It’s something you see quite often in cartoons, and, over this long, hot summer, it’s been nice to see it once or twice for real: a couple of kids behind a makeshift stand, on which sits a pile of fresh lemons and a big jug. The hand-scrawled sign says "Lemonade" and gives the price per cup.
If you wanted to categorise this kind of enterprise, you would need to opt for "vertically integrated direct-to-consumer" (VIDTC). Modest though it may be, a lemonade stand shares both the virtues and limitations of these kinds of businesses in the grown-up, commercial world.
The salient characteristic is the indivisibility of customer service, outlet, product and supply chain. The chief virtue is a touchy-feely responsiveness to consumer needs and whims that you don’t get when these elements are separated and a retailer gets in the way.
Assuming the kids are at it for the holidays, and not just an afternoon, they will have a chance to learn and adapt to maximise returns. Perhaps, through accident or experiment, the drink is made stronger one day. They would quickly know whether customers preferred it and bought more, or winced their way through their cup.
Or they might learn that people vary – with some liking the regular mix and others wanting it more diluted – so they would keep extra water on hand to customise.
Signage could be worked on, with the kids discovering that adding the word "Fresh" brings a big sales uplift. And what about extending the product offer? Not just lemonade but cookies. Would that bring in more cash or turn people away because the offer is now less focused?
Either way, production response can be fast, since the kids would have a hands-on relationship with the suppliers of their raw ingredients – whether the local market or via an arrangement known as "supply chain as a service" (SCaaS) – in this case, "mum".
The virtues of the VIDTC model have not been lost on 21st-century entrepreneurs and the venture capitalists who back them. These founders don’t pitch their stand on a street corner or down by the canal, but at a digital destination – yet the principles hold.
Like the lemonade kids, they tend to specialise in a very narrow niche, to give them focus and credibility. Beltology is just belts. Eve is mattresses. Ohne is tampons. It’s a sniper mentality.
Some manufacture, like Harry’s Razors, which bought an old razor factory in Germany to go head to head with Gillette’s metal-bashing prowess. Others, like Eve, assemble product through the "production stacks" of SCaaS. Either way, the aim is to develop a product of sufficiently nuanced quality to give consumers reason to bypass the retailer "middleman".
The poster boy for the sector is Andy Dunn, founder of online clothing brand Bonobos. His zeal for the digital roots of the movement has led him to coin yet another acronym to capture its unique flavour: DNVB (digitally native vertical brand).
Dunn has ventured a set of "rules" that he says defines the way DNVBs work. "It’s not ecommerce. It’s vertical commerce. DNVBs are maniacally focused on the customer experience." He sees richness of consumer data and ownership of the brand end to end as the enablers for these brands to "drive more intimacy than the competition".
He also sees that traditional brands long-used to trading through retailers will attempt to launch DNVBs of their own – though few, in his opinion, will succeed.
He is probably right, because the limitations won’t be to the big corporates’ tastes. It’s hard to extend horizontally, since that robs the brand of "specialist" status, turning into an "e-tailer" and pitching it against Amazon. The cost of customer acquisition is high, and payback can be a long time coming: it took Bonobos 10 years to break even.
There is something else – the naïve over-expectation that can attend corporate adventures into the digital sphere. One of the cartoons that has fun with the lemonade-stand setting shows a kid who has pasted a lower-case "i" in front of the word "Lemonade" on his sign. As he explains to a friend: "I’ve no idea what it means, but sales have skyrocketed."
That kind of tech magic dust is what the big brand-owners will hope for. But launching a DNVB is difficult enough for the dedicated. Success may come eventually, but you have to survive a long, hard winter first.
Digitally native vertical brands
– The term was coined by Andy Dunn, whose online clothes brand Bonobos was founded in 2007 and bought by Walmart in 2017 for $265m.
– According to a 2018 report by the Interactive Advertising Bureau, all retail growth is shifting from bricks-and-mortar stores to these specialist brands with their data-enriched digital channels.
– Big, traditional brands have found themselves chipped away at by DNVBs. Gillette’s market share for men’s razors fell from 70% in 2010 to 54% in 2016, following the challenge of Dollar Shave Club and Harry’s Razors.
– Women founders feature strongly – successful DNVBs started and run by women include Glossier (beauty), Away (travel), Stich Fix (fashion), Rockets of Awesome (kids’ clothing), Rocksbox (jewellery) and Goby (oral care).
– DNVBs focus on social media and content sharing, rather than traditional advertising channels. Glossier has built its brand almost entirely through Instagram, where it now claims 1.2 million followers.
Helen Edwards is BSME and PPA business columnist of the year. She has a PhD in marketing, an MBA from London Business School and is a partner at Passionbran.