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Direct to Consumer
Customer experience, refined product, storytelling, interactivity, transactionality, data use - what is the success of Direct to Consumer strategy based on?
An efficient supply chain, effective distribution at points of sale and domination in traditional communication channels have cemented the stable competitive advantage –status quo – of leaders in the CPG category for many years. New sources of financing, the growing popularity of consumer and business digital technologies and, as a result, a fresh approach to building customer experience, and to developing a product based on data, have led to the emergence of entirely new competitors, so-called Digital Native Vertical Brands (DNVB), brands born in the digital world, such as Dollar Shave Club, Casper, Warby Parker, Allbirds, Glossier, Honest, Bonobos, Away, Everlane...
DNVB brands are nibbling away at leading brands in their respective categories, they have taken 12% of the market share for razors, 15% for sports shoes and 20% for mattresses (Luma Partners).
DNVB
- What DNVB’s success is based on
- What are the two main strategies for implementing Direct to Consumer?
- What competences should an organization implementing the D2C strategy have?
What DNVB’s success is based on
The global FMCG leader Procter & Gamble (market capitalization of $353 billion), with a number of brands in its portfolio, has been attacked by a number of specialized, vertical competitors. The graphics prepared by CBinsights illustrate which contenders, including many financed by Venture Capital, compete with brands held by the concern.
Source: Disrupting Procter & Gamble: Private Companies Unbundling P&G And The Consumer Packaged Goods Industry
[access 13.11.2020]
Global ecosystems: the prevalence of the Internet, mobile applications facilitating multimedia storytelling, customer acquisition, communicating benefits, building and involving the community, and collecting and analysing data
Obsessive focus on improving customer experience and continuously improving products based on consumer feedback (Allbirds brand of sneakers funded on Kickstarter has made improvements to the product in 27 iterations)
Self-service, hyper-targeted, billed for results digital advertising (Programmatic buying, walled gardens Google/FB/Twitter)
General availability and easy implementation of eCommerce solutions (Shopify, Amazon, Allegro)
Simple organization of efficient fulfilment, distribution, returns, customer service
Consumer openness to testing new brands, low loyalty to category leaders
Relying on data collected from each interaction, at every stage of customer acquisition and customer service, throughout the organization, ensuring a full optimization loop (CAC > LTV)
Venture Capital investing heavily in all categories of CPG, “disrupts” current leaders. The first DNVBs on the stock exchange include Peloton ($39 billion market cap), Boohoo ($5 billion market cap), Casper ($312 million market cap), Blue Apron ($91 million market cap).
What are the two main strategies for implementing Direct to Consumer?
The rapid success of digitally native brands in attracting customers and scaling up has not escaped the attention of current leaders. In response to the new, agile competition, two main defensive strategies have been selected - buy or build.
Firstly - Acquisitions (acquihire), among other things, to use the digital competences developed by DNVB:
- Unilever > Dollar Shave Club - $1 billion (2016)
- Amazon > PillPack - $1 billion (2018)
- Coty > Kylie Cosmetics - $600 million (51% shares in 2019)
- Nordstrom > Trunk Club - $357 million (2014)
- Walmart > Bonobos - $300 million (2017)
- P&G > Native - $100 million (2017)
Secondly, implementing the Direct to Consumer (D2C, DTC) strategy drawing on DNVB’s best experience and based on traditional competitive advantages (scale, consumers, business relations, financing, supply chain, marketing, etc.). However, the attempt to introduce a directly competing offer turned out to be neither simple nor fast - Gillette Shave Club (a creative copy of Dollar Shave Club) appeared on the market only four years after the original and was perceived by consumers as being an unreliable attempt at imitation. It took Nestle Nespresso fourteen years to become profitable, during which time awareness of the environment and the need for a closed ecological system have changed, resulting in the company being consistently criticized for littering the world with capsules or blocking the use of reusable coffee cartridges. Iconic examples of an effectively implemented D2C strategy are represented by brands such as Nike, Disney and Birkenstock, which have made difficult decisions regarding the role of resellers in the sales channel, product portfolio consolidation, building competences, and their own omni-channel sales based on customer experience.
Source: Felix Richter, Nike Cuts Out the Middleman [13.11.2020]
19% of the sales ($11 billion) of “The House of Mouse” are made through a Direct to Consumer channel, mainly through Disney+. The company’s recent reorganization has separated the content production competences from Media and Entertainment Distribution, which is fully responsible for P&L management, distribution, operations, sales, advertising, data and technology, streaming service and TV networks.
What competences should an organization implementing the D2C strategy have?
Organizations building competences of Direct to Consumer are able to collect and use data and digital technologies to continuously optimize various areas of their business.
Benefits resulting from the implementation of the Direct 2 Consumer strategy
Full resignation from or limitation of the role of intermediaries, direct sales to customers (without resellers, independent retailers, marketplaces).
Direct relationship with customers, building knowledge about their preferences, behaviour, attitudes (1st party data ownership, full sense of identification and building customer engagement)
The ability to quickly and iteratively improve products, advertising, sales, customer service, etc. based on immediate consumer feedback and data collection
Full tracking of expenditure on advertising campaigns on digital channels and its direct impact on sales (also offline - Warby Parker sells glasses in almost 100 stores in the USA with a margin similar to Tiffany). Often implemented by insourcing marketing structures directly to the organization.
Better customer experience - full control over the brand and its environment, product, distribution channels (omni-channel without channel conflict), communication, customer service
Higher margins, higher sales, loyal customers
The crisis situation in which some companies found themselves as a result of the Covid-19 pandemic may significantly contribute to the use of the Direct to Consumer strategy in day-to-day operations, in the upcoming period. Factors such as: greater role of advertising and digital media, remote sales and services, the need for self-service, without contact or isolation may be also important.
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