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The Direct-To-Consumer Model Is Taking Over The World

Our shopping experience may never be the same again

3Jun

Both retailers and consumers rave about the efficiency of the direct-to-consumer (DTC) approach which is gaining prominence in e-commerce. So what are the reasons for choosing the DTC model over a traditional in-store or distributor one?

With the strategy being a relatively new one, we have to bear in mind that brands are still experimenting with it. While some are currently having more success than others, sooner or later, the future of retail may well revolve around it. One of the reasons why the model has become popular is that consumers have become increasingly aware of the inner-workings of the retail business model and its markup scheme.

In terms of sales, the math is quite straightforward: items purchased at traditional retail outlets usually have a markup of 400%. That means that the $1,500 leather jacket in a store would cost around $300 to produce. After adding a modest 100% markup for the sake of designers, it is then being topped up by another 150% markup on the final price tag.

One of the advantages of the direct-to-consumer approach is that entrepreneurs can avoid investing in brick and mortar sites, rent and hiring staff. The Internet has always been a cheaper and in some senses, a more convenient place for retailers and consumers. It has seen a huge increase in the numbers of direct to consumer models not only from a monetary perspective, but also in the sense that one of the key aspects of a distributor/retailer model is that they create the buzz around the product and the producer only needs to create the product itself. With the increased use of the internet it is now easier to bypass this and create buzz around a product or company. Through basic approaches like social media marketing and even gaining popularity through crowdsourcing sites like Indiegogo or Kickstarter, direct-to-consumer companies have found that they can create their own buzz and demand for a product.

A pioneer of this model is Warby Parker eyewear, a brand which could be considered as one of the most successful examples of a company using the DTC business model.

Warby Parker was founded in 2010, a time when the US eyewear market was operated as a near-monopoly concept with one large company controlling pricing. Using a DTC strategy, the brand managed to undercut the bigger player by aggressively using its direct-to-consumer strategy. It beat the rival's prices which led to a reshaping of consumer opinion on how much a pair of glasses should cost. That's not all, Warby Parker also managed to create a strong social message by donating one pair of glasses for each pair sold. Dozens of brands attempted to use a similar approach, but most of them have not had the same kind of success.

So does it mean that the direct-to-consumer approach only suits particular brands? No, not necessarily, it just needs to be done correctly.

When it comes to strategic planning, it is important to look at all relevant elements. In order to make the model work, there must be the right 'value'. There are two types: one lies in a good product at a fair price. The other is the value that derives from cultural credibility, trends, and other intangible factors. Brands that want to survive and succeed by using the direct-to-consumer approach must apply a good blend of both.

Another element is that supply chain and customer experience need to be at least at the same level as traditional retail models. Bike manufacturer Canyon recently fell foul of this when switching to a new factory and software system, with customers complaining about missed orders, slow manufacturing times and frustrating customer service. It seems that the worst is over and they are back to the point they were at, but the reality is that it did significant damage to their brand and made people think twice about buying from them in the future.

In order for the DTC movement to continue to grow, brands need to champion their strategy. While new brands will continue to flourish, established companies need to be patient because it may take some time to integrate the model into their business routine. It changes the dynamic of how a company operates, but can have significant results if it is done right.

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