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01
Mar

2017

Why a Direct-to-Consumer model is now critical for manufacturers

It’s not often you’ll hear Shakespeare quoted in modern day business - but the Bard may have had manufacturers in mind when he wrote, ‘It is not in the stars to hold our destiny, but in ourselves’.

Many of today’s consumer product manufacturers certainly live by that mantra, with an increasing number taking matters into their own hands - opting to sell direct to consumers, rather than solely relying on retail partners. The digital age has paved the way for this shift, which promises the potential for higher sales through better access to consumers and the opportunity for brands to establish more control over the customer experience.

Reaching these benefits isn’t easy. Indeed, the shift to a direct-to-consumer (DTC) model relies on the development of a new brand and selling strategy, enabled by eCommerce and online marketing. The relatively low costs of digital technology have made DTC a more viable option, yet it’s a transition that poses challenges. For established brands, new digital competencies are required and existing business models will need to be modified. And while new entrants are likely to be more digitally native, brand awareness will need to be achieved quickly.

The DTC concept has been something that most consumer goods manufacturers have been experimenting with for some time, albeit unprofitably, but many are recognising that their future survival could now depend on it. We’re already seeing established manufacturers being challenged and usurped by DTC start-ups able to offer a more engaging customer experience – but some are fighting back.  

Gillette vs Dollar Shave Club

There’s no better example that characterizes the DTC model than Dollar Shave Club, and it’s ongoing battle with established manufacturing goliath, Gillette. Gillette’s 120 years of trading history has counted for little against the direct engagement approach employed by 2011 start-up, Dollar Shave Club.

If you’re one of the few people not to have heard of the subscription-based online retailer, Dollar Shave Club (DSC) offers consumers regular delivery of razor blades for between 3 and 9 dollars a month. By 2014, sales had grown to 65million dollars, with the start-up winning multiple awards for its highly engaging web presence, bold brash marketing and viral videos.

Gillette recently responded with the launch of its own subscription service, Gillette Shave Club - offering payment plans starting from $17.50 to receive five Mach3 Turbo cartridges every five months. Not only more expensive than DSC, it is more expensive than Gillette’s own in-store products - suggesting the strategy is to establish itself in the subscription world without compromising retail partnerships.

This is a difficult balance to strike. Established brands have an edge over start-ups in terms of brand recognition, and can leverage this to transition towards DTC sales and the benefits it brings (lower costs, brand control and so on), but aiming to keep retailers on-side at the same time is a major challenge. Offering exclusives in one of the spaces may be one way to do it - and there is an argument that this best of both worlds approach fits best with current consumer trends.

The consumer perspective

Almost one third of European consumers who shop online, now buy more products directly from a manufacturer than they did 5 years ago, according to the Manufacturing Pulse 2016 report. This trend, often referred to as disintermediation, is seeing more consumers looking to bypass the middleman and buy directly from the manufacturer – with the aim of paying less.

 In slight contrast, the rise of Amazon represent the continued consumer appetite for the ‘one-stop shop’, with shopper habits heading ever more in the direction of convenience. While a subscription-style service like Dollar Shave Club fits the convenience trend, in the sense of home delivery, is it likely that all consumers will engage with multiple brands directly in this way - when their preference is to buy multiple products in one shop? This seems unlikely, which is why the right balance must be struck.

Here’s where it becomes important to investigate ways in which you can deliver DTC sales without compromising your retail partnerships. Nevertheless, disintermediation is unlikely to be a fad that is going to disappear anytime soon. Earlier in June, we witnessed this model in action with the launch of Shobr – the new Danish online grocery marketplace, run by suppliers without retailers.

 For branded manufacturers, Shobr provides a new route to market at a lower cost as they can sell directly to customers via the platform. It also allows them to showcase their entire range, as there is no limit to the shelf space available. It will be interesting to see how this model catches on and if they execute their promised international expansion.

 So, whatever strategy best fits your business - whether it’s cutting out the middleman altogether or simply offering an alternative DTC channel, it’s clear that now’s the time to start getting closer to your consumer customers.

Three ways to get DTC right

  1. Control the customer experience: Selling directly to your consumers means winning back full control of your brand. From marketing and packaging to purchasing and delivery, you’ll be driving the whole customer experience at every touch point.

Consider the shaving product example again. Traditionally, retail partners (drugstores, chemists etc) controlled the purchasing experience - and it wasn’t a particularly positive or enjoyable one. Razor blades locked away behind protective cabinets served to complicate the buying process and made it difficult to browse and compare alternatives.

Of course, with marketplace competition relatively low, giants like Gillette never had cause to change the experience - until game-changers like DSC laid down the gauntlet by offering customers a far more engaging purchasing process.

It is also vital to ensure the necessary fulfilment operations are in place to ensure consumers receive a consistent and positive customer experience. This is a common pitfall that some manufacturers fall into. No matter how engaging, effortless and elegant the online experience, from awareness to purchase, if a consumer is let down by poor delivery the whole process is undermined.

Even if your business isn’t under this kind of pressure today, investing in your brand and optimising your customer experience is key to fending off potential rivals in the long-term. 

  1. Get closer to your customers: Valuable customer data is far more easily captured and analysed online than it is in store - so selling directly to your customers via e-commerce represents a real chance to get closer to your customers.

Personalisation is a key consumer trend, and shoppers now expect a tailored service from brands. Harnessing consumer data and new technology to create these one-to-one shopping experiences gives you a real edge.

  1. Engage across multiple channels: As part of the personalisation process, you need the means and the intent to listen to your customers across multiple channels.

Create social connections with your customer base, and you’ll build meaningful conversations that give you greater insight than ever before into what works for your business.

Brands no longer need to listen to customer needs through the 'retailer filter'. Where success of a product was once defined solely by retailer’s sales figures, now you can interact directly with your customers to find out exactly what drove those sales (or lack of). 

This combination of e-commerce driven data, direct social engagement and meaningful consumer conversations is key to developing brand affinity that lasts a lifetime.

Ultimately, every manufacturer needs to look at the financial case for DTC. Is there real potential there or does the opportunity only represent a small fraction of revenue? Another consideration is that a move to DTC is clearly going to concern current retail partners, who are likely to consider the manufacturer as new competition.

Understanding these implications are as important as weighing up the new operational challenges (i.e. multichannel management, fulfilment and customer services) versus the distinct advantages of owning the customer relationship.  

Ben Robinson

Ben Robinson

Practice Director: Customer, Consumer & Digital

     

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