Dominating the whole production chain, from obtaining raw materials to delivering after-sales services, seems like a costly and painful effort for most startup founders. But it can be the solution to be more efficient and profitable in times when external investments are scarce. And the fruits of your labor aren't restricted only to your startup's financial department.
Having control over every process is a strategy adopted by verticalized companies, that appear in the online world as Digitally Native Vertical Brands (DNVB). As the co-founder of JustForYou, a beauty tech that follows this business model, I had the practical experience of seeing how being a DNVB brings not only more control over the business' contribution margin but also other benefits, such as more product innovation and customization.
That's why I'll explain what is a verticalized company and a DNVB in more detail. I'll also write down the competitive advantages of being a DNVB, and on the other hand, what you should pay attention to when adopting this business model. Finally, we can chat about the future of digitally native vertical brands. My hope is that you'll feel more prepared to create a startup that follows the DNVB model after reading this article.
A verticalized company centralizes the whole production chain. As a real-life example, you can think of a sweets brand that not only cooks their pastries but also produces the packaging and sells the final products in its own stores.
Although that is an easy-to-understand example, verticalization is used not only by small and traditional businesses. In the world of innovative and scalable startups, classic examples of verticalized companies are the Digitally Native Vertical Brands (DNVBs).
These are brands that were born and raised only in the virtual world, but not only that. Besides selling products on their own websites as many brands do, they also decided to take over their production chain, from buying raw materials to delivering after-sales services.
There's a warning to be made here. The truth is that many companies say they are DNVB but they are only DN. They own their e-commerce but depend on third-party providers for all the other parts of the production chain, such as storage, customer service, and logistics.
Giving up your control over important processes can compromise the quality and the speed of scale of your startup even in normal market conditions. By relying on external suppliers, your company is just as exposed to whatever factor that could affect these third-party providers, and that could end up impacting your results. What if your provider can't deliver the products you need in time for a launch? What if, even worse, this provider goes under?
When a startup goes beyond its digital birth and carves its path in manufacturing, there's a bigger chance of maximizing revenue and growth – given that the company pays attention to some conditions that we'll explore at the end of this article. Owning the whole production chain can provide more efficiency to your startups, especially in times when the rest of the market is more volatile (which is just another day for us here in Latin America).
Let's explore this efficiency in more detail. Here are some of the competitive advantages of verticalized companies, seen in startups that adopt the digitally native vertical brands (DNVB) business model:
Taking control of your manufacturing process gives your startup better control of its cash reserves and more adaptation speed – two assets that are more than welcomed when you are forced to make pivots during difficult times.
But why third-party providers wouldn't provide you with a similar adaptation speed? Because a company that doesn't control its development and manufacturing processes relies on the conditions imposed by these suppliers. And they rely on forecasts: you need to sign long-term contracts and buy a minimum of stock.
Now let's imagine your situation. As an early-stage founder, you're probably kicking off your business with super limited resources. If you depend on third-party providers, you're forced to sign a long-term contract without really being sure if you'll sell everything – and at the right price to keep a healthy margin.
You have a lot of stuff to think about at the beginning of a startup.
The last thing you should do is put money into a strategy that you're not sure will work.
– Well, a verticalized brand also spends a truckload of money in the form of capex!
In our case, that was money well-spent. It really was a high upfront investment, but the investment is diluted by sales over time. Even if you end up with some idle space and equipment, you can use it to provide for other brands. At JustForYou, we even created a business unit to serve other digitally native vertical brands in the beauty, health, and wellness segment.
If that money was locked in the form of stock, we wouldn't have that option (nor the level of knowledge in development and manufacturing we acquired over time).
That brings us to our second asset. Most e-commerces don't own a unit for research and development (P&D) and don't establish practices for checking the quality of the product they offer. That's obvious since they aren't the ones that manufacture these products. On the other hand, most factories don't own e-commerce channels.
Seeing this gap in the market, brands that dominate both manufacturing and distribution end up not only overcoming financial efficiency problems, as we've stated previously, but also innovation and quality problems. That's one of the reasons why digitally native vertical brands have expanded so much in the past few years.
Lemme tell you two stories that explain this competitive advantage, taken from my experience at JustForYou.
Because we do everything in-house, from manufacturing to collecting data, we can notice and produce exactly what the customers want at that moment. That's why we could launch a new leave-in hair product in record time.
But verticalization also works in terms of innovation and R&D when you receive bad news. If a customer contacts us because the product didn't have the results they wished to achieve when they filled out our form, we interview this customer. Then we send his answers to our quality and R&D teams and send him a free revised version of that same product.
This process feeds new pieces of information to our automated manufacturing process, and with that, we avoid making the same mistake. In the past four years, over 3 million unique formulas have been analyzed by our customization technology.
We know that every positive or negative impact we generate on our customers is 100% on us, and that's how we like it. Relying on a third-party provider to make these launches and changes with the necessary speed for a startup, with the same care that you have for your customers' feedback? Impossible.
One of the biggest benefits for founders who integrate and verticalize their startups' processes is direct contact with the customer. That's a strategy that bolsters the whole company, be it production, tech, or marketing teams.
With the historical customer behavior in hand, it's possible to customize their buying journey and, with it, customize their whole experience with your brand. You can also make use of aggregated data to identify assertive market opportunities and create new products.
Controlling the whole production chain is a good strategy to balance the speed of scale and customization of products/services. And having that balance is essential for startups to have an advantage when battling inside competitive markets.
Brands that own the whole production chain and invest in innovation don't launch products because they think something is trending. DNVBs can identify demand directly from their customers, seeing real problems and creating precise solutions, without wasting resources.
That's what we did in the previous two stories I told, about launching and reviewing our products at JustForYou. The result is that half of the people that access our website fill out our form completely. Our conversion rate reached 3,57% in the last two months of 2022, 3x more than what big beauty e-commerce players reach.
It's relatively easy for a DNVB to go to market. What's hard is to keep managing the business with efficiency – and that's even harder in times of scarcity. This scarcity can present itself because investors aren't as attracted to risky investments as before, but also because digitally native vertical brands are just beginning in Latin America, in comparison to regions such as the US, China, Japan, and Korea.
It's also true that the more assets you have, the harder it will be to handle your cash burn and reach efficient and sustainable profitability. The secret to being a startup that also has a brick-and-mortar front is investing in innovation but, more than that, verticalizing your processes the right way by following the best playbooks and templates. And by always studying and updating your knowledge.
These playbooks and templates are a gathering of guides about recommended structures, tactics, and practices for your team to focus on growing the business since all previous knowledge has already been gathered. These documents should be available online to everyone in your startup.
Lemme give you a practical example. You want to test a new approach for making offers during the check-out step, with the objective of improving your startup's average ticket price. Has that approach been tested before? If it was, who or which team tested it? Were the results documented? What have we learned from them?
In JustForYou, we aim to work with a strategy that's similar to Amazon's (while of course considering our difference in size). Amazon has an internal Wiki that works as a knowledge-sharing website. Employees can add, edit, and keep the content relevant to the business and its processes.
It's been said that, before you interrupt someone to ask a question, you should always check the Wiki. The coolest part is that if you haven't found the info you needed there, it's your responsibility to document and share that new knowledge. This eliminates the problem of learnings being lost in e-mails or in documents stored on external servers.
I'd like to end this article with another vision, shared in a Forbes report called In 2023, D2C Is Out, And The Migration To Wholesale Is In.
Yes, thinking about new channels is an undeniable reality for companies with a D2C model, if their goal is to reach their growth and profitability metrics. Opening new sales fronts can make the brand more well-known for existing and new customers, allowing you to test the waters for a future expansion.
These new channels also contribute for better management of your customer acquisition cost (CAC), given that the competition for users in digital channels is getting more and more expensive, and requiring more and more efficiency when developing strategies.
In JustForYou, we reached R$ 500k in revenue by investing not even 5% of that in marketing strategies with influencers. You can also invest 5x more in other initiatives and not see the return on that investment (ROI). And so, it's essential that brands think of opening new channels while also developing clear long-term goals.
Now it's your turn: what do you think is coming for DNVBs?