Dollar Shave Club just celebrated its second birthday. In two short years, this modern men’s lifestyle company has captured about 9% of the U.S. men’s razor cartridge market, according to BGP Group. (This is a measure of market share by units.) It’s a remarkable feat for a young company in a very short amount of time and it shows how dramatically industries can be transformed by new entrants who reimagine a market an entirely different way than how incumbents think.

In the case of consumer packaged goods, most are manufactured by CPG behemoths who rely chiefly on two aging mechanisms for building consumer awareness: broadcast marketing and physical retail shelf-space. Dollar Shave Club, and similar modern lifestyle brands like Warby Parker and Bonobos, view these dependencies as a disadvantage and have turned the model on its head. Broadcast marketing, in the age of social media, looks as out of touch to digital natives as President George H. W. Bush looked to us when he was surprised by a supermarket price scanner . Now, brands are built by having direct conversations with your customers, not shouting at them, engaging them to provide real time feedback on your products and services and enlisting them to vouch for their satisfaction with your brand. Brands are now built by your customers, not announced to them. And because of this, product discovery is shifting away from physical shelves into the social streams we all follow. If your brand does not occupy meaningful share in the minds of your customers, it won’t move through the streams and allow influencers to introduce you to new customers.

Social marketing done correctly requires far less marketing spend in aggregate than broadcast marketing. This means brands built with the economic firepower of $100M+ traditional marketing campaigns end up pricing their products higher to cover their required marketing spend. This is why you see the modern brands able to offer their products at lower prices than the incumbents, creating a value gap in the minds of customers.

Traditional CPG has built big walls around physical retail distribution. They have leverage over the decisions physical retailers make as to which products to stock on shelves. But modern brands are born on the internet and sell directly to their customers, initially bypassing physical retailers, sometimes forever. They get to know their customers, they speak with them, they use social data to understand their influence and their habits. In short, they are hyper-informed as to who their customers are and what they want, and they have an easier time finding new ones. With so much of commerce moving online (14% of US holiday season sales were online in December 2013), customers prefer the convenience of direct-to-you product delivery and the low-friction of mobile commerce. Traditional CPG, like other industries who sell through complex multi-layer distribution, must allow for healthy distribution and retail markups and don’t get to know their customers. They are slower to learn when preferences shift or to react to the moves of competitors.

All of these differences add up to advantages for the modern brands built on the internet — price advantages, information advantages and most importantly, higher customer loyalty. Dollar Shave Club has received envious net promoter scores and, for the subscription part of the business, has extraordinarily low churn rates. About half of all of their new customers are added organically and not through paid marketing. Their products cost less and provide more value than the legacy brands. Legacy brands often cannot respond to these threats effectively. They can’t undercut their own retail partners on price, they can’t sell directly in any real volume, and most importantly, they don’t hold an authentic place in customers’ minds, so they tend not to have a strong place in the social streams. Their customers are not their partners.

Once established firmly online, modern brands do move offline. But you are seeing them do so in inventive ways. They tend not to just sell their products into legacy physical retail, they work to re-invent physical retail with their own branded presence (Apple Stores are the high water mark here, and Warby Parker has made some important innovations too). They do often expand to traditional ad formats like TV and radio, but they do it in a highly quantified and targeted way, with a holistic view of a customer across every channel and touch-point, able to see the online influence of a customer who hears a radio ad in Dallas and how many social connections of that person ended up visiting the mobile site of the brand itself.

Dollar Shave Club, like some of the modern brands in their cohort, has grand ambitions to build a multi-billion dollar lifestyle brand, in partnership with its customers. They have expanded into content such as podcasts and the hysterical “Bathroom Minutes” as a way to be even more present in their customers’ lives. They are launching many more products over the coming months to offer great value across many product categories to their customers (often in response to customers begging them to do so). Their growth is accelerating and they see a clear path to capturing double-digital market share in each of the product categories they enter. With more than one million paying subscribers and a fresh $50 million of new capital, they have grand designs on building a better bathroom. I am honored to be along for the ride and to have a front row seat.

Source: http://www.pakman.com