Selling directly to consumers is an effective strategy to achieve higher conversion ratios for ecommerce businesses. Direct selling gives more power to the brands to minimize inefficiencies that arise in the traditional supply chain. With e-commerce sales projected to hit 7.4 trillion dollars by 2025, there is a lot of untapped potential for consumer brands to maximize their profit margins. In light of this, consumer brands need to start building direct relations with their end customers in order to build strong competitive advantage in their respective sectors.
There are several benefits that accrue to consumer brands that adopt a direct to consumers selling strategy. First, these consumer brands are able to gather insights into what the customers really want and care about. Direct-to-consumer (DTC) brands have utter control over customer data and hence can use it to improve their products. This could be in the form of pre-releases to community members, gathering feedback and then releasing a new and improved version for the masses. In addition, the DTC company has complete control of the brand experience in the supply chain.
Ultimately, the goal of DTC is to improve the consumer brand’s bottom line. This is a precursor to improved consumers’ commitment to the brand and their lifetime value. Going DTC can also be a defensive strategy for the company not only in the short run, but also in the long run as the online shopping market continues to grow. Some of the companies that have pivoted include PepsiCo, Kraft Heinz, and Nike through Nike Direct. Nike’s sales grew by 36% in Q1 of 2020 through its digital sales platform, Nike Direct.
Brands have ventured into DTC with varying results. Compared to the norm of selling through traditional channels such as retailers, online marketplaces and working with dedicated distributors presents different dynamics that brands need to adopt to. Many brands are hesitant to launch DTC due to limited experience, even though it provides a lot of untapped revenue potential.
Misalignment in recruiting the right talent to spearhead the DTC agenda is one of the major reasons why some DTC companies fail. It is a norm in many companies to poach talent from various departments to fill in new roles on the DTC side of the business. These individuals could be superstars in their previous roles or even be top management personnel. However, these leaders lack the necessary knowledge to build the new business channel. Running a DTC channel calls for innovative and disruptive thinking in the digital world, that some of these seasoned leaders may lack. Recruiting the right digital talent is therefore a critical element for a DTC strategy to be successful.
The DTC channel needs to have the customer’s experience at the core of its design. This might be obvious for other domains of the business, but oftentimes DTC is seen as just an additional channel to sell more. As a result, this hurts the long-term value creation among customers.
DTC should go beyond the transaction to become economically viable. Acquiring new customers can be up to 5 times more expensive compared to keeping current customers. Hence, appropriate measures have to be taken to lock in recurring revenues. One of the ways to ensure this is by designing loyalty programs for customers to derive value. As the customer keeps on using the program, the company is able to generate insights on user preferences, provide better product recommendations and eventually lead to more sales.
Another way is through having a subscription-based business model. These subscription models are normally designed to drive customer spending per year if they do not churn. A good example is the Dollar Shave Club and Gillette’s DTC approaches. Gillette’s subscription model has it that the first delivery is free. This kind of innovation boosts the value creation process for the customer.
At the heart of DTC, unit economics are king. For DTC to work, the customer lifetime value (CLTV) to customer acquisition cost (CAC) has to be at least 2:1. To keep costs in check, DTC companies need to be in charge of the whole customer journey, from pre-purchase, and delivery to post-purchase. On pre-purchase, DTC companies need to keep a close eye on the CAC for each customer and the marketing return on investment. These metrics need to swing within the company’s acceptable rates. On delivery, hand-off should be seamless to ensure that customers will not stop purchasing following an unpleasant delivery experience. Finally, with post-purchase, DTC companies need to find a way to generate a “lock-in” effect with the customers in order to achieve superior unit economics. For example, a loyalty program for rewards will keep the customers within your ecosystem. As the customer redeems their rewards, they generate more user data on preferences which can then be used to provide better product recommendations and even eventually more sales.
For brands beginning their journey in DTC, listing on existing online marketplaces and established apps (such as Amazon, eBay, and Jumia) will shorten their learning curve on what works well and what does not. On the other hand, digitally mature brands need to scale up their online presence. This will be ideal to grow customer engagement and be in control of the metadata generated.
Author: Dickson Ndoro