DTC and Amazon: How Brands Sell Direct and Online

Introduction

The direct-to-consumer (DTC) model promised brands a way around retailers: sell online, keep the retailer's margin and own the relationship with every customer. A decade later, most of the brands that built that model have added retailers back. Glossier, the beauty brand that grew almost entirely online and through its own stores, announced its first wholesale partnership, with Sephora, entering Sephora's US and Canadian stores and website in early 2023 while keeping its own store fleet.

The reason is arithmetic. Customer acquisition costs, shipping, returns and technology absorb much of the margin a brand saves by cutting out the retailer, and most shoppers still buy most consumer products in stores. Online selling has not gone away; it has concentrated, and the platform models behind it are explained in the TMT guide's article on e-commerce business models. For many categories, Amazon is now the largest online shelf, and brands face a second choice there: sell to Amazon as a supplier or sell through its marketplace as a seller. The economics of both choices, and what they do to a brand's margins, are central to valuing any consumer brand with a meaningful online business.

Selling direct changes a brand's profit and loss in several ways at once. The gains are real:

So are the costs. The brand pays to ship each order, handle returns, run a website and payments, and, above all, find customers. In a store, the retailer brings the shopper; online, the brand must buy the shopper's attention through search, social media and other advertising. The retailer's margin that DTC saves is, in effect, payment for services the brand now has to provide itself, which is the core of the trade-off described in the article on retailer power and customer concentration.

Customer Acquisition Cost (CAC)

The average marketing and sales cost a business spends to win one new customer, usually calculated as total acquisition spending in a period divided by the number of new customers gained. In DTC businesses it is compared with customer lifetime value (the gross profit a customer generates over the relationship) to judge whether growth is profitable.

Investors look at two related measures. The LTV to CAC ratio compares the lifetime value of a customer with the cost of winning one; a common rule of thumb treats about three to one as healthy. The payback period measures how many months of a customer's purchases it takes to recover the acquisition cost. Both depend on how often customers come back, which is why a single order tells little about the business.

How online sales fit with the rest of a brand's distribution is mapped in the article on the consumer channel map. The model works best for products with high prices per order, strong repeat purchase and low shipping costs relative to value: beauty, supplements, pet food on subscription, apparel basics and premium consumables. It works poorly for low-priced, heavy or impulse products such as soft drinks, snacks and household cleaners, where shipping alone can exceed the margin.

The DTC wave of the 2010s rested on cheap digital advertising and abundant venture capital. Both became scarcer. Advertising costs on the largest platforms rose as more brands competed for the same audiences, and privacy changes to phones and browsers made targeting harder and more expensive. Growth that had looked self-funding began to depend on ever-larger marketing budgets.

At the same time, the limits of online reach became clear. Most US shoppers still buy most packaged goods, beauty products and apparel in physical stores, so a brand selling only online was absent from the majority of purchase occasions. Brands responded by moving to omnichannel distribution:

The shift also changed what buyers pay for. Strategic acquirers value insurgent brands for their shopper loyalty and growth, then put them into their own retail distribution, which can multiply sales far faster than DTC alone, a pattern covered in the article on buying insurgent brands. The retailer side of online selling is covered in the article on omnichannel and e-commerce economics for retailers.

Amazon offers brands two main ways to sell, and the choice shapes price control, margin and operations. For many categories Amazon is also the place where shoppers start a product search, so a brand's search ranking there works like eye-level shelf space in a store.

First-party and third-party selling

In first-party (1P) selling, the brand acts as a supplier: Amazon buys products at wholesale prices, holds the inventory and sets the retail price, much like a traditional retailer. In third-party (3P) selling, the brand or a reseller lists products on Amazon's marketplace, keeps ownership of the inventory and sets the price, and Amazon charges fees. Third-party sellers account for most of the units sold on Amazon, around 60% in recent years by Amazon's own account.

Under 3P, Amazon charges a referral fee on each sale, a percentage of the total price whose most common rate is 15% according to Amazon's seller pricing page, with lower and higher rates in some categories. Most sellers also pay for fulfillment.

Fulfillment by Amazon (FBA)

A service in which a seller stores inventory in Amazon's warehouses and Amazon picks, packs, ships and handles returns for each order, in exchange for per-unit fulfillment fees and storage fees. FBA listings qualify for Prime delivery, which usually raises sales, but the fees can take a large share of the price of low-cost or bulky products.

On top of referral and fulfillment fees, almost all brands buy advertising to appear in search results, so the full cost of a 3P sale can approach what a traditional retailer would have kept as margin. The platform side of these economics, including take rates, is covered in the TMT guide's article on marketplace economics.

The brand's challenges on Amazon

Amazon gives brands enormous reach but creates challenges that a traditional retailer does not:

Many brands run a hybrid model, selling core items through 1P for scale and newer or premium items through 3P for control, and use brand registry tools to manage listings and remove unauthorized sellers.

Online channels change a brand's financial profile in ways that can mislead. DTC and 3P sales are recorded at retail prices, so they raise gross margin compared with wholesale sales, but they bring fulfillment, fees and advertising costs that sit lower in the income statement. A brand moving from wholesale to DTC can show a rising gross margin and a falling operating margin at the same time. 1P sales to Amazon look like any other wholesale business, with Amazon's terms in place of a traditional retailer's.

Bankers looking at a brand with a large online business also study cohort retention, the share of each month's new customers who keep buying, along with acquisition costs over time and the brand's dependence on Amazon search rankings. A brand with strong retention and falling acquisition costs has a durable online franchise; one buying growth at rising cost has a marketing expense dressed up as a channel. The data sources that show what is selling online, and where traditional scanner data falls short, are covered in the article on consumer data.