August 24, 2020
20 Advantages of Adopting a Direct to Consumer Business Model
The days of brands and companies focusing on manufacturing and leaving the selling to retailers is quickly disappearing. With the rise of eCommerce platforms, social media, and mobile search, businesses are looking for new innovative ways to improve consumer experience and increase their profit margin.
That’s where direct to consumer, also known as D2C or DTC, comes into play. Direct to consumer business model challenged traditional supply chains and set brands free from third-party distribution.
Direct to Consumer Business Model: In a Nutshell
Traditionally, the supply chain involves a materials supplier, product manufacturer, wholesaler, distributor, and retailer. The sales model also includes sluggish negotiations at every production stage — especially on the delivery process.
As a result, it often leads in long lead time for product launches, and much longer for brands to wait for the customer feedback.
On the other hand, a direct to consumer business model follows a shorter and more straightforward path than the traditional standard. By cutting off the middlemen, wholesalers, and distributors, businesses can harness the potential of cloud services and eCommerce to sell their products directly to end-users.
This year, direct to consumer sales account for about $17.75 billion from the total eCommerce sales. That’s a 24.3% leap from the previous year.
With that, statistics imply that many consumers prefer direct buying than purchasing on retail stores for several reasons. With that, DTC offers advantages for businesses that adopt this model for their sales.
Why Consumers Want Direct Buying
Since day one, consumers always held power over the market. If they don’t buy your products, then you can’t sell them. Moreover, the advent of the information age magnified that authority — allowing consumers to uncover bold claims quickly and broadcast product satisfaction or disappointment widely.
Previously, consumers tended to buy from wholesalers to look for a price break. That’s why retail stores leverage bulk discounts to drive more sales. But today, customers are becoming vigilant buyers, making sure they’re highly informed of the product they’re purchasing before actually making the purchase.
Furthermore, some folks say the best way to dominate the market is to cut profit margins and compete for the lowest price. But something else is remarkably evident from the DTC movement — customers are still willing to pay for security, quality, and service.
Along those lines, here are some advantages of adopting a direct to consumer business model for your brand.
Improve Profit Margin by Removing Middlemen
By eliminating various factors that stand between you and your end-user, you’re getting rid of entities that are cutting portions of your profit.
For instance, when you’re selling clothes to wholesalers and retailers, you’d have to set a price that’s low enough so they can mark it up and resell it to consumers. In other words, wholesalers limit your profit margin, which is essentially the measure (in percentage) of your profit compared to the product cost.
Additionally, the more distributors and retailers there are in one model, the lower the lifetime value of each customer will be. That’s because you’ll have to pay more go-betweens to send your product out into the market.
If a t-shirt costs you $5 to manufacture, and you sell it to a wholesaler for $10, and they mark up the price to $20, then you have a 50% profit margin ($5 divided by $10).
However, skipping the wholesaler by selling directly to your consumers for the same $20 price, your profit would be $15, and a profit margin of 75% ($15 divided by $20).
Faster Product Launch and Market Reach
One reason why consumer-packaged-goods (CPG) companies spend less on innovation is the sheer number of risks involved. That includes the time it takes for a new product to reach its target market.
Usually, a new product launch following the traditional model takes around 18 to 36 months — from planning, up to the moment it reaches the shelves. For legacy CPG businesses, it will consume significant time and effort, which are both invaluable resources.
Moreover, most CPG brands have shareholders and public traders. That means they have to convince their investors first before taking chances on a groundbreaking product that may not bear fruit in 5 years. Most retailers also find it risky to stock an innovative product without any sales history.
On the other hand, DTC companies can implement faster product launches by showcasing new products on a smaller scale. Manufacturers can develop a new item, test it within a tighter demographic range, and collect customer feedback.
Without worrying about shareholders and retailers, DTC brands can understand what their end-users love and hate about the product. Therefore, they can make adjustments whenever needed and further improve their products using data-driven methods.
Better Connect With Your Customers
Businesses that rely on distributors and retailers to sell their products are missing out on reliable consumer data that are valuable to their brand. And since eCommerce is on the rise, customer data is one of the most crucial assets for local and digitally native brands.
Moreover, if you’re selling products through a retailer, the only data you’ll get are numerical figures without social insights — volume sold, returned, and future demand. While that’s great for inventory management, those figures won’t tell you much about your end-users.
On the other hand, if you’re marketing those same products through your eCommerce site or physical brand store, you have the chance to cross-sell and upsell relevant products to your customers.
Hence, your consumers will directly tell you which products may complement their original purchase through product reviews and inquiries. Also, you can A/B test your prices to see if you can charge more, or if lowering your costs may result in more sales.
Expand Mindshare — Fast
Traditionally, if you’re aiming to put your brand on a global scale, you need to thoroughly illustrate to retailers and wholesalers that your stocks can move.
That said, it may take a few years to prove that you’ve established a regional presence, notwithstanding the time spent finding national distributors. It only gets more challenging for an international scale. Prove success, convince retailers, build new relationships, and expand — rinse and repeat.
In the DTC model, you can minimise the time to market since you’re launching your products directly to consumers. Once your website is up and running, you can virtually sell your products anywhere you can ship them.
Control Your Brand’s Story
Whenever you send your products to a third-party for reselling, you’re technically giving up control over your brand. You may not notice it at first, but gradually, you’re leaving your marketing control in another company’s hands.
However, three of the four Ps of marketing — price, promotion, and placement, are within your direct control if you follow a direct to consumer model.
Additionally, you can explore and experiment on discounts and promotions through customer research. You can also control your sales flow using various marketing techniques. And if you’re launching your products on your webpage, you can manage where to place it, how to present it, and ultimately, how customers will perceive it.
Directly Manage Your Brand, Product, and Reputation
As discussed, CPG brands don’t have control over their products once they hit the shelves. Their only trump card in influencing the sale is through their packaging and outbound marketing techniques such as TV commercials and billboards.
Because of that, larger production firms are spending billions on commercial ads just to tell consumers who they are and what they sell. But regardless of how much they try to influence consumers, if retailers struggle selling their products, they are at risk of incurring a loss.
With DTC, you have absolute control over your brand, product, and reputation. Besides, in today’s competitive eCommerce and market landscape, consumers demand a high-quality shopping experience.
Hence, manufacturers now prefer gaining control over production and marketing than entrusting it to different distributors and retail partners. That’s because DTC lets brands engage with their customers from manufacturing, and even after they purchase the product.
Aside from direct control over several elements, another advantage of adopting a direct to consumer model has influence everywhere, all the time.
Unlike plain CPG, you can set up a limitless eCommerce platform where customers can shop across multiple channels with all the varieties as well as payment methods. Despite that, legacy brands and CPG companies can integrate into DTC without abandoning their existing retail partnerships.
If necessary, consumers can also return your products in different ways, regardless of which channel they initially bought the product. Thus, omnichannel retailing through DTC challenges traditional models and is becoming a massive player in eCommerce.
DTC Mitigates the Anxiety About Knock-off Products and Fraudulent Services
Several brands have stopped retailing on Amazon and similar eCommerce platforms due to the inability to prosecute shops that sell cheaper counterfeits.
Additionally, selling your products right beside cheaper knock-offs dilutes your brand with inferior goods, giving buyers a poor impression of your actual products.
You can always leverage social channels to spread awareness and encourage people to buy only from authorised retailers. But when you sell your products on your official eCommerce site, you guarantee your customers that they would spend their money on authentic and high-quality goods. Not only does DTC relieve you of the anxiety about knock-offs and fraudulent services, but it also makes sure your customers are safe from online scams.
Brands Carry Every Product; Retailers Don’t
Satisfied customers become loyal consumers, so if they already love your flagship products, they would want to check what else you offer.
However, when you’re sending your products off to a retailer, chances are they will only accept your best-selling items. Wholesalers may carry your t-shirt on their shelves, but customers may want to check out your shoes and other apparel. Whatever your case may be, the best place for end-users to look for is on your official brand website.
DTC Lets You Showcase Every Product Variant
As stated, retailers won’t display your entire product line if some of them aren’t selling as much as the others. That’s also true for product variants since many wholesalers only stock the most popular colours and sizes.
But by purchasing directly from your brand, customers can shop for the entire selection. That’s why DTC is very crucial for brands who showcase products and goods that don’t fit the standard mould.
And since having all variants available caters to all consumers, your end-users can quickly become brand advocates — establishing online communities for people who share the same size or style preferences.
Direct Access to Accurate Information and Support Team
Shoppers get direct access to your business staff by visiting your eCommerce site or physical brand location. On the other hand, retailer sites might have a team who know very little about your products and message.
Therefore, information gathered directly from the company website is much more accurate and comprehensive than third-party distributors. Having an in-house support team will also give you more freedom and control on customer relations, especially for services including refunds, replacements, and others.
Shopping Directly Improves User Experience
Spending hours scouring through pages just for the right product can get annoying when you discover the item isn’t in stock. It could only get worse when you place a different order and get notified of a shipping delay.
But when users shop directly to the source, they have better chances of getting what they need whenever they want it. DTC brands also optimise payment and shipping methods to accommodate a wider reach, so you will most likely get your item on time using your preferred payment method.
Quickly Sell Replacement Parts On a Broader Scale
Retailers mostly sell spare parts for the currently popular product models. Thus, when the trends shift, and retailers stop selling parts, users that bought the older model may have difficulties finding replacement parts.
With DTC, businesses can stock replacement parts on outlet stores and websites longer than any retailers or wholesalers. Also, they can sell spare parts without marking up excessively.
Therefore, a DTC business model ensures that the brand doesn’t quickly abandon existing consumers, especially in the tech industry, where the demand for small electronics and spare parts are high.
Showcase Hero Accessories For Product Bundles
For businesses thriving in the tech industry, selling a product together with its related accessories adds value to the purchase and significantly improves the shopping experience.
In a retail setting, shoppers can buy a new camera under your brand but settle for a generic case. But when purchasing straight to your website, you can bundle other accessories together with your camera.
Thus, when buyers purchase everything that bears your logo, they will feel that they’re part of your brand family, which is necessary for the word of mouth and customer retention.
DTC Businesses Better Handle Product Returns and Service Issues
When customers complain to a retailer about their recent purchase, the most common response would be to give them a refund and take the product back.
However, under a DTC business model, there’s more incentive than merely settling the financial claim. You can offer refunds for your end-users, but you can also send exclusive vouchers which they can use on their next purchase to keep them coming back for more.
Improve Customer Impression Through Positive Consumer Reviews
When you exhibit consumer sentiment through product reviews and listen to product suggestions, the public would know that you’re doing the right thing.
Besides, if shops sell you goods from someone else, they can always pass the blame to the manufacturer whenever a problem arises. However, if you buy products straight from the manufacturer, the buck stops there.
As a result, consumers will feel more comfortable shopping directly on brands because there’s no wiggle room. Before, brands had fewer reasons than consumers to prefer a DTC business model — until eCommerce reshaped the marketing industry.
Brands Have Absolute Control of Their Image
By adopting a direct to consumer business model, brands eliminate the risk of image dilution from third-party retailers and distributors. That’s because retailers don’t have all the reasons to promote their goods.
That’s because all those retailers do is resell popular items, as long as they profit from them. In terms of customer relations, brands hold the ship’s wheel and have absolute control on their public image.
Maximises Relationship-Building Potential
Aside from collecting relevant consumer data, selling direct gives you immediate access to your customers. With that, you can maximise your relationship-building potential by offering subscription services, first-time discounts, and a responsive support team.
Regardless of your business model, your consumers are undoubtedly your most potent advertisers. But with DTC, you have more chances to produce brand advocates and influencers who will spread your message and promote your brand by word of mouth.
Prevents from Keeping All Your Eggs in One Basket
Direct to consumer allows you to widen your reach through eCommerce and local company sites. Unlike the CPG model, you no longer have to depend on wholesalers and retailers to transact with your consumers.
In other words, DTC helps you make more sales by expanding at your own pace, which is typically faster than gaining the trust of retailers and letting them do their job.
Gain Access to a Mailing List Goldmine
When end-users purchase from retailers, you can only collect customer information when it involves a warranty registration. However, when your customers buy directly from you, you’ll know who they are, where they live, and how to contact them.
With that said, DTC gives you access to a goldmine of mailing lists to supercharge your email marketing strategy. Never before has there been an opportunity to build a robust and resilient relationship with your consumers.
Direct to consumer business model is an innovative and remarkable model that challenges the status quo of traditional marketing. By adopting this standard and integrating it into digital channels, brands now have the tools to engage and relate to their consumers at a personal level.
Moreover, consumers in the Information Age are always on the lookout for new trends and more comfortable shopping experience.
Therefore, the only way for brands to keep up with their market is to ditch the long and winding supply chain and leverage eCommerce to sell their products directly to the end-users.
While adopting a direct to consumer business model can be tough work, building a best-in-class eCommerce website to cater to a DTC business model is what we do best. At G Squared, our digital enthusiasts use results-focused and data-driven web solutions to suit all your DTC eCommerce needs.