As more middle-market manufacturers choose to skip the middleman and sell DTC, let’s take a look at the pros and cons of taking such a leap and why you should start thinking like a digitally-native DTC brand.
The Benefits
First party data
When you sell DTC (direct-to-consumer), you have direct access to the consumer. Selling online gives manufacturers valuable insights into customer profiles and purchasing habits, and allows manufacturers to “own” their customer data and build their brand accordingly. When customers buy direct, you know who they are, where they live, and how to contact them.
Never before has there been more opportunity for manufacturers to build ongoing relationships with consumers. Gone are the days of solely relying on retail partners for customer and sales data — which typically offered little insight into why products performed (or didn’t) and gave zero insight into who the customer actually was.
Testing new products before rolling out to retailers
With your radical new visibility into customer data comes the ability to test new products before rolling them out to retailers at scale. Having direct engagement with consumers allows many of our manufacturing clients to forecast demand before mass production begins and to use real-time feedback from their digital marketing campaigns to determine production quantities and the best target market (thus which retailer to sell to). Testing new products can also greatly decrease the chances of stale inventory eating into your profits.
Offloading slow moving inventory or buybacks
For some of our manufacturing clients, this benefit alone is reason to setup a DTC e-commerce presence. Having your own DTC e-commerce website or setting up a branded store on a major e-commerce platform allows a manufacturer to run sales on slow moving inventory, and provides an opportunity to get a much higher return on the inventory compared to liquidating or selling at a loss.
Just because a product didn’t sell-through at Retailer ABC, it doesn’t mean there isn’t a demand. With creative digital marketing strategies you can run highly targeted marketing to get this product in front of the right audience.
Some great offloading strategies we have worked on with clients include:
- Flash/seasonal sales: Limited-time opportunities or season related offerings for customers to take advantage of a great deal.
- Product bundles: Re-package a slow moving product with complementary product(s) and combine your products into one sale for a customer.
- Gifts: Change the price of stale inventory and offer a “buy one, get one free” (BOGO). Consumers value free offers and can feel obligated to buy more with the proposition of a free product.
- Donations: As corporate social responsibility is increasingly valued by consumers, offering to donate the slow moving product to a relevant/current cause can drive sales and better position your DTC for increased brand-loyalty.
The Challenges
Marketing costs
While DTC can be a no-brainer for companies manufacturing high end brands at high price points, DTC can be less attractive for companies selling less expensive goods. Even though DTC is often seen as “cutting out the middleman,” that doesn’t make it cheap.
When manufacturers take the leap into DTC, most find themselves competing through the same channels and targeting the same customers as numerous other DTC brands. This drives up customer acquisition cost (CAC) and as some e-commerce industry experts say, “CAC is the new rent.” Instead of the traditional middleman (the retailers and wholesalers), manufacturers are presented with new gate keepers – Amazon, Facebook, Instagram, etc.
This is not to say that brands can’t succeed on these channels with a creative and results-oriented approach, but with a flood of DTC competition in most markets, there is an increasing need to differentiate your marketing strategy and there is definitely no more “build it and they will come.”
Operations and logistics
Often the most overlooked challenge in our experience is the time and cost associated with setting up and maintaining a DTC operation. Fulfilling and delivering online orders can significantly squeeze margins, and managing a consumer facing brand and the customer service involved can take up a huge chunk of your organization’s time.
With easy and secure payment solutions like Paypal and Stripe, and a ton of third-party fulfillment services and full-service e-commerce solutions like Shopify and WooCommerce, you can greatly simplify the DTC process. But don’t underestimate the hard and soft costs associated with setting up and maintaining your e-commerce business.
Here are some key operational questions we present to our manufacturing clients thinking about creating an e-commerce site or selling DTC as a third party:
- Who is going to handle customer service?
- Who will be in charge on monitoring and maintaining inventory?
- What shipping courier(s) will you use?
- Will you offer free or flat shipping rates?
- What countries will you ship to?
- What will your return policy be?
- What payment processing solution(s) will you implement?
Tough competition
Following a surge in venture capital money to DTC brands over the last decade — more than $3 billion from 2012 to 2019 — competition is as tough as ever. Now many of the most hyped, extremely well funded DTC brands are struggling to meet expectations and in some cases are even opening physical retail stores and selling through traditional retailers to keep up with their investors need for constant growth.
As the line between the DTC and traditional brand business model fades, your competition is everywhere.
No matter what, you should be thinking like a DTC
We encourage every one of our manufacturing clients to consider going DTC. Not because it’s always right for their organization, but because it forces them to step back from the way they have always done business and think about selling to a new generation of customers.
Those same DTC customers that everyone’s lusting over are the new buyers, account managers, merchandisers, etc. of your retail and wholesale clients. Whether you’re selling to them directly or the business they work for, manufacturers (and any B2B company) must reconsider how they communicate and conduct business with this new workforce.
Business is, and will continue to be, about relationships. But where and how those relationships are formed and fostered is changing. With 82% of B2B buyers wanting their business purchasing experiences to be similar to their personal shopping, the modern B2B buyer expects more from the companies they do business with — a vast array of company/product information readily available online, personalized digital buying experiences, and online customer service just to name a few examples.
Back to the basics
No matter what path your company takes on your quest for digital transformation, it’s important to really consider the “why” before investing in any new digital marketing tools or channels. As with any new technology or trend, it’s easy to get wrapped up in the excitement of conquering something new, but just because you can build it doesn’t necessarily mean you should.
Like any business decision, it’s important to define and keep true to your organization’s short and long-term goals. If you’re building a DTC e-commerce site to move stagnant inventory, you will likely have a completely different set of solutions than if your main objective is to test new products before presenting them to major retailers or brands.
