The Rise in the Direct-To-Customer Marketplace
Posted: 06/15/2021 | Author: Jim Lochner for Creatives On Call | Tags: Thought Leadership
Direct-to-consumer (DTC) commerce—the process of selling directly to the end consumer and cutting marketplaces, retailers, and wholesalers out of the customer sales journey—is all the rage. E-commerce accounts for 6.6% of all consumer packaged good (CPG) sales and 40% of the sales growth in the sector. More than 50% of consumer brand manufacturers are shifting their traditional retail strategies to incorporate DTC. Two out of every five Americans have made a purchase directly from a brand or manufacturer, and by 2022, DTC e-commerce customers are expected to hit 103 million.
Interested in learning more about how your company can keep up with the DTC rise? Creatives On Call has answers here.
DTC To Date
Early digital DTC brands had little competition and low ad costs. They launched with one or minimal flagship products, used early adopters to spread the word, and optimized paid media to scale. They offered lower prices, which resulted in higher profit margins and loyal one-to-one customer relationships. For instance, Bonobos, one of the earliest digital DTC brands (when e-commerce only represented 5% of US sales), launched in 2007 with a single product—men’s pants. In 2009, Amazon went full DTC with their private label brand, AmazonBasics. In 2010, Warby Parker focused on building relationships for their eyeglass company by allowing customers to try on test glasses in their own homes.
The closing of more than 9,300 retail locations in 2019 forced more CPG companies to invest in DTC. Even big-box retailers got on board. Target bought a stake in mattress retailer Casper for $80 million, Walmart acquired Bonobos for $310 million, and Unilever bought Dollar Shave Club for $1 billion. Venture capital firms also poured cash into DTC brands, almost 60% of all money invested ($3.3 billion) between 2015 and 2019.
Two kinds of digital DTC brands have emerged through all this growth:
• DTC-only brands. These brands have either created new product categories, new business models, or pivots on their previous business models. They have succeeded because they entered the market independent of traditional retail, and have stayed alive because their business model fits the needs of the pandemic.
• Traditional brands. More and more CPG companies and other big brands continue to move online, embracing DTC’s low-risk, high-reward strategy. Last fall, Cadillac launched Cadillac Live, which gives potential customers a chance to take a virtual tour of a Caddie without visiting the showroom. Pepsi debuted two DTC websites, PantryShop.com and Snacks.com, where consumers can order popular food and beverage brands. Kraft Heinz launched Heinz To Home, with warehouse club-sized packages of staples for home deliveries. The more CPGs move online, the more they will flex their marketing muscle to drive consumer awareness, which could pose a threat to smaller DTC-only brands.
The DTC bubble was predicted to pop in 2020. But when the pandemic shuttered many traditional brick-and-mortar stores, 84% of consumers started shopped online, and 10 years of e-commerce growth happened in just 90 days. Nearly every retail category reported higher year-over-year e-commerce sales growth in 2020 compared to 2019, with food and beverage leading the way at 74%.
There are some distinct advantages for embracing the direct-to-consumer model:
• Control and brand clarity. DTC allows companies to control the entire branding experience—product, packaging, and messaging—without competing for shelf space.
• Speed to market. Companies can make product changes and get to market faster without third-party channel coordination, seasonal delays, or other retail interruptions.
• Better data. DTC allows interface with consumers, which provides brands with valuable, first-hand customer insights about buying trends, regional preferences, and product positioning.
• Long-term relationships with consumers. That consumer interface results in early adoption, brand loyalty, and repeat customers. A DTC brand with a 28% customer retention rate can improve its revenue by 60%.
The hardest part of direct-to-consumer is getting customers to take the first step. Some successful DTC strategies could include:
• Discounts. Offering discounted signups, free trials, or other freebies to new members is a strategy that pays off.
• Fast and free shipping. 46% of Americans are more likely to buy from a DTC brand if the shipping is free, compared to 42% who would purchase directly from a branded manufacturer.
• Affordable prices. Shoppers want to find the most budget-friendly option and will jump on exclusive sales and promotions.
• Seamless experience. From point-of-contact to customer interactions and returns, brands that create a seamless experience find greater success. 26% of Americans said they would purchase directly from a brand if they could easily reach customer service and 24% said superior customer service was an influential part of their buying decision.
But with great products comes great responsibility. Like many business decisions, incorporating DTC is not without risks. Selling directly to consumers introduces new exposures to the manufacturer typically covered by wholesalers or retailers as part of third-party contractual agreements. Running an e-commerce store also could expose you to greater general liability risks, and cyber-security is a major priority with the increase of handling sensitive customer and financial data. While direct-to-consumer seems simple, selling to consumers makes the supply chain more complex, with additional points of vulnerability where disruption could occur.
To mitigate these risks, the following can help keep your company on the right track:
• Engage a cross-functional team to identify potential challenges and vulnerabilities. This will ensure you have the needed skills and assets to manage the operational risks of direct distribution. Creatives On Call has creatives standing by that can help you assess the risks and plan and implement your strategy.
• Work with insurance partners to evaluate the insurance implications, review the risk controls you already have in place, and adjust your coverage if needed.
• Contract with third-party firms to manage your product inventory and distribution and to mitigate potential delivery risks.
• Maintain your traditional distribution channels as your DTC model gets off the ground. The more channels you have open, the more chances you have to reach your customers.
The Future of DTC
DTC online sales reached $17.75 billion in 2020, a growth of more than 20% over the previous year. 25% of US consumers are making nearly one-fifth of their purchases from DTC brands. DTC stocks are also doing well. Overstock.com reversed years of losses with a gain of 874% last year, while other DTC brands like Wayfair (229%) and Shopify (161%) showed triple-digit gains as well. According to Global Investment Daily, no mainstream online company folded during the pandemic.
But the news isn’t all rosy. Pre-pandemic, DTC brands were viewed as the digitally savvy retail category of the future. But Covid heavily impacted supply chains and DTC brands have struggled to deliver on fast shipping, seamless experiences, and a decent price point. DTC companies have been unable to advance consumer commitment to their respective brands, giving traditional retailers and branded manufacturers the opportunity to catch up. Nearly 30% of Americans see no difference between buying from a DTC company and a traditional retailer, but only 7?el that DTC brands are the most reliable, compared to 57% for online marketplaces like Amazon and Walmart, 41% for traditional retailers, and 37% for local businesses.
Direct-to-consumer is not a decision to be taken lightly for any business. But it also can be a viable option that stimulates further growth. Creatives On Call can help you maximize your DTC journey. Our stable of creatives experienced in strategy, design, production, customer engagement, and digital technology are standing by.
This is a time for marketers to step up to the challenge and get creative in meeting current demands and behavior changes. Creatives On Call supports your business through this. Contact us here. We have Marketing professionals ready to start in areas including:
• Strategy & Advisory
• Design and Production
• Content Creation & Management
• Customer Engagement & Experience
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