Direct To Consumer – Why do it and how to make it work?

By November 3, 2020January 26th, 2021No Comments

Our Managing Director of Retail, People & Organisation Considers the Direct to Consumer Model.

Psychologists believe it takes 66 days to create a long-term habit. With the third wave of a global pandemic upon us, the consumer shift to online and digital over the last 12 months looks set to stay and the “stickability” of this shift looks promising for those with a strong digital presence. 

So, with this backdrop it is easy to understand that many consumer brands and manufacturers are considering their Direct to Consumer (D2C) strategy. From the early D2C brand disruptors like Dollar Shave Club which was subsequently bought by Unilever for $1BN in 2016, through to the impressive “rise” of Gymshark in the UK, there are plenty of examples of successful D2C companies and brands across the globe. Outside of the macro trend towards e-commerce and the D2C model, there are also other important reasons for looking at this business approach:

Capitalising on today’s digital tools and platforms to develop a direct-to-consumer capability can deliver a range of benefits across financial, operational and market dimensions:

Revenue growth – Brands can establish their own direct connection with customers, increasing engagement and conversion rates through their own eCommerce channels.

Improved margins – Brands no longer have to outspend the competition for better in-store positioning and promotions through pricing or trade spend or negotiate pricing with retailers for paper-thin margins.

Expanded market reach – Brands don’t need to be restricted by geography or their distributors’ reach when they market and sell their products directly to consumers online.

Reduced capital expenditures – Brands can reduce some CAPEX investment costs as they don’t necessarily need to develop costly, cumbersome brick and mortar physical retail stores to drive growth. They do however, need to invest in digital channels.

Improved customer data – Brands can leverage the incredible wealth of data generated by digital tools and platforms to better understand their customers’ preferences, lifestyles, demographics, and path to purchase.

Improved customer experience and relationships – Brands can own their customer relationships by leveraging their data-driven understanding of customer behaviour and the consumer market to deliver a more targeted value proposition.

Comprehensive product assortment – Brands can provide a full assortment line of products while not being restricted to what traditional retail partners deem as “hot” selling items.

Add to these advantages the impact of a strong digital strategy on share price, where Nike has seen the share price rise by 130% since they announced their “Consumer Direct Offence” late in 2017.

Deloitte D2C Graphic

Graphic Credit: Deloitte

However, the path to being a successful D2C company is not always straightforward and this business model requires consumer brands and manufacturers to contemplate:

  • It has the potential to alienate important Wholesalers and Retailers if not managed carefully and strategically
  • Brands become responsible for customer service, an expertise that they might not have at the fore if they have been used to working through more traditional retail channels
  • The initial outlay of costs and expenses should not be underestimated and whilst margins might be improved by cutting out the “middleman” e.g. the wholesaler or retailer, these funds will need to be somewhat reinvested in things like digital marketing and social media
  • Brands will potentially acquire increased operational costs and risks
  • Armed with this higher level of consumer engagement and touchpoints it is imperative customer data is effectively utilised to understand what the consumers expect. Failure to engage and cultivate this input effectively will lead to disheartened consumers who move on to the next engaging brand

So, given these advantages and things to consider, how do you go about building a successful D2C strategy? We believe there are a number of key building blocks to this journey which are split across strategic and operational issues:

Culture – like with most of these successful transformations the culture has to be right from the very top of the organisation to bring about long term, sustainable change. Nike’s D2C strategy has been driven from the very top with the CEO, Jon Donahoe consistently communicating its importance internally and externally. True consumer companies have customer obsession at their very core as the level of engagement of the consumer and the requirement to manage this relationship is heightened the moment you move to the Direct to Consumer model.

Data & Systems – with a D2C operating model it is imperative that systems are fit for purpose and do not give a consumer a reason to walk away or disengage. Website speed has to be fast, functionality has to be in line with consumer expectations. Data has to be collected and connected to create a single customer view across a complex, multi-faceted data landscape. The organisations that are successful in this space engage effectively and seamlessly across consumer channels and use consumer data and feedback to inform customer service, product offerings and even pricing.

Marketing – Demand generation and driving traffic to your webstore is an industry in itself, with the pace of change rapid. The organisations that do this well constantly test, refine, implement and review marketing techniques, creating that continuous learning cycle with return on investment the key KPI. With social media now being used by nearly 50% of the global population and 54% of social media users researching products through Facebook, Instagram, Twitter etc (source: GlobalWebIndex) it is important that you are highly competent in this digital marketing space. Give consideration to using relevant influencers to give credibility to your brand with 49% of social media users impacted by influencers in their buying decisions (source: Fourcommunications).

Product – it goes without saying that the quality of a product is key to success in these highly focussed consumer companies.  Some of the key questions these organisations should be asking themselves include: Do your competitors sell a similar range to yourself via D2C? To what extent does ongoing consumer feedback influence product development and pricing? To what extent do we test new products with our consumer base for feedback and do we have a community for this? How well do we understand product profitability within the organisation and how much does this influence the product offering and pricing? How well controlled are counterfeit products within the market and do we have robust policies in place to protect the organisation and the consumer? How closely do we monitor the competition to ensure our product offering and pricing is appropriately positioned? Could we offer a subscription service as part of our offering to help ensure revenue predictability? (Warby Parker is a good example of this model – check them out!) All of these questions and more are key to ensuring your product maintains relevance and your business stays healthy

Payments – The world of payments is going through a huge transformation and has been for the last few years. With the rise of Klarna, Laybuy and Clearpay, alongside the stalwarts of Paypal, Apple Pay and Google etc they are all grappling to create that perfect consumer experience in the checkout. The savvy brands and manufacturers are considering these options as part of their consumer journey and making one or more of these options available based on their consumer persona and what will work well with their customer base. Our view on this is take the time to pick the right checkout options and test, test, test to create that frictionless checkout experience which consumers now expect.

Fulfilment – Amazon have shown us all that efficient fulfilment which meets your consumer demands is key to building trust and a sustainable business, but of course we don’t all have Amazon’s resources and fulfilment space in the UK is rising in price given the surge of e-commerce over the last few months. Next recently commented that “We estimate that the additional cost of these facilities in the current year will be in the region of £2m”. Therefore, organisations will need to be creative based on their assets and give consideration to other options which could include shipping from the factory directly, shipping from dark stores, shipping from “pop up” nodes strategically based due to consumer concentration or shipping from the retail store directly utilising inactive staff due to reductions in footfall. Again, organisations will need to appraise their options given their business dynamics.

Direct to Consumer Fulfilment Options

D2C Fulfilment Options

Transport – Management of the supply chain inbound and to your consumer (final mile) is a key customer touchpoint and should be considered very carefully. One of our close associates, David Meredith ex Head of Operations at the John Lewis and Waitrose group was telling me recently about the importance of the John Lewis van turning up at your front door so the neighbours could see this when the new furniture was delivered! John Lewis’s consumer feedback helped them understand the importance of this and these delivery touches are key to consumer satisfaction. Speed is obviously a key component of Transportation and delivery but depending on the product this can vary. Delivery time options and convenience may become more important e.g. the delivery and removal of a white good product, or the environmental considerations for the delivery is also gaining prominence with the younger consumers. Again, this comes back to understanding your consumer and potential consumer and having options that fit with their requirements.

Returns – like much of this consumer journey the commodity we are trying to create as part of the transaction is time for the consumer and a frictionless process. Returns is another key area for these D2C companies to consider and once again Amazon have led the way in creating a smooth and easy returns process. Returns and the ease of returns is a key buying consideration as part of the consumer journey and it really can make a “world of difference” between the one time customer who purchases but never returns or the long term customer who advocates strongly for your brand and the customer experience.

People – as the ex Head of HR for eBay Enterprise in Europe and Asia I could not finish this article without reference to the key catalyst for success in this D2C journey, your people. Whether it’s the guy picking and packing product in your retail store that is fulfilling e-commerce sales in their inactive time in store or the girl delivering the product to the front door of the customer, customer obsession and having this at the core of the organisations culture is key! As is having the right skill set and this D2C journey requires some new and different skills that may not be in existence. Going back to the start of this article Unilever recognised back in 2016 that Dollar Shave Club had good momentum but more than this they had the D2C skills that they wanted to engrain in their organisation and culture and this is key to a successful D2C journey.

 Ben Willis – Hexagon

Ben Willis leads the Retail, People and Organisation practice of Hexagon Consultants and advises companies on their e-commerce and D2C proposition – please get in touch if you’d like to discuss your D2C journey!

Call 0113 8730040