D2C: Direct to Success / Benefits and Challenges
Direct-to-Consumer (D2C) is gaining popularity among manufacturers who want to differentiate their distribution strategy and build a direct relationship with customers. But is this approach suitable for everyone? In our article, we will examine the benefits and challenges of this model, as well as discuss the different sales channels within D2C.
What is D2C?
D2C or DTC stands for direct-to-consumer. The name is pretty much self-explanatory: D2C is a B2C business model that functions with no intermediaries along the way. This means there are no distributors or retailers between the brand and its customers.
Traditionally, manufacturers frequently work with wholesalers, distributors, and retailers, such as superstores. As a result, the brand can focus on producing their goods and distributing them to the business partners who handle the rest.
In the direct-to-consumer model, all the crucial production and sales-related activities are the sole responsibility of the company. So, a D2C company needs to:
- Manufacture the products
- Store and pack them
- Distribute them to the stores
- And/or ship them to the customers
The Current State of D2C
The Direct-to-Consumer model is not new, but it has begun to gain greater popularity in recent years, especially with the development of Internet technology and changes in consumer behavior. Today, companies are increasingly using the D2C model to reach their customers directly, bypassing traditional distribution channels. According to a study published by KPMG, this model is currently getting traction in such countries as China, The United States, and Canada. In these countries, D2C accounts for over 15% of all online sales.
When we look at forecasts for the D2C market, we see rapid growth in sales in the direct-to-consumer channel in the United States. According to the data, D2C e-commerce sales will reach nearly $170 billion this year. Interestingly, companies previously distributing in the traditional B2B model are responsible for the vast majority of sales in this channel, while digitally native brands account for “only” 25% of this value.
D2C Sales Model – Benefits and Challenges
Let’s take a look at the benefits and challenges that come with the D2C sales model.
- Opportunity to increase margins
There are no middlemen between the manufacturer and the customer, so by the same token, there is no need to share profits, which, after all, affects the margin level. Manufacturers can make more profit from the sale of each product, even selling it at a lower price than in traditional distribution channels.
- Direct contact with the customer
Manufacturers can communicate directly with customers, collect feedback, thus better understanding their needs and preferences. This allows them to innovate faster and improve the quality of customer service and the products themselves.
- Building brand awareness and customer loyalty
D2C allows manufacturers to freely shape communication between the brand and customers and build brand awareness. This translates into increased customer loyalty and even community building around the company.
- Sales data analysis
D2C enables manufacturers to collect and analyze transaction data and order history. This allows for better customization of products, marketing efforts and sales strategies. Access to the data also allows for more advanced analytics based on AI and machine learning, which can be used to personalize communications and sales or improve loyalty program operations, among other things.
- Faster time-to-market
Manufacturers can bring new products to market faster, without the need to negotiate with distributors or change sales strategies at retail stores. This is particularly important in sectors subject to rapid change, such as fashion or technology.
Of course, there’s always the other side of the coin; the direct-to-consumer strategy entails some challenges and risks as well.
- Building sales and marketing competencies
In the D2C model, a manufacturer must handle sales and marketing on its own, which often requires building new competencies in these areas. This can be a challenge, especially for companies that have previously relied on external partners to distribute and promote their products.
- Managing logistics
Selling directly to consumers means that the manufacturer must manage logistics itself, including warehousing, packaging, shipping and handling returns. This can be complicated and costly, especially in the beginning when a company is just building its capabilities in these areas.
- Competition with distributors
Implementing a D2C model can lead to conflicts with traditional retailers and wholesalers, who may feel threatened and decide not to sell a manufacturer’s products.
- High barrier to entry
Implementing a D2C model often requires significant initial investment, for example in building an e-commerce platform, logistics system or marketing campaigns.
- Customer service
The D2C model requires the provision of direct customer service, which can be a challenge, especially when there is a large increase in the number of customers. Prompt and professional service must be provided, otherwise you risk losing customer trust and negative feedback.
- Systems integration
Moving to a D2C model usually involves the need to integrate various systems within the company, such as ERP, PIM and WMS systems. Effective integration enables a smooth flow of information and efficient management of business processes.
Types of D2C Business Models
You can approach D2C sales in several different ways. There is just one common denominator – you need to maintain full control over the sales channels you’re using.
Self-owned online store
Custom e-commerce is the primary sales channel in the D2C model, but its implementation is labor-intensive and involves a significant investment. It may be a good idea to divide e-commerce development into stages. The first may be to create an MVP (Minimum Viable Product), a simplified version of the online store containing the most key functionalities. The MVP allows you to test the solution and collect initial feedback from customers before taking further steps and investments. Next steps may include, for example, incremental addition of new features, improving usability or optimizing the customer’s purchase path. The phased approach allows for risk mitigation and efficient management of the e-commerce implementation process.
Platforms such as Facebook, Instagram, Pinterest and TikTok offer the opportunity to sell products directly through so-called social commerce. Typically, running such a store is free (except for the cost of advertising and marketing efforts) and not too complicated, especially if you don’t have too many products on offer.
Marketplaces such as Amazon, eBay and Allegro allow manufacturers to sell directly to consumers while offering access to their huge customer base. Other types of marketplaces are also specialized ones, meaning they offer an assortment of products from a particular product group, such as sporting goods or automotive items.
Temporary stationary stores can be a great way to promote a brand, test products and interact directly with customers.
The D2C model, while offering many benefits, also requires facing numerous challenges. The right strategy, such as dividing the implementation of an online store into phases or using a variety of sales channels, can help companies successfully introduce and optimize this model. D2C can open up new opportunities to increase margins, better understand customers and innovate faster.