Image source: Sherman’s Alley

Challenges and Risks Associated with Adopting a Direct-to-Consumer Business Model

12 minute read

Transitioning from a business model that sends pallets and containers of products to retailers, dealing primarily in B2B transactions, to a business model that sells “eaches” directly to consumers and includes B2C transactions can be difficult. A company consists of many different divisions, and the transition can affect each of these uniquely. Some of the ways divisions are affected include:

Warehouse

Business Operations

Management

 

Warehouse Operations

Picking

Pickers will have to adjust to new procedures when restocking and picking. Transitioning from using machinery, such as forklifts, to using more mobile equipment, such as carts or pick-to-light carts, can be difficult.

Warehouse-Picking-OperationsPickers need to be more vigilant in making sure that the picked products are labeled properly and not defective or broken in any way. Some products may have to be handled with more care than others due to a fragile nature.

The accuracy of the picking department is essential to increasing the number of orders that can be fulfilled. Practices such as slotting inventory, using counting scales, or implementing a pick to light system can be put in place to improve accuracy.


Packaging

Unlike picking pallets for B2B where packaging procedures are simple, and pallets are packaged the same way, shipping eaches involves more variance. When selling directly to consumers, there are a higher volume of orders being shipped, and the process requires much more organization. There are many decisions to be made such as deciding the size and shape of boxes that need to be purchased and type of packaging material to use for each of these products. There are also standards and regulations to be met when shipping specific types of products such as food items. Having a dedicated packaging area in the warehouse, where all the boxes and packaging materials are readily available, makes the packaging process as efficient as possible.

Direct-to-Consumer-PackagingUpon being brought to the packaging area by the picker, the product must be labeled and prepared for shipment by the packaging department. Keeping track of how each product must be packaged can be difficult. Some WMS or ERP systems can be used to track important packaging information such as:

Which box size should be used for each product.
The number of eaches that can fit in various box sizes.
Which products need to be padded with bubble wrap or labeled with a warning label.

The packaging and quality assurance departments work side by side to ensure that each package a customer receives will be satisfactory. Since the company is now working with eaches instead of pallets, the packaging process takes longer than picking or shipping the product. Allocating more resources to these departments saves time and increases cost-efficiency.


Quality Assurance

The focus of the quality assurance department should be to make sure the package being shipped meets the following criteria:

  • Direct-to-Consumer-Quality-Assurance-1The package contains the correct items and correct quantity of each item.
  • Nothing is broken or at risk of being broken inside the package. 
  • The package is correctly labeled.

When selling products to an intermediary, quality assurance does not have to consider as many variables as when selling directly to consumers. Consumers can be very picky about receiving exactly what they paid for. The responsibility of the quality assurance department should be to ensure the integrity of all products being shipped. The product must be packaged and labeled correctly with all safety standards, such as warning labels, to protect consumers. The product must also not be hazardous in any way that the consumers are not aware of. Proper attention to safety standards helps the company avoid any liabilities.

Making sure all the above criteria are met results in fewer returns, which means an increase in revenue and a good reputation for the company.


Shipping

As the shipping department transitions to a direct to consumer model, it will face many challenges including:

Direct-to-Consumer-Packaging-of-Broken-Case-InventoryAdjusting to shipping a high quantity of small packages rather than, or in addition to, a few large pallets or cases.
Finding ways to streamline shipping a higher volume of packages.
Calculating variable costs to determine which options are the most cost-effective.

For companies that don’t have large shipping departments, using a third party like FedEx, UPS, USPS, or DHL may be one way for companies to streamline the shipping process. There are many variables to consider when selecting a shipping method. Costs may vary depending on the number of packages being shipped, the weight and dimensions of the box being shipped, destination, how quickly the package needs to be delivered, and what time of day the customer would like their package delivered.

Misplaced shipments can result in lost revenue for the company.  Incorrect shipments from one business to another are typically handled in the context of an ongoing relationship, so when an incorrect shipment is delivered to a business, mistakes are easy to catch for both parties. On the other hand, sometimes customers have no obligation or incentive to acknowledge mistakes. For example, receiving a call from a customer who ordered a $200 camera, but received a $1500 laptop, seems very unlikely. However, if a customer orders a $200 camera, but receives a $100 camera, a complaint and a return are to be expected. The customer service department must be able to rectify situations such as customers receiving the wrong product to avoid lost revenue.


Receiving

Receiving returns from consumers and businesses are two entirely different procedures. A return from a business will usually be more organized and contain mostly products which are defective or did not sell. Also for the sake of maintaining a professional relationship, a business will do their due diligence in making sure the correct merchandise is being returned.

Direct-to-Consumer-Receiving-Stock

So, the restocking process when receiving a return from a business is fairly simple. However, when selling directly to the consumer, if a company sells more than one kind of product, returns may consist of various products in various conditions. Creating a return merchandise authorization (RMA) process to set guidelines in place for what a customer can and can’t return could be one way to make sure the company can’t be taken advantage of.

Dealing with these returns effectively frees up valuable warehouse space. A multichannel recovery approach can be an effective way to deal with returns. Products which are still in good condition can be sold direct to consumer or B2B. Other products can be disposed of via auction or bulk sales. A multichannel recovery approach is an excellent way to make sure no products are going to waste and hurting the company’s overall revenue.


Personalization

Direct-to-consumer-customer-personalizationA benefit of switching to a direct to consumer model is the ability to offer customization. The manufacturing process may need some adjustments to personalize products for customers at an extra cost. The goal should be to change the manufacturing process to allow for customization of products without greatly changing the overall cost, complexity, or time of assembling the product. Adjusting to a new process may be difficult for employees, but the increased margins on customized products will impact revenue, and result in a better product experience for the consumer.


BUSINESS OPERATIONS


Marketing

Marketing for business to business relationships is usually conducted through trade shows, professional contacts, LinkedIn, and industry publications. Once a business has partnered with an intermediary, then the intermediary will be responsible for marketing the product to the consumer. In contrast, when selling direct to consumer, the business is solely responsible for marketing their product. Social media can be a fantastic place to start. For businesses on a budget, taking advantage of social media marketing can be a less expensive alternative to traditional channels. Interacting directly with consumers through social media channels such as Twitter, Facebook, and Instagram, as well as creating product videos on YouTube, can all have a massive impact on growth. Consumer engagement through social media contests or social responsibility initiatives can also help build brand recognition and awareness.

Direct-to-Consumer-MarketingConsumers shop using various devices including phones and tablets, so ensuring that readability on mobile devices is the same as readability on PC is important. When marketing online, precautions should be taken to ensure that the ad displays the same across all platforms. Building a mobile specific website may be one solution to the problem of cross platform formatting.

Other ways to market directly to consumers include traditional channels such as direct mailers, emails, radio, and TV. Marketing needs to be proactive in making customers aware of the direct to consumer channel when advertising through these traditional channels. Customers are not likely to go out of their way to purchase a product. The success of the marketing department in directing customers to the channel is crucial to increasing sales.

Marketing also collects data about which products customers are purchasing, time spent on different sections of the website, and which products are likely to be purchased based on customer demographic and other personal information. The collected data can be utilized to find the optimal combination of traditional and digital marketing.

Sales

Selling directly to consumers is different from selling to businesses. Instead of developing professional relationships with clients or targeting a specific industry, the focus of the sales department transitions into making sure the customer is able to purchase the product without any issues.

Image source: Sherman’s AlleyWhen selling to a business with the goal of generating repeat sales, the sales team will walk the business through the purchasing process and be there to answer any questions or concerns. When selling direct to consumer, the customer should be able to make a purchase very easily without any help. The website should be tested to make sure that it’s possible to add items to the shopping cart, pay using various payment methods in a secure way, and navigate the site without any bugs.

Utilizing consumer data for sales can help increase revenue. Targeted ads can be placed on the web to entice consumers to purchase products. Adjusting prices, or creating promotions, based on current purchasing patterns of consumers can be one way for the sales and marketing teams to work together when adapting to selling direct to consumer.


Engineering

 

development-cycle-1030x591The information obtained by the sales and marketing team can be relayed to the engineering team to help product development. Products are constantly evolving to be better suited to satisfy the consumer, and what better way to get feedback than directly from the consumer? For engineering teams which use a continuous development cycle, having a quicker feedback relay can be useful for fixing serious bugs or issues with the product in a timely manner, as well as making enhancements that consumers ask for. The engineering team is responsible for ensuring the product being sent out fulfills all requirements expected of it by the consumers.


Customer Service

Customer satisfaction is an important metric to keep track of when selling direct to consumer.  While satisfying every customer may be impossible, a customer service division that operates while keeping in mind the importance of customer satisfaction is more likely to succeed. Having a strong customer service team can increase revenue by reducing returns, avoiding negative reviews, and making customers into brand advocates.

Direct-to-Consumer-Customer-ServiceCustomers may contact customer service for several reasons including:

Purchasing the product or processing a payment.
Issues with a misplaced or incorrect shipment.
Directions on how to use a product.
Making a return.

When dealing with customers directly, the variety of questions received will be greater than when selling B2B. Since there are many possible reasons a customer could be contacting customer support, having a database that helps employees deal with various situations could be useful. A database of all previous situations, with information of how the situation was dealt with and any questions that were asked, can be kept and regularly updated. The customer should feel satisfied at the end of their interaction with customer service. Many businesses survey customers to monitor the success of their customer service department and gain information on where the process needs to be improved.


Management

Direct-to-Consumer-ManagementThe role of management is to facilitate coordination between all of the different divisions of the company. If the sales team says that the product will be delivered by January, but manufacturing knows that the product won’t be ready until March, there can be internal conflict as well as external backlash from consumers who purchased the product. Management should make sure all divisions of the company are on the same page so situations like the one described above are avoided. There is less room for error when selling through a direct to consumer channel, so the importance of ensuring products are delivered on time and promises are fulfilled is increased. Management should ensure that all divisions of the company share the same vision, believe in the same values, and are able to cooperate effectively.

Due to increased scrutiny when selling direct to consumer, reviewing and editing company policies to make sure employees and executives represent the company properly may be necessary, since a company’s image is crucial in B2C sales. Consumers are more likely to purchase from companies that are ethically and morally sound, or show some form of social or environmental responsibility. Management monitoring the company image and coordinating all departments of the company to have a shared vision can fuel growth and increase revenue.

Other Points to Consider


Maintaining a Good Relationship with Partnered Retailers



Maintain-Relationships-with-Current-Retail-Partners-794x1030Customer satisfaction is an important metric to keep track of when selling direct to consumer.  While satisfying every customer may be impossible, a customer service division that operates while keeping in mind the importance of customer satisfaction is more likely to succeed. Having a strong customer service team can increase revenue by reducing returns, avoiding negative reviews, and making customers into brand advocates.

Customers may contact customer service for several reasons including:

  • Purchasing the product or processing a payment.
  • Issues with a misplaced or incorrect shipment.
    Directions on how to use a product.
  • Making a return.

When dealing with customers directly, the variety of questions received will be greater than when selling B2B. Since there are many possible reasons a customer could be contacting customer support, having a database that helps employees deal with various situations could be useful. A database of all previous situations, with information of how the situation was dealt with and any questions that were asked, can be kept and regularly updated. The customer should feel satisfied at the end of their interaction with customer service. Many businesses survey customers to monitor the success of their customer service department and gain information on where the process needs to be improved.


Dealing with Negative Social Media



Having a social media presence is a necessity when selling direct to consumer. Social media can reach a wide audience, but the permanence of social media should make businesses wary. Once something is out there, removing it from the web is difficult. A negative social media post going viral could be detrimental to revenue. Messages should be reviewed before being made public, as they can easily be misconstrued and go viral very quickly before the mistake can be corrected. Since the product is being sold directly to the consumer and not through an intermediary, there is no shift of blame and the company is solely liable for any backlash.

Monitoring social media channels using services such as Google Alerts allows businesses to see any relevant mentions about their people, products, and brand. Using one of these services allows a business to react swiftly to any negative posts before other potential customers are influenced. Having a plan in place to deal with a negative situation would be beneficial to avoid being blindsided. Businesses should be quick to address the customer, apologize when necessary, and have a customer service representative follow up to resolve any issues. When replying to customers, the appropriate channel should be selected. Contacting the customer through a private channel such as phone, e-mail, or direct message might be preferable, depending on the situation, to avoid making delicate issues public.

Dealing with negative social media can be challenging, but the benefits gained by maintaining a social media presence outweigh the negative aspects. If a company’s social media presence is managed properly, social media can be a great tool for gaining new customers, increasing customer loyalty and brand awareness, and increasing revenue.