Anthony Fletcher, CEO of healthy snack brand graze, outlines the key considerations for entrepreneurs and companies looking to get started on DTC.
As technology costs fall it has become easier than ever for an entrepreneur with a burning product idea to bring it to the market by going direct-to-consumer (DTC). This approach uses access to first-party consumer data to make changes to the product and brand to reach consumers without using traditional retail channels.
Consider what value propositions make sense to you
The primary incentive for operating via a direct-to-consumer model lies within the value proposition created by combining digital experience, service with a more traditional physical product. It is key that a business has a solid understanding of where this value lies within its model and how it would translate across new channels.
For graze this involves having a large and constantly changing range of products, the convenience of delivery, the ability to personalise as well as the excitement and surprise of treating yourself.
Other DTC brands opt to leverage the economics of cutting out the retailer to provide better value for customers.
Dollar Shave Club, the male grooming delivery service, for instance, capitalised on consumer dissatisfaction with razor prices by delivering low cost products.
Tails.com, a tailor-made dog nutrition business based in the UK, creates a personalised product through a digital questionnaire which takes into consideration dog breed, age and other health issues. It also delivers value as it saves consumers with a large dog lugging heavy bags across the grocery car park.
US-based direct-to-consumer brand Allbirds, a San Francisco-based start-up aimed at designing environmentally friendly footwear, has a unique product and sells direct to consumers as a way of making it available to potential early fans as well as celebrating the brand.
Pure play or multichannel?
Increasingly, the direct-to-consumer model is being viewed as just one element of a business’s wider multichannel strategy. When customers shop across channels why limit the size of your potential market?
One particular approach that is growing in popularity sees businesses launch solely via DTC to start, in order to build brand awareness and help perfect their offering in a data-rich environment. This method is particularly useful when expanding into international markets as it enables businesses to test their product without absorbing as much of the cost or complexity of setting up local operations.
Graze, for instance, launched its full UK range into the US in 2013 but we changed 50% of the range within the first six months to better suit the tastes of our new target market. Using in-house customer feedback we were rapidly able to identify which snacks worked with US consumers and tweak our range accordingly, saving both time and money and strengthening our position when we did come to launch into retail in 2016.
One thing to watch out for is being clear on the economics of different potential channels especially if you are seeing DTC as a “loss leader.” While it is fine to see one channel as a “brand” or “innovation” investment to start, sooner or later your business will need to demonstrate its profitability.
What’s more, one of the unquestionable downsides of the multichannel approach is the complexity of mastering various commercial models.
Get your economics right
Many direct-to-consumer businesses struggle to get off the ground because they are unable to turn a profit, illustrating the simple importance of having a firm grip on how the economics of your model work.
Gross profit is particularly critical in this regard. Certain product formats are ultimately just more expensive to post, meaning you must be prepared to have lower margins or pass on higher costs to your customers.
Razor blades are a prime example of a high value product that is compact and light, and are often cited as the poster child of ‘good economics’ for the DTC model.
Delivering the tech
The costs associated with the technology needed to support and deliver an effective direct-to-consumer model have dropped in the last five years, but it is still just as important that you choose the right solution for your business.
There are a range of options out there, including the more affordable, but less flexible Shopify or Magento, which many businesses choose to wrap their offering around. Alternatively, those businesses that are confident in their own tech abilities choose to build their platforms in-house.
A major consideration for businesses is the alignment of the chosen platform with other key components of the DTC “tech stack”. The major ones to think about are: the CRM system, how you want to handle data and how to deliver great customer service.
Performance marketing
This makes or breaks DTC business. Can you generate cost effective traffic to your website?
Despite being a relatively new concept, performance marketing enables an online business to measure all forms of marketing – as opposed to just digital.
The core of performance marketing is coming up with an ‘attribution model’ which enables the business to link spend with direct-to-consumer sales. While there are numerous ways to do this, effectively what you are trying to calculate is the Customer Acquisition Cost (CAC) for every pound spent.
Graze has its own in-house systems, others choose to rely on media agencies or off-the-shelf solutions.
The next step is then to understand in detail the Life Time Value (LTV) of your different customers. This can be cut in various ways including geography, demographics and channel. By combining information on CAC and LTV you are able to calculate the CAC:LTV ratio – the core metric of any direct-to-consumer business.
Your performance marketing team can then scale and optimise this figure which often comes down to a testing mindset across deals, proposition, creative executions and channels. The process works best if it is fast, iterative and data led. The best teams are excellent at designing tests which minimise spend while honing in on winning strategies.
While it is often tempting to stick to digital channels, it is worth bearing in mind that these are seeing a lot of price inflation recently and some of the biggest direct-to-consumer brands have become profitable by operating across more traditional channels.
Having started out as a pure play DTC business back in 2008, graze is now the UK’s number one healthy snack brand –(Nielsen data and graze online sales based on Retail Sales Value of healthy snacks sold in UK), operating a successful multichannel model across international markets.
