As technology thrives and becomes every day an essential component of an individual’s daily life, it also changes the way companies operate. Nowadays, brands are more than ever looking at ways to engage with their costumers and be present in their lives. As a consequence, a new model of business has appeared in the last years, due to the success of e-commerce platforms, known as the Direct to Consumer (DTC). In essence, a firm which embraces this kind of business entity does not use traditional distributors, retail shops or any other “middle-men” channels. Products are directly sold to the customers, most of the times online or also through their own branded stores (Forbes, 2020). The most known examples are the American beauty brand Glossier, the yoga-related apparel brand Alo Yoga and last but not least the made in Italy swimwear brand adored by the influencers, which is Amazuin.
There are two main values which enable the success of this new concept. Firstly, products are sold to the consumer at a price above the traditional wholesale but at the same time is lower than retail (Forbes, 2020). Secondly, the premium which is established, is used for marketing in order to acquire the attention of potential customers and retain them in the long term. Consequently, on one hand the consumer pays less but on the other, the brand makes the same profit and builds a relationship with the client. On the whole, it is a win-win situation (Forbes, 2020)
Moreover, also numbers are key components to determine the financial sustainability of a brand and its potential to scale up. The first one is the gross margin. Normally, successful DTC companies have a gross margin in between 50% to 85% and this depends entirely on the type of product (Forbes, 2020). If a product or a service of a company works, its gross margin will increase incrementally as the business grows and expands its distribution operations. The other component is the costumer acquisition cost (CAC). Since DTC brands have a strong need and desire to attract directly their customers to the website, store or app, this cost is simply the advertising needed through Facebook, Instagram and other social media platforms (Forbes, 2020).These two numbers are extremely meaningful and crucial for the success of a DTC company.
What is more, DTC necessitate a wide variety of customer-centric capabilities in order to exceed the CAC and grow in terms of customer lifetime value. There are four significant factors which increment these numbers. To begin with, technology is the fundamental pillar of a DTC company. From the IT architecture to security systems, it ensures excellence and support across the entire purchase experience of the customer. Furthermore, data and analytics bring customer-insights and demands up to light. The difficulty stands in collecting and ingesting data from different sources and then group them in a common data pool that supports analytical models. Nevertheless, if a concentrated range of information is collected, it helps the company in driving value by enhancing customer satisfaction, understand preferences and identify signs of churn. Moreover, another factor is operations which differs depending on the stage of a company. At an early stage, DTC brands often outsource their logistics to enable quality, speed and the flexibility to improve the efficiency of operations. Meanwhile, brands who have their own retail network use their stores as e-commerce fulfilment centres (McKinsey, 2020). Lastly, an agile operating model is necessary to adapt to the constant changes in customer preferences. Cross-functional teams need to be built in which they will work on limited sprints to iterate on products or services based on customer outcomes.
On the whole, the pandemic accelerated this customer shift towards digital channels and also the digital usage had an increase of 14% (McKinsey, 2020). The e-commerce penetration gave raise to a new way of making business without using intermediaries, but aiming for a direct contact with the customers. Also, as restrictions are fading away, DTC brands are implementing activities in order to have a stronger engagement level and retain more their customers.
Sources:
McKinsey. (2020). DTC e-commerce: How consumer brands can get it right. https://www.mckinsey.com/business-functions/marketing-and-sales/our-insights/dtc-e-commerce-how-consumer-brands-can-get-it-right
Forbes. (2020). How Direct-To-Consumer Companies Succeed—And Why Many Fail. https://www.forbes.com/sites/richardkestenbaum/2020/09/21/how-direct-to-consumer-companies-succeed-and-why-many-fail/?sh=1798331e6531