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Default CategoryMar 03, 2020

How Direct-to-Consumer Is Shaking Up Traditional Retail Models

Peter Yobo

Perhaps you’ve noticed there have been some major shifts in the way consumers shop over the past 10 years.

Maybe you have been one of the millions who purchased a Harry’s or Dollar Shave Club razor, a pair of Allbirds shoes or Warby Parker glasses, maybe a HelloFresh meal kit, or a StitchFix box—all without leaving your couch.

If so, you have been enjoying the benefits of a direct-to-consumer (DTC) sales model. And you’re not alone—there has been an explosion of new DTC companies that are transforming consumer’s shopping experiences and expectations. In 2019, 40% of Americans made a purchase from direct-to-consumer brands and 80% of business-to-consumer (B2C) brands believe DTCs are impacting their market.

Take Tesla for example—traditional automakers rely on local dealerships to sell their inventory, but Tesla opened their own brick and mortar stores to sell their niche cars and own their customer relationships.

DTC makeup brand Glossier started as a blog by Vogue intern Emily Weiss in 2010 and is now valued at $1.2 billion.

Even one of the largest retailers in the world, Nike, has invested significantly in DTC channels. Nike has planned for its DTC sales to grow by almost 2.5 times in the next five years, from $6.6 billion in fiscal 2015 to $16 billion by fiscal 2020.

The future is bright for startup direct-to-consumer brands, and a wide range of legacy brands, like Nike, are working hard to develop their own DTC models.

Are you thinking about taking the plunge into the DTC waters too? We’re sharing a few considerations to keep in mind as you begin the journey as well as our approach to building a successful DTC strategy.

a brief overview of direct-to-consumer

Direct-to-consumer means just that: reaching customers directly, without a middleman such as a physical retailer, wholesaler, or online retailer. Removing the middleman allows DTC companies to maintain control over the manufacturing, distribution, messaging, and marketing of their products to customers.

For example, Dollar Shave Club was started in 2011 by two men who were fed up with the prices of razor blades. With their own money and some investment funding, they built a billion-dollar company that had more than 3 million members and took over 50% of market share in a short five years.

How did they do it?

Dollar Shave Club’s direct-to-consumer model kept customer relationships in house, procured data about those customers to enhance digital marketing outcomes, and passed on the savings from extra costs traditionally demanded by the middleman to customers.

Direct-to-consumer strategies are often characterized by agile, go-to-market capabilities, simple product offerings, a distinct brand personality, and transparent and memorable interactions. These characteristics drive their ultimate goal—reaching and acquiring customers.

the benefits

As you can see with these success stories, companies are able to create new value for customers and increase market share through a DTC strategy. We’ve outlined four of the biggest benefits below:

1. Control of the Customer Experience

Brands who go directly to consumers take ownership over their most important assets: their customers. You have control over how customers experience your brand and don’t have to rely on a third party to promote your brand.

2. Ownership of Customer Data and Insights

You have deeper insights into your customer—what they purchased and when, where they prefer to purchase, their demographics, etc. This first-party data is the key to creating a personalized experience that drives repeat purchases.

3. Ability to Build Loyalty

If you’re selling through a retailer, you are not able to communicate directly with your customers or build loyalty to your brand through loyalty programs. With a DTC model, you can build lasting relationships that create lifetime value for both your brand and the customer.

4. Power to Cut Third-Party Costs

Selling directly to customers cuts third-party costs, which increases margins and allows you to offer more to your customers (i.e., free shipping, free gifts, etc.). Increasing margins feeds back into the loyalty that is built and captured.

the challenges

Many companies are trying to pursue a DTC strategy to achieve the above benefits, but there are several challenges that prevent success.

1. Insufficient Capabilities to Deliver on DTC 

In some cases, companies have made an initial attempt and investment to deliver a DTC strategy without being fully prepared to service the true demands of a DTC model. For example, DTC models usually require fulfillment at an individual unit level, whereas most companies are only set up for bulk order fulfillment.

2. Poor Organizational Structure

Companies have to learn how to attract, engage, and convert customers directly, instead of focusing solely on account management. Some companies do not have dedicated sales and support teams in place and end up relying on their distributors and retailers.

3. Lack of Real-Time Data 

Most companies, since they haven’t owned the relationship with their client previously, don’t have the data to generate real-time insights that allow for agility. Real-time data allows companies to enhance or create new products and experiences for their customers.

4. Missing Executive Sponsorship and Prioritization 

And with so many competing priorities, it can be tough for business leaders to devote time and energy to developing a winning DTC strategy. Many recognize the need to make the investment, but building a DTC strategy gets pushed to the back burner when managing the current day-to-day revenue drivers and tasks already on your plate.

There’s a definite shift in how customers are interacting with brands, and if legacy brands are to continue to remain relevant, they’re going to have to navigate these challenges and reach their consumers directly.

credera’s approach to a direct-to-consumer strategy

As we’ve helped companies build DTC strategies, we’ve identified four areas that companies have to focus on if they’re going to be successful:

1. Product – Design products that offer value to the end customer and iterate on the product to drive additional value post launch.

2. Customer Experience (CX) – Create and deliver a consistent experience for your customer at and beyond the touchpoints they have with your business.

3. Omnichannel – Engage with the customer in the right channel, context, and time based on your business strategy and best practices.

4. Data and Analytics – Harness available data and unlock key insights that drive product development, customer experience, conversion, and loyalty.

next steps

As consumers continue to prioritize convenience and personalization and digital channels continue to advance, direct-to-consumer will only become more and more prevalent and competitive.

We have a team of people here at Credera that make it their business to think through sustainable strategies that allow companies to take their products and services directly to consumers and bypass some of the potential pitfalls listed in this blog. Reach out to us at findoutmore@credera.com to talk through how we can help.

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