Direct-to-Consumer (D2C/DTC) model – why is it getting more and more popular?
For the past years, the D2C (direct to consumer) sales model has been gaining popularity – more and more manufacturers have decided to open their own branded shops or sell through such channels as Amazon. What are the advantages of this model? What do brands have to pay attention to when making a transition to D2C? How to manage pricing in such a situation? Read our article to learn more!
D2C / DTC – what is it and how does it differ from the traditional sales?
Abbreviations D2C or DTC stand for Direct-to-Consumer. Simply put, it is a model in which a manufacturer sells directly to final consumers, without the intermediary of retailers.
Traditionally, the most popular model was the one in which a brand was responsible for manufacturing the product which was then distributed to retailers. Retailers offered these products to the final customers and were responsible for product promotion and distribution across different shop’s branches.
In the D2C, it is the brand that is responsible for:
- Shipping the products.
It also needs to have a strategy for B2C pricing and customer service very well thought-through.
Naturally, a brand doesn’t have to give up selling via retailers completely when deciding for the direct sales – instead, they can combine those 2 models.
How popular is D2C?
Although the direct-to-consumer approach is nothing new, it has been gaining popularity in the last few years.
According to a Barclays Corporate Banking report from 2019, 73% of UK manufacturers declared that they were already selling some or all of their products directly to end users. As a comparison – in 2014, this number equaled 56%. In addition, 77% of the manufacturers polled aimed to invest in D2C in 2020.
In the US, D2C ecommerce sales grew 45.5% in 2020, making 14% of total retail ecommerce sales. It shows how significant the market dynamics is.
The popularity of the D2C model depends on the industry. The leading one is Apparel and Accessories in which, according to PipeCandy, as many as 77% of companies are D2C companies. As a comparison, in the “Jewelry and Luxury Goods” category the share of D2C brands is only 4%.
Advantages of the Direct-to-Consumer model
Why do so many companies decide to try out the direct-to-consumer model?
- The first reason is customer data that they gain. Without the intermediary of retailers, brands can understand their final customers better – by analyzing both direct feedback as well as aggregated data about clients (demographics, acquisition channels etc.). It gives them insights about the type of customers that are interested in their offer and their behavior on the website.
- Secondly, D2C is currently significantly easier and cheaper than it used to be. Brands don’t need to open their physical stores – they can set up an online store instead. Many of them don’t even decide on that, but prefer selling directly on marketplaces. Then they need to take fees and provisions into account but on the other hand – don’t have to care about setting up and maintaining their own online store.
- Higher margins – when selling directly to the final customer, brands can set higher prices than the ones that they offer to retailers. In other words, they transfer the margin that used to belong to retailers to their account. One should remember, however, that due to the increased costs related to the maintenance of the website, customer service, packaging and shipping, DTC brings lower net profits than it might seem at the beginning.
Customer experience & marketing activities
- Brand can optimize customer experience – in the traditional model, brand usually depends on a marketing strategy of retailers. With its own online store, it can define and optimize the customer experience, e.g. by implementation of loyalty programs, appealing presentation of their offer, etc.
- What’s more, brands can have a closer relationship with their customers. They can ensure high quality of customer service, manage clients’ complaints and react to customer feedback immediately. It can often lead to innovations, e.g. in product development.
- Exploration of new sales and marketing channels – brands that implement D2C model have more flexibility in deciding where, apart from their and their partners’ websites, they want to promote and sell their products. These can be price comparison websites, such as Google Shopping or Idealo, as well as marketplaces, such as Amazon or Allegro. It allows them to target new customers.
Pricing in the Direct-to-Consumer model
When a brand decides to sell in the D2C model, it needs to think its pricing strategy through – especially if it still sells via partners as well. Should the pricing be based on costs (cost-based pricing) or on the market prices (e.g. should the decision be influenced by the margins previously set by retailers?).
According to Agata Mossop, VP Channel Development at Lenbrook International:
Price competition simply should not occur between the manufacturer and the distributors. It is not a long-term strategy and it speaks poorly of the brand.
You can learn more in the interview with Agata Mossop about building effective cooperation with retailers.
The first step when determining the pricing strategy should be analysis of the market prices. At what prices do your clients sell your products? Do prices change frequently? You can check it in the Dealavo tool for price monitoring. You should take retailers’ prices into account – if you offer products at prices that are too low, it might negatively impact your relationship with them. On the other hand, if you set prices at a significantly higher level than other stores, you may not attract any customers. In the tool, you will be able to check which products are available on different e-commerce platforms as well (e.g. if your client has an account on eBay) and which stores have them in stock.
Once your store is set up, you should keep on analyzing the market to be consistent in the positioning of your store. That’s what the price tracking tool is used for (among other things). Learn more in our article about price tracking tool.
Apart from analyzing prices of your brand’s products, you can compare your prices to other manufacturers that you compete with. Make sure your marketing strategy and price positioning are consistent – the best way to check whether your products are relatively expensive or low is by computing the price index.
And, of course – don’t forget to adjust your strategy based on your results. Check how the change in prices influences your profits. Then, you can automate your pricing based on rules that are the most effective.
Warby Parker is probably the most referred-to example when it comes to the D2C model. It’s one of the pioneers that started selling glasses online. It is famous for giving the opportunity to test products ordered online – customers could order up to 5 glasses for testing and return those that they don’t like for free. Apart from their online store, Warby Parker owns physical stores as well. The company is active in social media as well:
Direct-to-consumer – final thoughts
Selling in the DTC model can be a tempting option for brands. It is cheaper than it used to be, is likely to bring additional profits and get to know the customers better. What the brands should remember is that it needs to work on some new operations.
From our side, we can recommend reading some materials about pricing: