Lucian Camp: The D2C market is in denial


The direct-to-consumer market has been growing steadily and recent figures from Platforum suggest it may be accelerating. With some two dozen D2C brands now competing for consumers’ investments, however, this growth has been patchy (for every Hargreaves Lansdown there is another little-known website with a distinct impression of tumbleweeds rolling across its pages). Some commentators even go so far as to think that, at a time of such opportunity for D2C services, the overall growth could have been a little faster.

There are plenty of possible explanations for those with that view, including, of course, many investors’ preference for face-to-face advice. In my opinion, however, one simple reason has not received enough attention: firms launching into the market are not spending anything like enough on customer acquisition activity.

There is a stark comparison with the equivalent budgets of the fastest-growing personal finance sector of the last 10 years or so: price comparison sites. Here, four major players have been spending well over £100m a year on customer acquisition. In D2C investment, the figure is a tiny fraction of this. Only a couple of brands have committed significant budgets over sustained periods and some more recent entrants are concentrating more on building brand awareness than generating response (I am not, by the way, saying they are wrong to do this: Platforum research shows that even among a sample of active investors, half the brands in the market have prompted awareness scores lower than 10 per cent).

The situation begs the question: why do so many D2C players believe they can build their customer numbers without significant acquisition budgets?

I think one key reason is a misperception about the power of “free” online communications. People rightly notice that some huge digital brands, such as Facebook, Twitter and Instagram, have recruited millions, even billions, of customers without spending any money on doing so. They also notice that many free or low-cost forms of communication exist in the online world. Social, mobile, viral, programmatic – the opportunities (and jargon) are endless.

But put together these two valid observations and it is easy to draw a false conclusion. Social media customers have indeed recruited each other, rapidly and in huge numbers, largely using online channels. But the propensity of people to recruit each other to these free communication tools says nothing about their willingness to help firms acquire customers for new D2C investment services.

The truth is that although there are certainly many wonderful ways to communicate with customers and prospects online, the most powerful and effective ones cost a lot of money. In fact, I would say they fit into a cost-per-acquisition framework that has not much changed since I first started working in this space a million years ago. Back then, the main way investors could show interest in a proposition was by cutting out a coupon in a press ad.

Falling short

The formula I have had in my mind ever since goes something like this: the starting assumption for any direct investment proposition should be that, if all goes well, it will cost £200 to acquire a new investor. There can then be anything up to a dozen specific factors relevant to a particular proposition (some positive, some negative), which, when applied, will make the actual figure higher or lower. In some cases, this could be much higher or lower. For example, returning to the recent entrants I mentioned earlier, if a firm spends its money on building brand awareness rather than generating responses the cost per customer could increase many times over.

From this single cost-per-acquisition number, the key maths follows. At £200 a customer, 10,000 customers will cost £2m and 100,000 customers will cost £20m. This latter figure is a lot higher than the expenditure of the whole D2C sector at the moment.

None of this directly concerns most advisers, who, of course, acquire clients in different ways and on a completely different scale. Indirectly, however, it must be good news that most of today’s D2C players – with the continuing exception of Hargreaves Lansdown – still seem to be in denial about the cost of building a substantial customer base.

Lucian Camp is founder of Lucian Camp Consulting, consultant to Platforum and one of the authors of Platforum’s UK D2C Guide