Why direct-to-consumer e-commerce brands are winning over retailWritten by 1HQ 08 January 2021
In today’s super-competitive retail environment, new businesses in every industry have had to operate in innovative ways and adopt modern business models in order to be successful.
One of the most popular strategies adopted by new businesses in recent years has been the direct-to-consumer (D2C) model, which has allowed manufacturers and consumer packaged goods (CPG) brands to compete with established competitors simply by changing the ways in which they sell their products.
But what does ‘direct-to-consumer’ actually mean, how do direct-to-consumer brands operate, and are these types of business scalable? Here at 1HQ, we provide answers to all of these questions and more in this handy guide, as we explore the world of direct-to-consumer e-commerce brands and look at why these brands are winning over retail customers in a range of different industries and sectors.
What is direct-to-consumer?
The term ‘direct-to-consumer’ refers to the method of selling products or services directly to customers, bypassing any third-party distributors, wholesalers, retailers or other middlemen in the process.
What is a direct-to-consumer brand?
As the name suggests, direct-to-consumer brands are companies that manufacture, produce and then ship their products directly to buyers without having to rely on middleman retail stores, distributors or wholesalers to sell their products to consumers for them. This enables D2C brands to sell their products at lower costs than competitors who use traditional business models and retain a larger percentage of the profit margin, as well as being able to keep complete control over distribution, advertising and marketing.
Unlike traditional retail-based competitors, successful e-commerce D2C brands can also experiment with a number of different distribution channels to see which suits their product and business best. From shipping directly to customers to opening up pop-up stores and making short-term deals with both large and independent retailers, these flexible businesses can stay in control of their brands and manipulate their own retail exposure to their advantage.
Typically limited to one specialist product range or a niche area of expertise, some of the most successful D2C brands are now able to challenge established brands for market share and industry dominance in their own fields. From SimplyCook and Beer52 to LOLA and Harry’s Razors, D2C brands are popping up in every category.
Take Casper Sleep, for example. The direct-to-consumer e-commerce mattress company spent big on brand design, marketing and advertising - most notably its campaign in the New York subway and London Underground - at the start of this decade and now has the largest market share among all the online mattress brands and is valued at an estimated $1.1 billion.
Similarly, Dollar Shave Club and Harry’s Razors are taking the men’s razor industry by storm, challenging industry giants such as Gillette and Wilkinson. Through aggressive marketing campaigns - taking advantage of new mediums such as podcasting and social media platforms, popular with younger demographics - these start-up D2C brands have made a huge splash. Although Gillette brand still maintains about 55 per cent of the global market share for razors, that’s down from 70 per cent in 2010. This is in no small part down to the colossal success of Harry’s and Dollar Shave Club.
Why are direct-to-consumer brands so scalable?
The D2C model enables businesses to sell to customers without the need to distribute products via retail outlets and wholesalers. In the age of booming online shopping, more and more consumers have grown comfortable, and actually prefer, shopping online to traditional brick-and-mortar purchases. E-commerce D2C brands play into this trend and present quick and simple opportunities for customers to purchase products without having to leave the home - and therein lies the scalability of D2C brands.
According to industry experts eMarketer, online sales increased by a massive 35 per cent in 2020 and accounted for 30 per cent of all retail sales in the UK, up from 22 per cent in 2019. This trend has allowed D2C brands to increase profit margins even more, challenge for larger market shares, and even blend traditional retail sales and D2C offerings, enabling growth at a much faster rate than retail businesses that operate using traditional models.
This scalability has also only been helped by the COVID-19 pandemic. The virus has fundamentally changed the way consumers purchase goods, with shopping centres, high streets and town centres shut for months, customers have opted to shop online as a safer alternative. This has forced traditional businesses to accelerate their own direct-to-consumer models, while existing e-commerce D2C brands have reaped the benefits.
How many direct-to-consumer brands are there?
According to a recent report from eMarketer, as of 2019 there are over 400 direct-to-consumer brands operating globally today. Whilst this is only a drop in the ocean compared to the number of traditional e-commerce retailers in operation, the report also found that web traffic to the sites of D2C sites doubled between 2017 and 2019. With the COVID-19 pandemic forcing businesses to adapt different distribution models to survive, this trend is set to continue and the number of D2C brands is expected to grow rapidly as we enter 2021.
Why sell direct-to-consumer?
In theory, selling direct-to-consumers has a number of advantages. These include:
- The ability to build stronger brand loyalty with your customer base:
D2C brands are in control of their own brand image, customer services and general relations with their customers. For traditional businesses, once the product is sent over to retailers to sell, you no longer influence the sale. D2C brands, on the other hand, can form a direct connection with consumers, without having to put their reputation in the hands of third-party distributors. This also means they can establish strong and lasting relationships and improve retention through targeted advertising campaigns.
- Higher profit margins:
By eliminating the middlemen when it comes to selling their products, D2C brands achieve higher profit margins. When selling through a third-party, a business will only make profit on the markup from cost to gross sale. D2C enables brands to sell their products at the same price as retailers, receiving a higher net profit and improving their bottom line.
- Expanded market opportunities and increased scalability:
Unlike traditional manufacturing businesses that may have exclusivity deals with certain third-party wholesalers and stockists, D2C brands are not restricted by their distributors or by geography. They are able to sell their products wherever they want, making it easier to target key demographics and fill gaps in markets.
How to sell directly to the consumer?
Although there are many ways to sell directly to the consumer and become a D2C brand, there are a number of things a business must do to successfully operate in this way. These include:
- Identifying gaps in the market - developing products that make life easier for the consumer.
- Understanding your target user’s needs and wants - give them a unique reason to purchase from you.
- Staying competitive - cost is still a huge factor when it comes to driving online sales, especially when shipping costs are factored in. Providing a good product at a competitive price is the key to achieving success with D2C brands.
- Prepare to spend significantly on marketing - as potential customers can’t typically learn about your product(s) in a physical store, enticing them through innovative marketing is essential.
- Understanding the importance of properly implemented customer relationship management (CRM) processes and software - this is the key to interacting with your customers, getting this right is essential for all D2C brands.
- Using the right channels to engage with your audience - online and social media presence are vital to D2C models, especially when starting-up and trying to expand. Learning to not only market your products through these channels, but also interact directly with consumers and providing a customer service outlet is very important.