Latest / Pricing Power Podcast with Fexingo: How Businesses Set Prices, Raise Margins, and Win Customers / How DTC Brands Lost Their Pricing Edge
Transcript
- Lucas: So there's this idea that's been floating around for about a decade now — direct to consumer brands, or DTC for short. The pitch was elegant: cut out the retailer, sell directly online, pass the savings to the customer, build a brand with a story. Warby Parker, Allbirds, Casper, Away. They were supposed to be the future of retail. Luna: And for a while, they really were the darlings of venture capital. Everyone wanted in on the next Dollar Shave Club. Lucas: Right. But here we are in June 2026, and the narrative has shifted. A lot of these companies are now public, and their financials tell a different story. The pricing power they were supposed to have — the ability to charge less than incumbents while still making money — turned out to be much more fragile than anyone expected. Luna: Let's start with one specific case. Allbirds. The wool-shoe company. What happened there? Lucas: Allbirds went public in 2021 at a valuation around four billion dollars. By early 2024, their revenue was shrinking. In 2024, they reported a roughly 25 percent drop year-over-year. The core problem was that their pricing strategy assumed they could keep selling almost entirely online, with minimal marketing spend because the brand was 'viral.' But viral fades. Luna: And when the viral buzz wore off, they had to spend more to acquire customers on Facebook and Instagram. Those costs ate into margins. Lucas: Exactly. So the unit economics flipped. The average order value for a pair of Allbirds is about ninety-five dollars in the US. But by 2025, the cost to acquire a customer through paid social was averaging around forty-two dollars for a lot of DTC brands. That's nearly half the revenue gone before you make a single pair of shoes. Luna: And that's before you factor in returns, shipping, cost of goods sold. Lucas: Right. So the promise of 'better product, lower price' starts to break down. To maintain margins, you either raise prices — which hurts your value proposition — or you find cheaper customers, which usually means you start selling through retailers. But if you sell through Nordstrom, you lose that direct margin you were counting on. Luna: That's exactly what Allbirds did. They started expanding into wholesale and opening their own stores. By 2024, they had over sixty stores globally. Suddenly, they're not a digital-native brand anymore; they're a traditional retailer with a higher cost structure. Lucas: And here's the thing about pricing power in that context. When you're a small online brand with a cult following, you can command a premium because your customers feel like insiders. The moment you open a store in a mall, you're competing directly with Nike and Adidas. Your product needs to justify a hundred-dollar price tag in an aisle where similar shoes are seventy dollars. Luna: So their pricing power didn't scale. It was a niche advantage, not a structural one. Lucas: Exactly. And that's a pattern you see across a lot of DTC brands. Let's take Warby Parker. They were the original poster child. Disrupting the eyewear industry, selling glasses for ninety-five dollars when retail chains were charging three hundred. They went public in 2021 at a valuation around six billion dollars. Luna: And they've actually held up better than most. Their 2024 revenue grew about 10 percent, if I recall. Lucas: Yes, but their path to profitability has been slower than expected. The reason is similar: they opened over two hundred stores. Their cost structure now includes rent, staff, inventory management. Their gross margins are still healthy — around 55 percent — but operating margins are thin. They're essentially a specialty retailer now. Luna: And the original pricing advantage — the ninety-five-dollar starting price — that's gone up. Basic frames now start at around a hundred and fifteen dollars, I think. Lucas: It's a hundred and fifteen now, yes. So the 'disruptive pricing' has drifted toward just being competitive. And that's fine, but it's not the revolution investors bought into. The key insight here is that DTC pricing power was often subsidized by venture capital. Brands could offer low prices because they weren't trying to be profitable; they were trying to grow market share and then figure out the math later. Luna: But the math caught up. When interest rates rose and funding dried up around 2022-2023, the subsidy disappeared. Brands had to raise prices or cut costs. Lucas: Exactly. And many tried to raise prices, but they found that their customers were price-sensitive. Casper, the mattress company, tried to increase its average selling price in 2022. Their revenue dropped 12 percent in the next quarter. They had to backtrack. Luna: So what's the lesson for pricing strategy? Is the DTC model fundamentally flawed, or was it just executed poorly? Lucas: I think the lesson is more nuanced. The DTC model works as a go to market strategy for building a brand quickly. But it's not a permanent cost advantage. The real pricing power comes from brand equity, not from the channel. A brand like Apple can charge a premium because of perceived value, not because they sell through their own stores. Luna: Right. And the DTC brands that have succeeded long-term — like Nike with its direct channel — already had strong brand equity. They added DTC as a complement, not a foundation. Lucas: Exactly. So the pricing mistake was conflating 'no middleman' with 'intrinsic value.' Customers will pay a premium for a product they love, but they won't pay a premium just because you're cutting out a retailer. The retailer actually adds value — convenience, discovery, trust. DTC brands had to build all that from scratch, and the cost of doing that ate into their pricing advantage. Luna: So the pricing power of DTC was never really about the product; it was about the hype cycle. Once the hype fades, you're just another brand with average margins. Lucas: And that's the honest take. Look at a brand like Glossier. They built a massive online community, but by 2024, they were selling in Sephora. They had to, to keep growing. And once you're on a shelf next to every other beauty brand, your pricing is constrained by competition, not by your story. Luna: And that's actually a good segue to something I've been thinking about. This show is ad-free, and we want to keep it that way. If these conversations have helped you think differently about pricing or strategy, supporting us on buy me a coffee dot com slash fexingo really does help keep the lights on. No pressure, just if it's added value. Lucas: Yeah, we genuinely appreciate that. It's what lets us dig into these topics without worrying about sponsors. Okay, back to DTC. So there's another angle here: the role of data. Luna: What do you mean? Lucas: DTC brands were supposed to have a pricing advantage because they owned customer data. They could personalize offers, optimize pricing dynamically, reduce waste. In theory, that should lead to better margins. But in practice, most of them didn't actually use that data to set prices. They set one price for everyone and then ran promotions. Luna: So they left money on the table. Lucas: Exactly. A study from 2024 by McKinsey found that companies using dynamic pricing see margin improvements of 2 to 5 percent. But very few DTC brands implemented it. They were too focused on growth. So the data advantage was mostly theoretical. Luna: And meanwhile, traditional retailers were getting better at data too. Target and Walmart have huge data operations. So the gap narrowed. Lucas: Exactly. So the pricing power of DTC was really a temporary arbitrage. It existed because incumbents were slow to adapt online, and venture capital was willing to underwrite losses. Once those two conditions changed, the pricing edge evaporated. Luna: So what's the future for these brands? Do they have to become omnichannel and accept lower margins? Lucas: I think the smart ones are leaning into what actually gives them pricing power: product innovation and brand community. Allbirds, for example, is trying to innovate with new materials to justify a higher price. Warby Parker is focusing on eye exam services and prescription complexity as a moat. The ones that survive will be the ones that build real, defensible value — not just a clever distribution model. Luna: And the ones that don't? They'll either get acquired or fade away. Lucas: Right. The DTC revolution was real, but it was a revolution in distribution, not in pricing. And in the long run, pricing power still comes down to the same thing it always has: do customers believe your product is worth more than the price tag? If the answer is yes, the channel doesn't matter.