In 1979, Harvard Business School professor Michael E. Porter described five competitive forces that impact brand and strategy.
While much has changed in the past 43 years, Porter's concept still applies to modern DTC brands. Competition is not about how big a brand becomes but its profitability.
Here are the five forces that can impact profitability and shape a DTC brand's business strategy.
👊 Existing rivals
Hello Captain Obvious, the first competitive force a DTC brand faces comes from existing rivals. If you’re JBW and sell diamond watches, your direct competitors will include every other diamond watch merchant.
Even in the case of direct rivals, competition is not simply a fistfight for sales and customers. Understanding the brand's existing rivals can help identify openings in the marketplace.
JBW's 200-diamond Jet Setter watch sells for $695 and could be an entry-level option compared to Piaget's Polo Skeleton watch, which costs more than matching Tesla Ys for you and a close friend.
JBW could position itself as a high-quality, high-value option relative to Paiget.
Understand existing rivals and identify how your DTC brand is different.
A DTC brand's customers are also a competitive force. Often customers are very happy to get more and pay less. You think they are loyal right up until they stop buying.
This competitive force is strongest in niche markets with relatively few customers or what Porter called "powerful buyers."
For example, Not a Wheelchair sells off-road rigs to help wheelchair users get outside.
The market for their $5,000-plus products is relatively small, and they could potentially face competitive forces from customers who want a discount or want extra value like low or no interest financing.
A DTC brand in this type of market needs to understand how offering a customer concession will impact its competitiveness and profitability. What would happen, for example, if a new mobility firm started to offer zero-percent financing?
If a DTC brand doesn’t manufacture its own products, suppliers can impact profitability and competitiveness.
Suppliers boost their bottom line when they increase prices, provide lower quality or less service, and push expenses onto the DTC brand.
Supplier pressure then is particularly acute when a DTC brand must depend on a single source or when the supplier holds product patents or intellectual property rights.
Imagine a DTC brand that wants to sell apple cider vinegar shampoo. The shampoo brand could work with a contract manufacturer like Essential Wholesale & Lab.
This DTC brand would have the option to use a formula Essential already has, add ingredients to an existing formula, or develop a completely custom formula.
In the first two cases, the DTC brand would only be able to get its shampoo from one supplier. Any disruption at Essential and any price increase could result in rising costs and shrinking profits. Even the third option, a custom formula, could be at risk if Essential kept the rights to it.
DTC brands need to understand how their suppliers make them vulnerable to competitive pressure.
🆕 New Entrants
Any time a new DTC brand enters a market, it adds competitive pressure. The brand wants to sell products. To do so, it must gain market share, impacting costs, prices, and profitability.
When a business is a new entrant, this all feels fine, but established DTC brands might not be excited to see new direct rivals.
If you're Warby Parker (founded 2010)...
You might not be too excited about Hubble (founded 2016) expanding into prescription eyeglasses.
When a DTC brand considers how new entrants could impact profitability and the level of competition, it should think about:
- What barriers new competitors would face
- How difficult it would be to produce a similar product
- What might compel a customer to switch
- How much investment the new entrant would need to make
If these barriers to entry are low, expect new rivals soon.
The final competitive force Porter described has to do with alternatives or substitutes for the products a DTC brand sells.
"Substitutes are always present, but they are easy to overlook because they may appear to be very different from the industry’s product: To someone searching for a Father’s Day gift, neckties, and power tools may be substitutes," wrote Porter in an article for the Harvard Business Review.
DTC brands should consider why customers buy and identify substitutes outside of direct rivals.
Early Bird's $78 sleep cocktail could be a competitor to Eight Sleep's $3,300 mattress since both products seek to help someone get a better night's rest.
If you lead a DTC brand, you need to take action. How could understanding these five competitive forces help your business grow? Does knowing about these forces expose potential weaknesses that you need to address?