On a Saturday afternoon, it took Mark Cuban just nine minutes to respond to Stephan Aarstol's 20-page business plan.
Aarstol is founder and CEO of Tower Paddle Boards, a $5 million company in which Cuban acquired a 30 percent stake on a 2012 episode of Shark Tank. In an effort to help brands attract business and avoid escalating costs, Aarstol has launched the No Middleman Project, a directory for people seeking the best direct-to-consumer companies. He needed Cuban's ruling on whether to make No Middleman an independent entity or keep it under Tower. Cuban urged the latter.
The middleman Aarstol is saying no to is really middlemen: Amazon and Google. The early promise of the internet--that companies could throw off the yolk of mediators and touch customers directly--has proved partly true, as the decline of malls and retailers like Sears and JCPenney attest. But, at the same time, Amazon and Google have assumed eye-popping scale and power, with Amazon projected to control nearly 50 percent of e-commerce this year, according to research company eMarketer. Aarstol says the higher costs associated with those channels weaken D2C brands' ability to keep prices low or quality high, or to innovate business models as, for example, Brandless has done with its $3 private-label offerings.
Tower started selling on Amazon in 2013. Over the years, sales on the e-commerce giant grew to 50 percent of its revenue. What with sales, shipping, and advertising fees--that last one unavoidable given the behemoth's competitive throngs--Tower's margins with Amazon slipped to just over 20 percent, compared with 50 percent on sales made through its own website. Buying AdWords on Google, which Tower no longer does, was similarly costly.
"If I sell a $600 paddleboard and Amazon is taking $200 off the top, we make about $150 and pay the factory about $250," Aarstol says. "The company that is going to unseat me is a direct-to-consumer paddleboard company that does not sell through Amazon, does not buy any ads on AdWords, and sells the same paddleboard for $400."
The only way to challenge Goliath, Aarstol concluded, was to assemble an army of Davids. The No Middleman Project is a directory of around 1,500 product categories, each with links to three to five D2C vendors personally selected by Aarstol and a colleague. "If you have 30 direct-to-consumer mattress companies, consumers don't need 30 choices," says Aarstol. "We look at these 30 and say, which ones bring the best value, the best everything? It is kind of like Consumer Reports."
The chosen few pay nothing to be listed, nor for the company profiles that No Middleman creates with headlines like "DSTLD Jeans: Champions of Ethical Pricing" and "Everlane: The Rise of Radical Transparency." The business takes no cut of sales--which are not made through its site--nor does it collect any fees. Aarstol plans to make money through sponsorships, which entail brand and product banners at the tops of pages. Only one company can sponsor a category "and they have to be editorially selected first, so you can't buy your way in," he says.
Sponsorships start at $10,000 a year for large product categories like vitamins or headphones and $3,000 for more niche ones, with those costs capped. Other companies in a category can bid at any time to take over a sponsorship, and the incumbent then has the choice of matching the higher number. (The bidding component was Cuban's idea.)
Aarstol doesn't expect to sell sponsorships for the first year while No Middleman is ramping up. (Tower sponsors the paddleboard category.) So, for now, all 250 companies on the site are getting free rides, and roughly 80 percent will continue to do so. Those companies range from kids' clothing brand Rockets of Awesome to electric-car company Polestar. Aarstol and COO Brad Kauffman spent a year choosing the first brands to represent.
Drafting the army????
Aarstol reached out to those companies about a month ago to announce they'd been included in the directory. Around 30 to 40 percent replied with appreciation, he says, and some agreed to work with No Middleman to create podcasts for the site. The rest did not respond. Just one company asked to be removed. "If for some reason someone does not want to be in there, we pull them," Aarstol says.
Aarstol hopes to eventually include 5,000 to 10,000 companies representing 15,000 to 20,000 categories in the directory, making it the "everything showroom," he says, playing off Amazon's reputation as the "everything store." Aggregation will enable companies to compete with Amazon in ways that go-it-alone-ers can't afford. For example, Aarstol imagines giving businesses the option to participate in some kind of Prime-like free shipping feature. He would like to create brick-and-mortar showrooms for No Middleman brands. He also expects that No Middleman companies will in some cases share lists, bringing down customer acquisition costs.
Xterra, a maker of triathlon wetsuits, was the first direct-to-consumer game in town when it launched in 2009. Today, "just about all brands are selling direct, so there is an incredible amount of noise we are competing against," says founder Keith Simmons. Amazon comprises less than 5 percent of Xterra's business, he says, but it is an expensive component. If Amazon brings Xterra new customers, it is well worth the cost. What worries Simmons is the prospect of existing customers migrating to Amazon for his products.
"If No Middleman creates more digital impressions and awareness that we are a direct-to-consumer brand, then that could help us," he says. "It is another platform that promotes our business."
Cody Barbo doesn't use Amazon or Google for his startup, the estate-planning platform Trust & Will. For new businesses like his, he says, "credibility and trustworthiness are at the top of our goals." He hopes No Middleman will provide that. "Their value proposition is they give us extra validation, especially when you consider the brands they are showcasing," Barbo says. "To be on No Middleman is quite an honor."
Consumers will also benefit, Aarstol says. Using Google to find products is challenging because there is too much irrelevant information. Using Amazon is challenging because of the sheer volume. "Anyone can sell on Amazon," says Aarstol, referencing the Chinese paddleboard vendors now crowding the site. "There is too much confusion. We want to do the homework for them."