probability of repeat purchasers.

My next rule has to do with the repeat rate of a user or a purchaser. Oftentimes, you want to ask yourself whether this is a product that people can keep buying time and time again, and to what degree.

Maybe it’s something that typically is bought two or three times. That's good. It's not the best, but it's good. The best are things like razors for shavers - something in the fast moving consumer goods (FMCG) space. People buy things like razors or supplements every month. But ideally you should have something where you can at least get a couple more purchases from that customer, rather than a single purchase then never again. That will be a huge benefit to you because you're paying every single time to acquire a customer when you're doing digital advertising and marketing.

Then once you've acquired that customer, if you know on the backend that once you get this person to buy 2-3 more times on average, it gives you a lot more margin in the long run based on the actual LTV of a customer. It may be two months, three months, six months down the road, but you know that your value of that customer is worth more than just that first day transaction. With that said, it doesn’t mean you shouldn’t always optimize to be first day profitable.

But that’s why knowing your repeat purchase rate and LTV is key. And the higher the number is, the more valuable the company is.

Rule #9: You must own your own label, rather than reselling something that someone else already sells.

My next rule deals with the label or the brand. Owning the label is crucial.

One of my specific rules always is we're building a brand that we're selling our own products for. We don't want to sell other people's products.

Look, Amazon's great, Walmart's great, etc. There's many, many, many businesses that have done well selling other people's products. But in most of those instances, you don't control your destiny whatsoever. They can change something on you overnight. So it's rarely a long, sustainable business.

Additionally, most of the time your margins are going to get squeezed. If not right away, then at least some point down the line. Typically in a wholesale scenario, you're spending 50% to just acquire the product. So, if my rule is that you want to be at an 80% margin on the gross margin side, you're going to be at 50% if you're wholesaling.

I know there are different arrangements between wholesaling and what selling somebody else's product is. But know that over time, even if you're killing it for them, prices are going to rise. You're going to lose control and you're going to have built a brand for somebody else.

That’s why my rule is to always ask, is this my product? Have we made it? Do we have some kind of patent trademark? Maybe. But if not, is this something that's easy for somebody else to make and it's over?

We want to have something that we've built, that is core and unique to us in some way or form if we're going to scale and actually invest in building something.

Rule #10: We are building a direct to consumer product sold via Shopify, where sales are mostly driven via Facebook ads.

My next rule is probably one of the most obvious ones in today's marketplace, and what most people assume, but you have to say it.

First, it should be something that you can put on Shopify. Shopify is by far the best e-commerce solution for businesses, big and small. Everyone is on Shopify, from the largest businesses in the world to most startups, so make sure it's something that you can put on Shopify.

Shopify does have some regulations, and then additionally, you need to be able to drive acquisition via Meta, whether it’s Instagram or Facebook. If you're going to build a DTC brand and you want to scale, it has to be something that you can not only advertise on Meta, but it should be something that people are going to be drawn to via Meta.

That means there's a lot of products that people wouldn't really be drawn to. There's also a lot that you might think people aren’t drawn to but actually do work, so do your research first on that.

Also, I love Google. Google's great. It's going to be a big part of your advertising, but it's not going to drive the massive amount of scale that Meta is going to do. So Shopify and Meta are the two most essential parts of the tech stack. Yes, there's other great parts of the tech stack like Klaviyo, but at the end of the day the most important thing is: can I be on Shopify and can I run ads on Meta at scale?

Rule #11: No one else should be doing the exact same concept. It must be unique.

My final rule is probably the most important rule in the entire 11 that I’ve laid out. It’s essential that your product and brand do something unique. There needs to be some element about your concept that somebody else isn't already doing in the industry.

Now, that doesn’t mean those can be micro changes. Most of the greatest products are mashups of Product A and Product B. We're just going to put them together and make it slightly better. You can probably think about a hundred of those that you use every single day.

Maybe you love the Stanley cup (think drinkware, not NHL) and you want to make your own cup. How is it different? How is it something that somebody else isn't already doing? If you have that unique proposition that's going to fuel your marketing, and you wrap back around to my very first rule where you're solving somebody's problem and you're doing it in a unique way, then you can make it work.

That’s the key. If you can do both of those things, you're going to fly. And what I'll tell you is the more unique the product, the higher potential success you have longterm. So if you're evaluating how big of a home run hit this DTC brand might be, that's one of the other core components you need to consider is the more unique it is, the larger potential revenue you're going to have as you go down line, because it's going to be something extremely valuable. And I refer back to, we worked with Greenlight at the time. A debit card for kid was unheard of. Extremely unique and massive growth that you've seen over the years. So that's my final rule and probably the most important.