With advances to the technology and logistics infrastructure across the world, companies now have the most practical ability to sell directly to consumers. PHD WorldWide's Gemma Spence outlines a few considerations that companies need to make to ensure they don’t cannibalise existing channels and undervalue the relationships that sustain the company.
So what is right, traditional distribution or selling direct? If you think about it, they are all right in one way or another, but let’s explore the commerce conundrum in more detail.
DTC: Is it right for your business?
Many brands are switching to direct to consumer (DTC) because they want to maximise their profits, with little need for middlemen due to transparent demand. Some even say it’s because manufacturers want to take full control of their product, brand, messaging, customers, reputations, etc.
DTC is exactly what it says on the tin: selling directly to the very end customer. The strategy behind this approach is that it bypasses wholesalers and retailers, thus cutting out unnecessary costs associated with having intermediaries between manufacturers and the consumer. This approach is actually a direct reversal of the traditional way companies have marketed their products through retailers instead of consumers. With the DTC model, the goal is to lower costs and maximise profits by eliminating retailers’ sales commissions and display space charges.
The direct-to-consumer strategy necessarily makes some crucial changes in how marketers use advertising messages. DTC marketing involves targeting messages specifically to people who are most likely to want to buy the product or service being offered. This usually involves tracking customer preferences over time to determine what information will most likely convince the customer to make a purchase.
Wholesale and retail distribution
Wholesale is beneficial for companies where stock holding, cashflow and distribution can act as bottle necks for success. However, when a wholesale distributor isn’t effectively creating demand, educating retailers and selling their products to the store owners, this may be a primary catalyst for deciding to pivot the model and sell DTC. No, it is not going to change this company’s profitability radically… and it’s not going to help them scale to levels that were previously unattainable. However, it will help them add a new sales vertical at a much higher margin than their primary wholesale model.
By choosing to go DTC, consumers who missed out on speciality products in local stores will now be able to purchase them directly from the manufacturer.
The power of a DTC model
The DTC e-commerce model is not a new concept, but it has been gaining steam in the last few years. Selling directly to consumers can benefit both the consumers and the manufacturers, now let’s take a close look at how this model benefits both parties involved.
- Higher customer lifetime value: The customer’s value during their relationship with your brand is known as the customer lifetime value (CLV). A high CLV reflects good profits. And good profits are a sign of a healthy business. When you have more middlemen, your CLV is bound to be lower simply because your intermediaries take a slice of your profit.
- Take back control and manage the brand, messaging, data and reputation: If anything, control is one word that’s causing many brands to adopt the DTC model – control over pricing, customer data, messaging, product, brand, and reputation. We live in a world where customers are more demanding than ever. You must provide them with a high-quality experience on whatever channel they decide to reach out through. So, if you don’t have total control over every touchpoint that your customers have with your brand, you are somehow shooting yourself in the foot. The power of manufacturers in a legacy retail model is so limited. Manufacturers don’t even have complete control over the pricing.
- Shopping is not mutually exclusive: According to Harvard Business Review, 73% of all customers use multiple channels during their purchase journey. And according to UC Today, 90% of customers want an omnichannel experience that has seamless service between communication services.
As you can see from the above stats, omnichannel commerce is fast becoming the norm that customers expect wherever they go. To be blunt, not having a unified experience will cost you sales and make you lose customers for good.
To create a unified customer experience, you’d need to have access to every touchpoint your customers have with your brand during the sales process. However, full access to every touchpoint that a customer has with your brand is hard – if not impossible – for manufacturers to have in a traditional sales model.
Examples of when it is right to consider DTC
- Distribution isn’t reaching consumer locations.
- Stores aren’t stocking your product (even authorised retailers).
- Experience is critical to your value proposition.
- You want to ‘premiumise’ the product or service.
- Stocking excess inventory.
- Need to move aging or obsolete inventory.
DTC as a sales channel could be a good complement to your existing sales verticals, which may plug holes and shore up lagging sales, but there is also a primary factor you need to think about before establishing any new route. If you are considering moving to this method, it’s critical to make sure you do not harm the relationships you’ve established with your existing sales partners. Without careful consideration and channel/category management this can happen inadvertently and quickly, leaving you to double back and salvage crucial relationships.
There’s no denying that the DTC e-commerce model is here to stay. But is it for every e-commerce company? No. Just because the industry has a low barrier to entry doesn’t mean that everyone and anyone can switch to this strategy on a whim. The DTC model is very demanding. It would be a mistake to dive into it without having the marketing, sales, tech, operations, and data analysis skillset.