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5 Key factors driving the Direct to Consumer model

Manufacturers selling direct to consumers is a hot topic. From Microsoft, who recently confirmed that they plan to open a first store in Europe in central London (adding to their approx 100 stores in the US and 1 in Australia), to Tesla, who have forsaken the traditional dealership model to sell direct, manufacturers want to get closer to customers and control the customer experience like never before.

Here are five key factors driving the direct to consumer (DTC) model:

1. The Amazon Juggernaut

Amazon is a threat to pretty much every retailer and CPG (consumer packaged goods) company that exists today. The online retailer accounted for 43% of all ecommerce sales in the US during 2016 and is expected to exceed half of all sales by 2021. Meantime, it’s estimated that 52% of consumers start their online shopping by going to Amazon, giving the brand an unprecedented grip on demand.

As a result, many manufacturers are facing a stark choice between selling through Amazon in order to maintain access to consumers, in the full knowledge that Amazon is entering many product categories itself, or developing a DTC model to build stronger customer understanding and loyalty.

2. Digital A Game Changer

To say that Digital has been a game changer would seem both glib and profoundly self-evident. Yet the continued surge in ecommerce and mobile commerce, plus the transformation brought about by digital marketing, are key factors in the DTC uptake.

It’s easy to launch an ecommerce site and the attraction of higher profit margins, faster growth (eg. ecommerce is growing 23% pa. in the US versus single digit growth offline) and direct access to consumers are alluring. Furthermore, the demographics are hard to ignore for any brand intent on maintaining relevance. 67% of Millennials prefer to shop on online rather than in-store whilst both Millennials and GenX spend nearly 50% as much time shopping online each week (six hours) than their older counterparts (four hours).

With digital marketing, the success of brands like Dollar Shave Club in side stepping traditional advertising and instead using social marketing to build substantial and profitable audiences has many companies sitting up and taking notice. The vice grip of Google and Facebook on paid advertising, the importance of search engine optimisation, the viral effect of channels like YouTube are all factors that have contributed to a transformation in marketing. This has forced manufacturers to rethink how they support their brands and opened the door to more targeted, direct promotion versus traditional mass marketing.

dollar shave club

Image Source : dollarshaveclub.com

3. Customer Experience Becomes A Competitive Advantage

Customer Experience has accelerated up the marketing priority list in recent years. With companies facing fierce competition at a local, regional and global level, combined with an erosion of pricing power and product differentiation, customer experience is a potential competitive advantage to both acquire and retain customers.

Meantime, digital savvy consumers are demanding a better experience and are equipped to penalise brands that fail to deliver. Expectations for digital have been set by brands like Amazon, Uber and Facebook, who’ve focused on simple, intuitive journeys that are fast and personal, embraced technologies early, such as mobile, social and cloud, plus ensured interoperability across devices. Beyond digital, customers want to have a personal, seamless experience with brands across online and offline channels, spurring the focus on multichannel and ultimately omnichannel.

A traditional route to market selling wholesale into retailers means the product owner vests responsibility for the customer experience to the retailer. By going direct to consumer, manufacturers maintain control of the relationship and therefore can invest to enhance the overall experience.

4. Data & Brand Communications

Nestle is the world’s largest food and drinks company with $90bn in annual sales. The Company has been steadily increasing its investment in ecommerce, announcing a few months ago that ecommerce now accounts for 5% of total sales, up from 2.9% in 2012. It’s also an area growing fast, up 18% last year (34% if Nespresso is excluded), 6X faster than the Company’s average growth.

Nestles CEO highlighted that Nestlé wants to establish “direct channels of communications” with consumers so it can offer improved service, communication and the ability to buy direct. Nestle’s aspirations are shared by many companies with DTC propositions, building direct relationships with consumers to increase both customer intelligence and loyalty. More customer loyalty results in a greater share of wallet and potentially more predictable revenues. Just look at what Prime has done for Amazon.

Customer intelligence helps companies to make better decisions in developing their products and propositions, and of course targeting customers more effectively. And in the emerging world of big data and AI, collecting customer data puts manufacturers ‘in the game’ in terms of being able to personalize the experience for their customers.

5. It’s All About The Economics

Economics 101 tells us that if you sell something through a third party, you have to give away some of your margin. So assuming a manufacturer's cost of sales rises less selling direct than the margin saved by selling through retailers, there is the opportunity to increase profitability.

Amongst the reasons Tesla provided for bypassing a traditional dealer network in favour of selling its highly successful electric vehicles direct, has been the pressure on margins. Tesla were concerned that with relatively low volumes of sales, compared to traditional auto-manufacturers, the overheads for managing and incentivizing franchise dealers would undermine profitability.

Tesla Store

Image Source : cleantechnica.com

Unilever’s acquisition of Dollar Shave Club in 2016 grabbed the markets attention with a $1bn+ purchase price of a company yet to make a profit. It was viewed as a bold move by Unilever, helping them to accelerate their digital transformation. One key attraction for Unilever in acquiring Dollar Shave Club, beyond the direct selling model, was its customer acquisition model utilising social marketing and in-house expertise, versus more traditional external advertising agencies and TV exposure. Unilever has the the second-largest marketing budget in the world, spending $8.4 billion in 2016. If some of that investment can be deployed more effectively, the potential to increase profitability is significant.

The DTC Model May Be Compelling But Remains Challenging

Selling directly to consumers may represent a compelling opportunity for manufacturers. However, making it a success represents many challenges in terms skills, culture, processes, insights and more. Companies like Unilever have opened their deep pockets to accelerate digital transformation. Others without the ability to build by acquisition, have to choose partners carefully to bring the expertise, agility and innovation required to deliver success.

About Knexus

Knexus works with manufacturers to improve the profitability of their direct to consumer proposition. Its real time content decision making engine delivers personalized customer journeys in real time that enhance engagement and increase sales.