Building a Consumer Brand is Difficult, but Consumer isn’t Dead
Lately I’ve been thinking about just how difficult it must be to start a consumer products (particularly CPG or apparel) business. With such low initial capital requirements and less technical expertise needed (relative to, say, a B2B enterprise SaaS business), the barriers to entry are incredibly low, inviting a flood of competition. Combine that with a few dominant powerhouse incumbents (think CocaCola, P&G, or Nike) engrained in consumer’s minds and you’d better have pretty unique competitive advantage if you want any chance of surviving.
What did these massive companies do to overcome the competitiveness of the cutthroat consumer products world and establish an economic moat? Like I mentioned, it wasn’t that they utilized tangible assets like capital or technical know-how to scale.
These companies were built on intangible factors — their cultures, brands, and traditions. And it’s these intangibles that give them pricing power, because their customers base decisions to buy their products based on something beyond just price. If you take nothing else away from this fact, the mere presence of brands should be enough to convince you that consumers, human beings, are irrational. We base our decisions to buy on signaling functions or cultural forces, often beyond our own control, whether we are aware or not.
This behavior is nothing to be ashamed of. It’s what makes us human — the fact that we have stylistic preferences, alternative ways of viewing the world, art & culture, and diversity.
From a consumer-facing business perspective, we can use knowledge of this behavior to establish our own unique competitive advantage and accelerate the growth and adoption of our product (because growth is what any early stage consumer company is seeking, right?).
Cultures: The most successful consumer companies build a culture of consumers through creating community and like-minded ideals that that company’s culture represents. They often take a seemingly mundane product or behavior and turn that into an experience.
Take Starbucks, for example. Before Starbucks, in what coffee connoisseurs called the “first wave” of the coffee movement in the US, coffee was merely something Americans consumed. Through bringing European coffee culture to the US, Starbucks upgraded that seemingly mindless behavior into an experience that consumers enjoyed — from something they consumed, to something they enjoyed consuming. This phenomenon drove the “third place” movement of a place between home and work that revolutionized the way people lived and inspired community.
The next time you buy that $5 cup of coffee, remember that you’re not doing it for the price, or the coffee itself for that matter, but the experience and the way Starbucks’ culture makes you feel.
Brands: A company’s brand protects it from competition through some kind of unique value proposition, messaging, or signal of community. These companies can then get their customers to pay a premium for their products and come back for repeat purchases based on the strength of the brand.
For example, Patagonia built a brand specifically tailored to its core audience & buyers of outdoor enthusiasts, leading to an increased willingness to pay and high likelihood that they would remain customers for life. Ultimately, we’re looking for a high customer lifetime value (LTV), and the combination of a higher price and more repeat purchases enabled through the brand only increase LTV.
Traditions: The values and beliefs surrounding the historical importance and consistency of a company over time allow them to sustain that advantage, solely driven by the company having been engrained in society.
In the same way that “Coke” has become nearly synonymous with soda, “Kleenex” with tissue, and “Tide” with laundry detergent, companies who build an economic moat through tradition have built loyalty over long periods of consistently meeting and exceeding the customers’ expectations. This consistency took generations to build the brand to what it is today; and while that may intimidate some emerging brands, it’s important to note that people adapt and change as well.
Just ask any Gen-Z’er their favorite beverage brand, I’m sure you’ll get a whole slew of answers consisting of iced coffee makers, kombucha bottlers, and craft beer brewers. This is all to say that traditions, though long-lasting, are not permanent. The next generation of consumers is more interested in sustainability, conscious about the products they buy, and connected technologically than ever before. Incumbent players may be unable to shift fast enough, and it’s why emerging D2C brands have been able to succeed in gaining brand share.
Taking all of these intangibles into consideration, there’s one other emerging area worth mentioning: influencers. With the increasing relevance of influencers and the passion economy, I think many underestimate just how powerful influencers can be for an emerging consumer brand.
Take two equivalent newly formed companies, let’s call them bottled water Brand A and bottled water Brand B. I don’t care how much better quality Brand A’s water is, if it was sourced in the highest region of the French Alps, uses the highest quality sustainable packaging, and charges a reasonable price. If Brand B is personally promoted and encouraged by Beyoncé and Cristiano Ronaldo — game over. Brand B’s initial growth will be kick-started so quickly that the compounding effects and rapid consumer adoption will put it on a trajectory of growth that any emerging consumer brand would dream of. All this to say, the power of influencers and a recommendation that resonates with consumers, from someone they trust, is extremely powerful.
Bringing it all together, it’s refreshing to remember that there’s more to competitive advantage than just reduced costs through economics of scale or network effects. At the end of the day, consumers drive all businesses in some capacity. And consumers, we need not forget, are human. Every company (no matter the industry) must relentlessly focus on the customer experience.
Many will argue that with the proliferation of tech, and with software eating the world, that consumer (especially in the VC space) is dead.
However, while building a consumer brand is possibly one of the most difficult and competitive types of companies to build, the world is changing rapidly (see 2020), the new generation of consumers is very different in their preferences and behaviors, and lots of capital is available. There may never have been a better time to start if you are passionate about serving the customer, keen on trends and how they are changing, and remaining relevant.
