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Four Reasons Businesses are Adopting a Direct-to-Consumer Model

12 minute read

The world is evolving into a fast-paced environment. 

Fast-Shipping-Statistic-1

Consumers want everything available immediately and conveniently. 83% of consumers say that fast shipping is considered as receiving the item within 2 days. This change is what has led to the rapid growth of e-commerce sites such as Amazon, Alibaba and eBay. The growth of these e-commerce siteshas led retailers such as Target, Walmart, and Best Buy to also increase their online presence. Competition is ultimately beneficial to the consumers, but has a severe impact on the bottom line of the manufacturers and the brands who supply products through these channels.

The pressure on prices has been increasing steadily leading to shrinking margins for the manufacturers. To combat shrinking margins, companies such as Nike have been investing aggressively in developing a Direct-to-Consumer (DTC) channel. Nike.com sales have shown a 46% increase in fiscal year 2016 from 2015, while total sales have only shown an 8% increase. Brands and manufacturers adding a direct to consumer sales channel in addition to their current channels allow them to:

The pressure on the supply chain to provide products quickly

Combat the problem of shrinking margins

Offer customization to consumer

Aligning your company's goals with the consumer's needs

 

 

The Pressure on the Supply Chain to Provide Products Quickly



In the past, whenever you needed a new razor, wanted to rent a movie, or just finished that book you were reading and needed to find a new one, a trip to a brick-and-mortar store would be involved.

Now, companies such as Dollar Shave Club, Netflix, and Kindle allow you to do these things without even leaving the couch. Amazon is now even expanding to grocery items so consumers can do their grocery shopping online, and have items delivered in under a day to their home. Brands that don’t have a direct-to-consumer channel are missing out on sales because consumers can just opt for a competitor which they can purchase from directly.

Buy-Direct-1According to a survey done by BrandShop, 90% of consumers would buy directly from the brand if possible. If 90% of consumers would rather purchase from a brand’s site rather than an online retailer, DTC sales can allow brands to control their own pricing structures and protect them from negotiated into lowering their margins by retailers. However, maintaining relationships with current retailers is also important as to not alienate any sources of revenue. Relationships can be maintained by making sure there is never any direct competition, such as marketing in the same space, and by not undercutting each other’s prices.

These shifts place enormous pressure on corporate supply chains to adapt to the new world of e-commerce. The standard of maintaining only B2B relationships and not marketing directly to the consumer has been outdated and adding more distribution channels is becoming a necessity.

Combat the Problem of Shrinking Margins

 

Margins are ever shrinking since retailers must put on more sales and lower their prices just to keep up with the increased competition. Shrinking-Margins-1In the past before the e-commerce boom, the process was simple. A retailer or distributor would purchase the product from the brand, and sell it at a higher price. This would result in a profit for both the retailer and for the brand. Now with the introduction of these e-commerce giants, such as Amazon, which buy the product from the brand and sell the product almost at cost, sometimes with no margin, retailers are being faced with the problem of not being able to compete with the price set by Amazon. As a result, retailers will want to get the product from the brand at a lower price, which hurts the margins of the brand directly.


Adding a direct-to-consumer channel allows a brand to sell directly to the consumer at the same price Amazon is selling to them and maintain a healthy margin. Remember that 90% of consumers have stated they would rather purchase directly from the brand than an online retailer. With this data being accurate, consumers would be more likely to purchase from a DTC channel than from Amazon.


For example:


Company A manufacturers soccer balls at the cost of $4 per ball.


Retailer X:

Purchases 1000 soccer balls at $8 each:        $8000

Profit for Company A:                                        $4000

Overhead costs incurred:                                  $3000

Sells 1000 soccer balls at $16 each:              $16000

Profit:                                                                    $5000

Amazon:

Purchases 1000 soccer balls at $8 each:        $8000

Profit for Company A:                                        $4000

Overhead costs incurred:                                  $2000

Sells 1000 soccer balls at $11 each:               $11000

Profit:                                                                    $1000


Customers have no reason to purchase from the retailer because they are getting a lower price through Amazon, especially since 72% of millennials research and shop their options online before going to the store. To compete, the retailer must now lower their selling price. In order to lower their selling price while maintaining healthy margins, the retailer has to go to Company A and ask for a lower purchase price.


Now:


 A Retailer:

Purchases 1000 soccer balls at $6 each:        $6000

Profit for Company A:                                        $2000

Overhead costs incurred:                                  $3000

Sells 1000 soccer balls at $11 each:              $11000

Profit:                                                                    $2000



So now Company A is only making $2 per unit sold to the retailer. If they had a direct to consumer channel, they could continue to sell to Amazon and the retailer, while making up for any lost margins by selling directly to the consumer as well.


Company A:

Manufactures 1000 soccer balls at $4 each:   $4000

Overhead Costs:                                                   $2000

Sells 1000 soccer balls at $11 each:                  $11000

Profit:                                                                      $5000



The margin on each soccer ball would now be $5 each when selling through a DTC channel, whereas when selling to a retailer it was only $2-$4.

The additional direct-to-consumer channel improves margins, increases customer base, and allows the brand to continue their relationship with the retailer without hurting either of their bottom lines. The DTC channel also provides a safety net in case Amazon or the retailer should ever stop purchasing their product. If the direct to consumer channel is successful and the main source of revenue for the brand, then they don’t have to rely exclusively on Amazon and the retailer to carry their product. Not being dependent upon retailers offers leverage in controlling the price the inventory is being sold for so that the brand remains in control of its’ own margins.


Offering Customization



When selling through a retailer, the actions a company can take are limited. A set number of products must be shipped and each product should have specific attributes. When selling directly to the consumer, a company has a lot more flexibility in what can be offered. Consumers can get their products exactly how they want them with a personalized touch.

nike-air-presto-rio-teal-white-black-1-300x300Flexibility in the products they offer is one of the reasons Nike has transitioned to a business model with a direct-to-consumer channel. If a customer walks into a retailer such as Footlocker, finds a shoe that is comfortable, but not visually appealing, they can’t have their shoe customized to be visually appealing to them. This problem can result in the loss of sales. However, with Nike’s new e-commerce sales channel, finding something visually appealing isn’t an issue. A customer can go online and customize exactly the type of shoe they want and not have to shop at a different retailer or brand. Not only does being able to customize products increase convenience and brand loyalty, but it shows that the company is willing to work with the customer and cater to their needs. Other businesses such as Trek, which allows cyclists to build their own bicycles, and Brooks Brothers, which allows men to create suits, have adopted this trend by allowing their customers to have their products they way they want them.

Personalization doesn’t just have to be product design, it can also be added to shipping procedures. Personalized gift cards included in packages or specific packaging are also factors which can be appreciated by the customer and boost sales. Customers having the ability to select preferences such as shipping type (express or normal) and delivery date can also enhance the experience of the customer.

Although, businesses should note that there can be added risks in offering personalization and custom preferences. An issue with the product or it a late product delivery may hurt brand image. The company could be held liable for the issue, since the product is being sold directly.

 

Aligning Your Company’s Goal with Consumer Needs



Coordinating the efforts of the sales and engineering teams can be a challenge. The marketing team can be a key asset in helping coordinate both teams and share information between the two. However, for the marketing team to be successful they need to have access to consumer data.

When selling directly to the consumer, highly detailed data collection is possible. Having their own DTC channel allows a brand to see things such as:

  • Which pages customers are visiting the most.
  • How much time is being spent on each page.
  • Which products each customer is purchasing.
  • Geographic location of customers.
  • Information entered when creating their account such as e-mail, ethnicity, and age.


78% of customers are more likely to buy from retailers with targeted ads according to a 2014 Infosys Survey. Collecting extensive data will allow brands which are developing these direct-to-consumer channels to further refine how they target their customers.

The ability to collect emails whenever the customer registers on the website is a major benefit when comparing direct-to-consumer to other channels. When selling through a retailer, the retailer may collect e-mail addresses, but these addresses never reach the brand. As a result, any direct marketing efforts via e-mail must go through the retailer. However, when the e-mails are collected through a DTC channel they can be used for many purposes. Two of their most essential functions are alerting customers of sales or new products, and surveying customers.

Alerting existing customers before via e-mail of an upcoming sale or product launch can generate additional revenue and gain loyal customers. Prospective clients have a 27% chance of buying after their first visit, and a 54% chance of buying after their second visit. So, if a sale or promotion entices them to come back and view the website, customers are more likely to make a purchase in the near future.

Surveying customers can be one of the best forms of receiving feedback and gaining a perspective on where your company needs to improve or adapt. Surveys sent after a client makes a purchase can be very helpful because a customer can describe their shopping experience and point out any issues which may not have been thought of previously. Also, if there are changes being considered, sending out a survey to see how customers would react to them could refine the changes and safeguard against backlash.

The information acquired by collecting this data and conducting these surveys can also be relayed to the engineering and sales teams to know how the product needs to be adapted, which products need to be promoted, and how sale prices can be adjusted. The information allows the engineering or product development team to adjust the product to satisfy customer needs. Information received through surveys about how the product can be enhanced can be valuable in creating a better product. The sales team uses the information collected to know which demographics to target and how the customer’s shopping experience can be improved. The goal is to use this data to improve brand loyalty and customer retention, as well as to allow the brand to gain insight on what it is already doing well, and what it is lacking.

When selling through a retailer or distributor, brands don’t see direct customer feedback or interaction. For example, if someone asks their friend where they got their shoes, the answer might be “at Footlocker” and mention nothing about which brand of shoe they bought. If a consumer always purchases their shoes at Footlocker or their clothes on Amazon, they aren’t loyal directly to the brand, but rather to the retailer. 

Attracting-New-Customers-Cost-5-Times-As-Much

Not having that brand loyalty can hurt the brand because they are still having to compete to acquire a customer’s interest every time they are shopping through that retail channel.

Customer retention is much easier and cheaperthan customer acquisition. A study conducted by consulting firm Bain & Company alongside Earl Sasser of Harvard Business School in the year 2000 showed that a 5% increase in customer retention could increase profits by anywhere from 25%-95%. In today’s fast-paced environment where consumers don’t want to shop around, or take the time to look for other brands, and are more likely to purchase from those they are already comfortable with, brands could see an even greater increase in profit. Also, it costs 5 times as much to attract a new customer than to retain a current customer. In addition, existing customers spend 31% more and are 50% more likely to try new products. These factors all advocate for a direct-to-consumer channel that allows the brand to communicate with directly with the consumer.

Direct-to-consumer channels also offer a safe environment to test new products before sending them to a retailer. If the brand realizes there is an issue with the product, they can immediately stop sales, issue refunds wherever necessary, and directly address customers. Whereas if the brand is selling through a retailer, it may take days or even weeks to correct the issue.

Increased customer engagement also leads to increased customer retention and brand loyalty because when consumers are browsing the brand’s website they are not being enticed by other brands as they would on a retailer’s website.

Sometimes when marketing is handled through the retailer, messages can be misinterpreted or altered. Misinterpreted messages can result in the brand reputation being impacted in a negative way. DTC channels allow companies to represent themselves in a way they see fit and make changes quickly before any damage is done.

A direct-to-consumer channel allows for companies to collect the necessary data, address the customers directly, and adapt their company’s goals to fulfill the needs of the customer.

 

Pick-to-Light Can Help You Adopt a Direct-to-Consumer Model


pick-to-light-device3
A simple URL causes the wireless IoT Cloud Display Devices to light up with two lines of custom text.  Use it display the picker’s name, SKU and quantity to pick or indicate into which bin or tote the picker should place the product!  It easily integrates with your WMS/ERP or you can use Google Sheets or Excel!  Devices run on 2 AA batteries that can last for years, depending on usage.  It's the next-generation of pick-to-light and can be used in many other ways!