Is Direct-to-Consumer Selling the Future of E-Commerce?
Technology has made online shopping easier than ever. Customers are able to access thousands of items at the touch of a button, making items more accessible and easy to find. Consequently, when the pandemic forced countries into lockdown and stores to close, many consumers started shopping online. Now, even despite stores reopening and allowing customers to shop in person, customers are choosing to stay at home and shop online, causing many companies to rethink how they do business. Before the pandemic, most companies used business-to-business (B2B) transactions to get their products onto a retailer’s shelves. Now, a lot of businesses (start-ups especially) are turning to direct-to-consumer (D2C or DTC) e-commerce to sell their products.
What is Direct-to-Consumer (D2C) E-Commerce?
Direct-to-consumer selling occurs when companies manufacture and distribute their products directly to buyers without reliance on retailers or other middlemen. Put simply, businesses produce and distribute their products directly to the consumer. This allows smaller firms entering new markets to avoid being pushed off of a retailer’s shelves by larger brands in the market. The purpose of D2C e-commerce is to “tailor the shopping experience to the consumer rather than the retailer”.¹ By eliminating the middlemen, firms are able to interact directly with customers and focus on providing the best shopping experience possible.
How D2C Firms Differ from Traditional Firms
As mentioned earlier, D2C firms eliminate the need for a middleman or retailer to get their product to market. Their marketing strategies also may differ to that of a traditional firm. Where a conventional business may advertise themselves via TV, billboards and magazines, firms using a D2C model usually market their products directly to the consumer through social media, YouTube and podcasts.
D2C brands also place a great amount of emphasis on customer experience and outreach and as a result, invest heavily into their marketing budgets. Their marketing budgets may increase at higher rates than traditional retailers due to the fact that sales are curated mostly from the firm’s online presence. In 2019, “78% of DTC brands said they increased their marketing budgets, compared to just 60% of conventional retailers”,¹ illustrating the importance of maintaining a strong online presence as a determinant of success as a D2C firm.
Lastly, the growth goals of D2C brands compared to traditional retailers can differ greatly as well. Firms that sell through traditional retailers usually want to increase sales quickly by bringing the product to a larger market. As D2C firms focus more on enhancing the customer experience and customer retention, they usually focus more on scaling their business at a sustainable rate, customer acquisition and personalization. This means creating the potential for the business to grow without being negatively impacted as well as drawing in and retaining customers. To accomplish these goals, they may also use technology such as artificial intelligence (AI) and chatbots.
Why Choose D2C?
In an age where consumers’ shopping habits are changing, expectations are rising too. There are more choices than ever before and so the onus is put upon firms to stand out from the crowd by meeting a consumer’s needs. Brands selling through traditional retailers usually have little influence on how the product is sold and its appearance on shelves. These firms rely purely on retailers to satisfy their customers. However, firms utilizing a D2C approach take back control over these things. They have the ability to make decisions on how the product is sold and its appearance on the company website and by tailoring them to a customer’s preferences, increase the chance of a sale.
Furthermore, with this model, it becomes easier to communicate a brand’s values giving them a unique selling point (USP) over their competitors. When a product is sold through a retailer, a profit may be made. However, by selling through a retailer, a firm loses the opportunity to convey its unique story and interact directly with customers — things that are essential to build long-lasting consumer relationships resulting in loyal customers.
Most importantly, the D2C model allows businesses to gather customer data which can allow a business to gain a better understanding of its customers. A thorough understanding of customers increases the likelihood of success in a market. As the D2C model provides access directly to the consumer, collecting vital information such as spending habits, viewing history etc. becomes a lot easier, allowing for a firm to understand their customers better. Customer data plays a big role in the business models of multinational corporations such as Facebook who use the data gathered from user profiles and searches to adjust potential advertisements accordingly; tailoring the ads to appeal more to the user, increasing the chance that they are clicked upon and viewed.
COVID-19 and D2C E-Commerce
As mentioned previously, the pandemic has resulted in lockdowns across the world. Such actions have led to a drastic change in both consumer spending and shopping habits. With shops and storefronts closed as a result of the pandemic, firms have had to rethink how they sell their products. The D2C model gained popularity because of its ability to be carried out directly online and as a result, many firms invested heavily into the technologies necessary to make it as successful as possible. The success of this model is evident. Recently, “Lululemon saw an increase in online sales by 68% to $352 million”² relying on this method to “generate more than half of its revenue”.²
As a result of shifting from the office to now working from home, consumer preferences towards formal wear have changed too. More people now favour athletic wear such as that “of Nike compared to the now-bankrupt formal wear of Brooks Brothers and J.Crew”.² These trends were reflected in Nike’s recent quarter earnings as “online sales spiked by 75% to just under $2 billion”.² The firm relied on direct-to-consumer sales for “30% of its revenues — a target that it was not forecasted to reach until 2023”.²
But it’s not just clothing companies that are shifting towards a D2C model. American multinational company PepsiCo launched PantryShop.com; a website geared towards selling their drinks and snacks.² AB InBev — “the world’s largest brewer has begun to test its own D2C scheme in Belgium”.² Though it may appear difficult to switch to this method of commerce, doing so appears to be a relatively easy process. Shopify; a Canadian company that helps other companies set up their own e-commerce platforms, claims to have “helped Heinz do so in just seven days last April”.²
Is D2C the Future of Commerce?
With all of these firms investing heavily into their online presence, it prompts the question: why not go 100% online? The answer is simple. These firms do not expect direct-to-consumer sales to account for majority of the revenue, rather they are concerned about collecting something far more important: consumer data. The data that can be collected by selling through their own sites is an opportunity one simply cannot miss. Since 2018, “Nike has bought two data-analytics firms to help measure and track data collected from online shoppers”² and chose to end “a two-year pilot programme wholesaling through Amazon, choosing to direct all e-commerce sales through its own website”.²
Additionally, data is important for these firms as it has the potential to increase sales. Though they do not expect a drastic increase in sales as a result of this approach, the consumer data gathered from the D2C model will provide an insight into consumers’ spending and shopping habits. This gives firms a competitive advantage over their rivals. As a result of gathering primary data, firms become less reliant on market-research reports and are able to use first-hand data to make decisions regarding how to tailor an online shopping experience directly to the consumer. PepsiCo head of global e-commerce, Gibu Thomas, says the company plans to use the data not only to customise online offerings but to inform in-store selling strategies as well.² Getting access to firsthand data directly applicable to a firm is of paramount importance. As said by Mr. Thomas at the shop’s launch in May, “What is different about this, is we’re getting data on what people are doing versus what they say they will do”.²
It is evident that the D2C model has significant benefits. The heavy investment by firms signifies a shift in consumer shopping habits. Though currently it is not expected to generate large revenues, the data gathered from this approach can lead to decisions that will. Overall, it is a model that encapsulates the preferences of the 21st century consumer and one that has the potential to increase a firm’s presence in the global market.
[1]A Better Lemonade Stand. “50 Direct-to-Consumer Brands & What You Can Learn From Them.” A Better Lemonade Stand, A Better Lemonade Stand , 29 June 2020, www.abetterlemonadestand.com/direct-to-consumer-brands/.
[2] “The World’s Leading Brands Jump on the Direct-Selling Bandwagon.” The Economist, The Economist Newspaper, 26 July 2020, www.economist.com/business/2020/07/26/the-worlds-leading-brands-jump-on-the-direct-selling-bandwagon.
