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Direct-to-Consumer: The Future of Retail as We Know It

August 20, 2020

direct-to-consumer

For much of modern history, manufacturers have brought their products to market by working with intermediaries in the retail industry. 

That is how brick-and-mortar sales evolved from small, mom-and-pop general stores up to today's massive, big-box retail outlets. By and large, this arrangement made quite a bit of sense.

That's because the average manufacturer specializes in a narrow set of products, whose sales cannot support the infrastructure overhead of a large retail footprint. Instead, manufacturers let retailers create a product matrix that blends their wares with those produced by others to create enough revenue to provide healthy profits for themselves and the manufacturers.

But now, the rise of the internet as a medium for commerce is changing all that. At first, large e-commerce operators like Amazon emerged as a growing threat to brick-and-mortar stores. Now, there's another quiet revolution underway, as manufacturers realize that they can use the internet to cut out the middlemen entirely – and sell their products straight to consumers using what's known as a direct-to-consumer (D2C) model.

What is the direct-to-consumer model?

To understand the D2C model, it's important to first understand what it's replacing. In a traditional retail model, manufacturers mark up their products as they move to stores, who then mark them up again before selling them to consumers. In that kind of sales arrangement, much of those markups don't go into the pockets of the businesses involved.

They instead go toward covering the additional costs of product shipping, retail employee wages, real estate, and countless other incidentals. And in the end, consumers pay higher prices – so nobody wins.

In a D2C model, by contrast, manufacturers sell products directly to end-users. That eliminates a significant amount of overhead, which means manufacturers can enjoy higher margins on sales while consumers still pay less than they would have in a traditional retail sale. In a way, D2C sales harken back to ancient times, when artisans would sell their wares to consumers in local markets. The only difference today is that manufacturers can use the internet to turn that local market into a global one.

Why D2C is moving markets further away from brick and mortar

Ever since the internet gained traction and moved into homes and businesses around the world, it has been wreaking havoc on brick-and-mortar retail. First, digital-native businesses like eBay, Amazon, Etsy, and others began to gradually chip away at traditional retailers' once-dominant market positions.

That shift brought on the closures of some of the world's oldest and best-known retail operators. One by one, storied retailers like Sears, Kmart, Toys“R”Us, and countless others have faced wave after wave of store closures and bankruptcies – some ending in total business shutdowns.

The situation became so dire that people began to refer to it as the 'retail apocalypse' in recent years. But now, the rise of D2C options is threatening what little territory that traditional retailers have left. That's because one of the defensive strategies many brick-and-mortar stores used to fend off e-commerce upstarts was to shift toward carrying specialty items that consumers found hard to locate online. The theory went that e-commerce businesses were interested in volume, giving them little incentive to cover low-margin markets, and that niche retailers could fill that void and survive.

Now, however, manufacturers of many of those specialty and niche items are starting to embrace a D2C model. They've realized that there's significant money to be made by delivering their products straight to consumers, even on items that sell at very low margins. That's now putting new pressure on brick-and-mortar retailers by depriving them of the sales they've been using as a lifeline for the last few years. And that new reality is likely to trigger yet another wave of reorganizations, closures, and bankruptcies among the remaining major retail chains.

5 key features of a D2C company

Although it may sound like any manufacturer can – and arguably should – set themselves up as a D2C company, that's not the way the market has developed. As has been the case with earlier retail strategy evolutions, the charge is being led by a handful of visionary upstarts. Those companies do have some key features in common, which can be used as a profile of what the typical D2C business now looks like. 

Those features include:

  • They tend to spring from industries with low retail barriers to entry
  • They're agile businesses with flexible operations and little in the way of owned infrastructure
  • They're customer-oriented and dedicated to high service standards
  • They rely on big data and analytics to fine-tune product offerings and day-to-day operations
  • They leverage digital marketing as a primary driver of their sales funnels

Put simply, the average D2C business operating today is a digital native that eschews any high-dollar infrastructure and devotes the bulk of its resources to customer service. They also tend to offer highly specialized product lines and focus quite intently on serving their market cheaper, faster, and more conveniently than competitors.

The technology behind digital D2C businesses

As previously stated, today's D2C businesses rely on technology to power their operations. It's the very core of what is making the trend possible. What's more, D2C businesses tend to be early adopters of some cutting-edge digital tools and techniques.

Among them, none are featured more prominently than big data and analytics technologies. D2C businesses today, on average, rely more on data than almost any other type of retail business. That's because their business models rely on establishing positive direct relationships with consumers, and the best way to do that is to track and measure every part of the customer experience through customer analytics.

They're also in a unique position to collect customer data and manage every stage of the analytics processes, so they don't have to worry about data lineage issues or build any extensive data exchange systems with other businesses involved in their value chain. For example, in a traditional retail model, manufacturers can only analyze sales from the perspective of wholesale orders by retailers.

Unless each retailer shares data about how and why consumers buy those products, they are unable to detect minute shifts in consumer habits, leaving them blind to changing markets. In a D2C model, the manufacturer has visibility into all sales stages and can adopt a more agile sales strategy.

But big data isn't the only technology D2C businesses rely on. They're also at the forefront of automation technology, too. They apply it to reduce overhead in everything from their digital marketing campaigns to their front-line customer service offerings and everything in between. And needless to say, like every other e-commerce operation, D2C businesses couldn't exist without the availability of sophisticated shopping cart platforms to run their sales operations.

4 benefits of the D2C model

Although it should be obvious by now, there are several benefits for businesses pursuing a D2C model. We've touched on a few of them briefly in the preceding sections. But to elaborate, here are the four most important benefits of the D2C model.

Lower overhead

When selling products in a D2C model, one of the biggest benefits is the lower overhead that comes from not having to maintain a large brick-and-mortar retail footprint. That means no lease costs for physical locations, no operating expenses like utilities and maintenance, and none of the labor costs associated with manning each location.

That means a business can offer lower prices on their products while still maintaining a healthy profit margin. They also often have more resources available to invest in marketing and customer service, which are among the most important aspects of the D2C model.

Direct customer connection

In a traditional retail model, a manufacturer has very little control over key parts of the customer experience. For example, if a potential customer has questions about a product, it's up to the retail associates to answer them. The same goes for addressing post-sale issues and a host of other customer service functions.

In a D2C model, the product manufacturer has direct communication with customers, which allows them to control and perfect the customer experience as they see fit. As previously mentioned, it also allows the business to harvest data from every customer they interact with.

Bypassing gatekeepers

One of the biggest challenges that businesses face under a traditional retail model is gaining access to the markets where they want to sell their products. In many cases, large regional retailers won't agree to carry a product unless it already has a lengthy history of proven sales.

And when they do agree to carry a product, many insist on exclusivity agreements that limit where else the items may be sold. In a D2C model, businesses can bypass those gatekeepers and offer their products straight to consumers.

Exercising brand control

Another major benefit of the D2C model is that it gives businesses complete and direct control of their brand and its image. With no intermediaries to worry about, maintaining positive brand sentiment and an excellent brand reputation comes down to how well the business treats each customer. They also exercise control over all product marketing, so they don't have to worry about third parties running promotions that might run counter to the image they've worked so hard to create.

Omnipresence

Since a D2C model means cutting retail partners out of the process, it also means a business won't have to invest the time it takes to grow their presence one regional market at a time. With a digital selling platform, D2C businesses are everywhere at once; accessible to anyone with an internet connection.

That makes adding new products to their lineup simple and their reach immediate. They also don't have to worry about maintaining relationships with countless competing retailers, and don't have to worry about one partner cutting into the sales of another.

D2C business examples

Right now, there are a variety of D2C brands that are gaining market share and disrupting what were once safe markets for brick-and-mortar retailers. Some excellent examples include:

Dollar Shave Club

Back in 2011, Michael Dubin and Mark Levine had an idea. What if there was a D2C business that offered a way for consumers to save money on their shaving supply needs? That's the simple question that led to the founding of Dollar Shave Club.

The founders began with a subscription razor blade service that grew to include more than 4 million subscribers by 2015. They've since added an array of shaving products and accessories to their lineup, capturing 48.6% of the e-commerce market for razor blade cartridges in the process.

Casper

For many years, one of the highest-margin products that a brick-and-mortar retailer could sell was mattresses. It was a sales process that thrived on customer confusion and a high-pressure selling environment that most consumers hated. Then in 2014, the evolution of memory foam mattresses made it possible for a D2C model to thrive. That's when a startup called Casper started to offer a range of bed-in-a-box mattress offerings that were cheaper than anything found in stores, and that made the buying process simple.

And in a world where people are even comfortable paying their rent online, they convinced apartment-dwellers and homeowners everywhere that buying a mattress online made sense too. Since then, they've become a household name that sells more than $400 million in mattress products each year – good for number seven on the list of biggest U.S. mattress brands.

Allbirds

Proving that the D2C model can even work in even the most saturated markets, Allbirds launched as a digital D2C sneaker business in 2016, carving out a niche that nobody expected.

They offered an environmentally-friendly, nondescript sneaker design that features a sleek, comfortable fit with no flashy colors or bells and whistles. That single sneaker catapulted Allbirds to cult-status among tech entrepreneurs and celebrities, turning them into a company valued at $1.4 billion in little more than two years.

The future of retail

Right now, the direct-to-consumer (D2C) model is gaining traction in markets still dominated by brick-and-mortar retail chains. As the preceding examples make clear, even markets that many assumed offered few prospects for success by upstarts aren't safe from the D2C trend. And it's not just traditional retailers that are in the crosshairs.

Even large do-it-all e-commerce sites like Amazon are starting to see some of their business drained away by D2C firms. That's one of the reasons that Amazon is spending so much time trying to lure D2C brands onto its platform, and when that fails they're trying to stand up D2C brands of their own like AmazonBasics.

So, the takeaway here is that the growing trend toward D2C sales models is both a continuation of the e-commerce revolution that's been underway for the past 25 years, as well as an evolution that might eventually supplant traditional e-commerce sites altogether. For that reason, it's no exaggeration to call D2C the future of retail – and it's only a matter of time before it becomes the default way that companies get their products into the hands of consumers.

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