Global retail eCommerce topped $1.9 trillion in 2016, making up nearly nine percent of total retail sales that year. What’s more, eMarketer predicts the industry will exceed $4 trillion by 2020 and command over 14 percent of the global retail market.
Before the eCommerce gold rush, brands mainly relied on brick-and-mortar retailers such as Target and Walmart to sell to consumers. Today, with the rise of digital commerce, brands have direct access to their customer base.
With easy and secure payment gateways such as Paypal and Stripe, and a plethora of third-party fulfillment services and full-service eCommerce solutions, more and more brands are choosing to skip the middle man and sell direct-to-consumer (DTC). A recent study estimates that more than 40 percent of U.S. manufacturers currently sell direct to consumer.
It’s not hard to understand why the DTC model is becoming increasingly popular. By bypassing retailers, brands are able to foster long-term relationships directly with their customers. They also gain control over the transaction, user experience, and customer contact information, which are crucial to generating repeat purchases and customer loyalty.
With an online presence and international shipping, brands can sell to customers all over the globe. They can also innovate faster because the DTC model makes it easier to beta test new products and explore new markets without committing to irreversible, costly investments, or changing complex partner agreements with retailers.
Then there’s the economic advantage. Industry experts estimate that manufacturers can expect a 15 percent boost to topline revenue by adding DTC sales channels. This revenue is incremental to business coming from existing retail channels. Smart brands can take advantage of DTC channels without cannibalizing physical retail sales or upsetting existing brick-and-mortar partnerships.
The retail market is rapidly moving online, and manufacturers and brands of all kinds are scrambling to keep up. To compete in today’s globalized business environment, it’s essential for brands to consider how a DTC strategy could help them gain greater consumer awareness, reach more markets, and ultimately, increase their profitability.
The biggest benefits of the direct-to-consumer model:
You control the customer experience: When you sell through a department store or any third-party vendor, you most likely have little control over how your products are displayed or represented. You could find your products stuffed on the bottom shelf in the back aisle. Damaged product could be inadvertently sold to customers. Your competitors may be able to negotiate more prominent display and steal away your customers.
When you interact directly with your customers, you have more agency to present your brand in exactly the way that you want. This control ultimately allows you to fine tune the conversion funnel and drive more sales.
An example of a brand that’s transforming its consumer experience and seeing impressive results is Nike. The global apparel giant is focusing both on digital commerce as well as in store interactions.
Online, the brand is improving the shopping experience by giving consumers expansive customization options and access to its full catalog, including subsidiary brands such as Hurley and Converse. Through the NikeiD service, for example, you can customize about 11 parts of your shoe, including the famous swoosh logo, the base, midsole, lace, outsole, and more. You can do all of this online and get your shoes delivered to you in 3-5 weeks. Nike also offers this customization for clothing and accessories such as hoodies, bags, and shirts.
This focus on the customer experience is working out nicely for Nike. The shoe giant grew its DTC business eight times faster than its wholesale business in 2016. DTC sales surpassed $6.5 billion in 2015, far exceeding the company’s $5 billion dollar target and making up 24 percent of overall revenue. Nike projects direct-to-consumer revenues to reach $16 billion by 2020, all while maintaining their existing retail network relationships.
You stay connected to your customers: Another major benefit to selling directly to consumers is that brands can not only interact with their own customers, but they can also nurture these relationships and strengthen communications over time.
Staying connected to your customers is essential to getting repeat customers, who spend an average of two thirds more than first time buyers.
A lucrative and scalable DTC strategy is to establish a subscription service where people purchase your unique product or box combination every month.
An example of a brand succeeding with a subscription model is IPSY, which enjoys over 5 million monthly site visits, has more than 2.5 million subscribers and generates over $150 million annually.
Essentially, the stronger relationship you build with customers, the more likely you’ll have them coming back for more time and time again. Moreover, in the DTC model, brands actually own their customer data, which is the heart of any business. Having this data means you know their personal info, their purchase history, behavior, preferences, wishlists, customer support inquiries, concerns, reviews and ratings, and credit card information. Having a deep picture of their consumers in this way allows brands to excel at delighting their customers, to pivot and adapt to changing tastes, understand the demand for new products, increase conversion rates, and ultimately, increase profitability.
Corey Epstein, co-founder and creative director of direct-to-consumer jeans brand DSTLD, told Racked.com that the customer data it gathers from its site allows it to be really nimble. It can know in real-time whether skinny jeans are selling better than straight-leg denim, for example.
“We are adjusting what quantity we produce based off our previous demand. That’s something we couldn’t do in the traditional world. Brands don’t even know what is selling until two months after when they get a report from the department store,” Epstein said in the interview.
You can expand into new markets on your own terms: One of the biggest risks associated with expanding your business into new regions and countries is that you don’t know if people will buy your goods. You can hedge for success, and save time and money by promoting your brand via social media and selling online direct to consumer, instead of taking the more time-consuming route of building a relationship with a retailer. You can test and develop new products as well take advantage of small-batch production runs, limited products, pre-orders, waitlists, and customer surveys.
A great example of a brand exploring new markets with DTC eCommerce is Kiehl’s. The beauty company is incorporating direct to consumer sales into its omni-channel expansion in Thailand to gain brand awareness and market share.
You can increase margins: Third-party retailers often mark up the price of goods by 50 percent or more. By making the sale directly with consumers, brands can put much of this margin back into their bottom lines.
For example, Nike is seeing almost two times the proceeds and substantially better margins per sale when it fulfills orders online.
In a recent earnings call, Nike CFO Andy Campion emphasized the importance of its DTC channel by saying it was “more productive and profitable than other less differentiated consumer experiences.”
There is clearly attractive growth potential in the direct to consumer model. However, some business owners may have concerns about making the transition.
Common concerns associated with going DTC:
Navigating existing retailer relationships: Some companies fear that their third party retailers will be unhappy if they move towards a DTC model. What if retailers don’t want to give you as much floor space or go so far as to no longer your products?
There are ways to keep retailers happy and expand your business with DTC. It’s important that you keep your prices consistent so you don’t undercut third party sellers. You can also keep your existing catalog in traditional retail stores and roll out new exclusive products via your own site and offer exclusive and custom product offerings online.
Establishing B2C infrastructure: Perhaps the most daunting part of rolling out a DTC strategy is the added costs of servicing each customer, fulfilling a magnitude of orders daily, packaging, the additional upfront costs of warehouse space and transportation fleets and other unforeseen hidden costs. You also need to hire a team of ecommerce experts, including people to manage store maintenance, digital marketing, payments, fraud protection, returns, logistics, tax compliance, and more.
While these are valid concerns, they can easily be navigated by partnering with a full-service eCommerce provider such as Scalefast, which serves as your global eCommerce partner by helping you deliver a seamless eCommerce experience from store creation to inventory maintenance to last-mile fulfillment.