Direct to consumer (DTC) sales – What’s stopping you?
It’s a fair question, isn’t it?
After all, we’re witnessing a surge in demand for DTC. Right now, eCommerce and rapidly changing consumer behaviour are combining to power growth in direct to consumer sales.
So, if you manufacture consumer goods – especially consumer durables – you can no longer simply adopt a “wait and see” stance on D2C.
The shift towards consumers buying directly from manufacturers is already firmly established. The COVID pandemic is accelerating it and no one seriously thinks that it will go into reverse anytime soon.
The facts on DTC sales are indisputable
Here’s what’s already happened:
- According to the UK Office of National Statistics, online transactions grew by 38% between November 2015 and November 2019. In the year between November 2019 and November 2020, they increased by a staggering 68%. This meant that over one-third of all sales took place online
- Even before the pandemic, manufacturers of consumer packaged goods were seeing about 70% of their growth coming from D2C online channels
- A recent Bain & Company article on home appliances showed that between 2015 and 2019 online sales growth was more than 10x higher than through traditional bricks and mortar stores
More importantly, here’s what’s likely to happen in the future:
- According to Barclays Bank UK manufacturers can expect to see D2C sales growing from £96 billion to £120 billion over the next three years
- EY’s Future Consumer Index reports that globally 39% of consumers say they will shop more online for things they used to buy in stores
- The same index reveals that in the UK 64% of consumers will primarily shop online for appliances and technology in the future. What’s happening in the UK is being replicated elsewhere too.
- In February 2019 Salesforce interviewed consumer goods leaders. 99% of those surveyed said that they were investing in direct-to-consumer (D2C) strategies of some kind
This is why we firmly believe that now is the right time for direct to consumer.
And yet, there are many organisations that remain hesitant about opening DTC channels. Yours may be one of them.
That’s totally understandable. You have legitimate concerns. Potentially one or more blockers is holding you back.
If so, this article is for you because we explore the 6 significant DTC blockers. And, more importantly, how you can overcome them to successfully grow your business.
DTC Blocker #1 – Channel Conflict
As an established manufacturer, you’ve no doubt developed a successful B2B sales model.
Over time, you’ve built strong commercial relationships with dealers and value-added resellers.
Moreover, you’ve acquired those prized retailer listings that get your brands in front of large numbers of shoppers in outlets with the greatest footfall.
So, the last thing you want to do is to put those relationships at risk. Naturally, you’re rightly extremely wary about competing with your own customers.
Indeed, logic dictates that you don’t bite the hand that feeds you.
However, you can’t ignore the logic of the market either. And this is pushing you inexorably towards DTC.
So how do you solve the channel conflict conundrum?
Most importantly, you must recognise and accept that you cannot avoid channel conflict altogether. You can however alleviate it by:
- Creating differentiated products or additional services that your dealer or retailer partners can’t or won’t offer
- Bundling product support packages to help consumers get the most out of your products post-purchase
- Working explicitly with partners in the supply process. For instance, by providing the option to buy through the retailer (e.g. via referral links). Or fulfilment through the retailer/dealer (e.g. pushing orders through to distributors or offering click and collect at retailers for “extended product lines)
- Ensuring price integrity by not undercutting retailers or dealers. Research demonstrates that consumers expect either a better price or added-value when they go direct. To avoid channel conflict, ensure that you’re adding value not cutting price in your DTC channels
DTC Blocker #2 – Sales Cannibilisation
There’s a mistaken belief that selling directly to the consumer results in a proportionate or even disproportionate loss of sales through your dealers or retailers.
In fact, the greatest fear that some manufacturers have is that dealers will delist their products entirely. Worse still, you won’t then be able to make up the loss of this sales volume by selling directly.
This is an understandable concern but generally proves to be unfounded. There are two reasons for this:
Firstly, it is never a case of B2B versus D2C. Opening a D2C channel is not designed to replace your pre-existing B2B routes to market.
In fact, they must co-exist. As stated above, DTC should offer the consumer something additional. Done well, DTC does not cannibalise your sales.
Indeed, the reverse is true, it extends the addressable marketplace for your products.
Secondly, by directly owning the consumer experience, brand loyalty increases which can have a halo effect in more traditional retail channels.
DTC Blocker #3 – Reduced Profitability
At first sight, this may seem completely counterintuitive.
After all, going direct means fully or partially bypassing your dealers or retailers. Dealers generally buy at prices ranging from 35% to 50% off retail list price. That’s a lot of margin to play with when going direct to consumer.
However, depending on the product you make, this margin could be significantly eroded. Indeed, it could even be completely wiped out by the additional costs of direct business. These costs include:
Marketing and sales costs
In addition to campaigns designed to increase brand awareness, DTC business demands that marketing campaigns also convert consumers into paying customers.
Generally, this requires a significant investment in search engine optimisation and search engine marketing to drive traffic volumes. Plus, some form of incentivisation such as sign-on offers or free shipping to maximise conversion.
For manufacturers used to supplying in bulk it can be extremely challenging to set up efficient systems and processes for picking, packing, and delivering individual products to residential properties.
In addition to delivery costs, you must also consider how best to take consumer payments, handle delivery enquiries and deal with product returns and refunds.
Moreover, DTC processes need to run alongside your traditional B2B operations which inevitably increases supply chain complexity.
Finally, your manufacturing business now needs to forecast consumer as well as trade demand. As a consequence, you may have to manage stock holdings and delivery schedules differently in your DTC channels compared to B2B.
If you are going into DTC for the first time, you must make a significant investment in customer service.
Consumers have high expectations and you cannot fall short. These expectations include:
- High-quality webshops with detailed product information, excellent stock availability, easy check-out processes, and full traceability post-purchase
- Customer support online and by telephone through knowledgeable and fully trained customer service teams complemented by messaging services and AI
- Professional, branded and sustainable product packaging
- Slick processes for order enquiries and returns
As you weigh up the costs of going direct to consumer, you may conclude that your best strategy is to start small and to test your hypotheses in an agile way before scaling your DTC business
DTC Blocker #4 – Allowing short term pain to outweigh long term gain
It’s clear you must make significant transformational investments to get your D2C model right from a business profitability standpoint.
You also have the cultural challenge of successfully shifting to a more consumer-centric way of working.
These changes can be disruptive and costly in the short term.
However, there are ways to reduce risk and minimise the short-term pain of building your DTC business. These include:
- Selling directly to the consumer via an existing third-party eCommerce platform
- Setting up a web shop but subcontracting fulfilment to a third-party logistics organisation
- Operating an integrated, wholly-owned D2C channel. However, you limit cost and complexity by offering only those product ranges most closely matched to your ability to support direct consumer purchases
By taking smaller steps, you gain a better understanding of which product categories are likely to be the most successful.
Additionally, by adopting a phased approach to building your D2C business you also learn how to implement effective governance over your DTC operations.
This includes customer data management as well as customer success measures. For example, sales metrics such as average order value, number of repeat orders, and customer lifetime value. Or, customer experience measures such as net promoter and customer effort scores.
DTC Blocker #5 – Inability to understand and meet consumer expectations
Building a DTC infrastructure with digital technology as the key enabler is, on its own, not enough to guarantee a successful transition to direct to consumer sales.
Additionally, you must also fully meet consumer expectations. And the expectations that today’s digitally native consumers have of brands have never been higher. They include:
- Distinctive product and service offerings
- Personalised communications
- Low effort interactions
- Rapid delivery and easy returns
And increasingly, a socially responsible purpose led vision that they can identify with.
Meeting consumer expectations requires an understanding of consumer behaviour. And the key that unlocks this understanding is first-party consumer data.
Therefore, you must actively collect, analyse and act upon information provided by the consumer as part of the pre-sale, point-of-sale, and post-sale interactions with your company.
Clearly, it is also essential to invest in the means to collect this information – for example, consumer surveys – as well as the data management platforms to translate this data into actionable insights.
Indeed, it is these insights that drive product innovation, improved customer experience and increased sales.
As an added bonus, enhanced insight into consumer behaviour, often makes it possible to build a truly differentiated proposition. Thus, reducing potential channel conflict with trade and retail partners.
Finally, consumer insights help you to target your advertising spend on consumers who are more likely to convert into customers and brand advocates.
DTC Blocker #6 – Skills and mindset
What differentiates those consumer products manufacturers such as Apple and Nike who are truly successful in the DTC arena from those that are floundering?
The short answer is mindset.
Put simply, as a manufacturer, you have to be fully committed to D2C. There can be no half measures. You have to think like a consumer and act like a retailer.
As an example, back in June 2017, Nike introduced its Consumer Direct Offense. In its words, this was “a new company alignment that allows Nike to better serve the consumer personally, at scale”.
Just 3 years later it was clear how successful this acceleration in D2C had been. Whilst revenues had fallen 4 percent due to the pandemic, D2C sales had increased by a massive 47 percent. In fact, by June 2020 DTC made up over one-third of Nike’s $37.4 billion turnover.
When you first venture into DTC, it is unlikely that you will already have people within your organisation that have the necessary skills and mindset to devise and implement a winning DTC strategy.
Therefore, in the early stages of your DTC development, you may need to bridge some of the skills gaps by bringing in business development consultants. Or by subcontracting certain elements of your D2C ecosystem to specialist outside teams such as digital agencies.
However, it is imperative over time that you create your own DTC teams recruited from online retail backgrounds with up to date digital skills.
Your teams absolutely must have consumer-centric mindsets and the knowhow to harness data and external partners.
Without this, you may find it difficut to engage and convert consumers through differentiated offers and outstanding customer experience.
DTC is not new.
However, for many manufacturers it is not yet a successful channel. This is because one or more of the blockers outlined above are preventing DTC sales from become a significant engine of growth and competitive advantage.
However, you must overcome these blockers in order to thrive in the post pandemic world.
Building a dedicated D2C infrastructure, offering differentiated products and services, being consumer-centric, and delivering a simply outstanding consumer experience are the keys to success.
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