The rise of Direct-to-Consumer
9 June 2020
Why D2C is a trend that will change everything
The D2C (direct-to-consumer) market has been growing rapidly, with double-digit rates for several years. It is projected to maintain a further 19.2% growth in 2021.
These data are pre-COVID-19, so the willingness to launch into direct-to-consumer will probably grow even more in the face of the uncertainty and loss of control of the supply chain that we have experienced in recent months. Meanwhile, brands like Beavertown Brewery have gone from an 85% drop in business to a 1000% increase in sales by launching into D2C in a short time. It’s also the story of how brands like Allbirds, Casper, Harry’s or BarkBox, all in CPG or FMCG, have long been taking over the market on the other side of the pond – and in the process breaking down the bricks of their competitors in physical retail – with annual revenues of millions of dollars and all-digital business models.
These movements have not gone unnoticed by other long-established brands, which have been selling through traditional channels for a good few years now. Recently, brands such as Heinz and PepsiCo have opened new channels of communication with their customers, where for the first time they have activated direct relationships with them.
It’s no coincidence that when asked about the main challenges facing brands in eCommerce in 2019, most indicated D2C growth as their main threat, even ahead of Amazon’s influence, according to a study by DEG Digital in 2019.
Why 2020 will be the year of Direct-to-Consumer
On the other hand, starting with the North American market, Facebook communicated in mid-May its new Facebook Shops functionality, integrated directly on ‘Shopify‘. However, a year earlier, Adidas had already reached an agreement with ‘Storr‘ to start including their fans in the sales funnel, a Social Selling App that makes it easy for any user to open their own store from their phone and take a 6% commission with each direct sale. One more move on their media dashboard, which started by removing TV advertising in 2017.
As always, looking at China offers even wider perspectives, and in many cases predictive of what is to come: Douyin (Tik Tok) is already a real success in streaming shopping. During the current lockdown period, businesses ranging from consumer brands such as Lego or Dior, to automotive brands have started connections with live product sales offering real-time discounts. Live streaming eCommerce, as this new discipline is called, has already exceeded $6.1 billion in total transactions via apps during 2019 and will continue to grow.
It’s clear there’s no turning back now. Brands are beginning to see the benefits of building new direct sales channels with their consumers after years of watching the boom in online and mobile eCommerce shopping. At the same time, we are witnessing a Retail Apocalypse, with thousands of physical retailers that have closed since 2019 (more than 9,300 stores and chains did so in the US alone). The superdigitalisation generated by the COVID-19 crisis will affect many of those who don’t accelerate their efforts in Direct-to-Consumer, Online-to-Offline or other channel transformation solutions in the face of new consumer habits.
Consumer expectations are at an all-time high
The consumer’s expectation of brands will not be the same as before either. Customers now expect much more from brands, and they will be the ones to deliver in highly competitive environments. To realise this, we only have to look at the revealing data from Scalefast on this subject:
- 61% of consumers would be willing to share more information with brands if it would allow them to have a better shopping experience.
- 54% of consumers expect to receive a personalised discount within 24 hours of first contact with the brand.
- 51% of consumers see it as vital to receive a personalised experience through the brand’s various digital channels.
- 26% of consumers believe that an improved security and user experience on the payment gateway facilitates their consumption at D2C.
- For at least 22% of consumers, having the option of same-day-delivery becomes an important purchase decision.
Many other studies also support this trend. According to the Direct-to-Consumer Purchase Intent Index, more than 80% of end consumers are expected to make at least one purchase through a D2C brand within the next 5 years. Even in Spain, normally a country with little development in online sales, the trend is one of change and exploration. We can see how in the months of April and May 2020 there are strong peaks in searches for the word “eCommerce”, according to Google Trends.
The pandemic has set in motion an unprecedented process of acceleration of e-commerce throughout the country, increasing by up to 40% in Spain compared to the same period in 2019. The situation has already generated habits of digitalisation that will be difficult to reverse given the length of the period of isolation. In turn, this trend is reflected in the marketing teams: according to the I COVID-19 and Marketing Barometer, developed by Good Rebels and the Association of Marketing of Spain, 46% of respondents expected a large growth ‘direct-to-consumer’ in the next 12 months.
The levers that explain D2C’s success
Direct-to-consumer means owning the entire customer relationship and leveraging all the data to create unique, personalised, more efficient, and highest return experiences. In turn, D2C strategies are already enabling the development of new recurring revenue streams through subscriptions, new product launches and customised tactics that lead to user loyalty much more efficiently than other channels can. In addition, there are at least four major foundations and competitive advantages:
- The improvement of the profit margin. By eliminating intermediaries, brands are able to reduce distribution costs and gain greater control over their profit margin in return. Distribution inefficiencies can be turned into extra income in the direct relationship with the customer, while avoiding phagocytising possible physical channels by hiring other partners and maintaining a commercial legacy.
- The ability to create customisable experiences. The relationship with the customer returns to the brand, allowing control over the entire experience chain: from website to personalised messages or product delivery. Far from a value proposition based solely on price, brands begin to build emotional and value-added buying reasons.
- Total control of the data. Maintaining a first-rate customer relationship means having access to all data in real-time. This allows brands to identify patterns, trends, needs, preferences and to know much better the tastes of their users. Control of the data also facilitates new ways of exploiting it: from clustering new audiences, to the inclusion of intelligent Marketing Automation flows. And also, of course, new ways to innovate in product and service from a CRM100% your own.
- The possibility of digital-first marketing. Brands are entering the field of digital performance, and starting to get global control of all channels, regulating their branding and conversion efforts under one funnel and finally closing the circle so that their communication is 360º once and for all.
The journey towards new D2C models may end with technology, with the creation of intelligent flows throughout the sales process, or with the selection of a good MarTech to do so, but its true essence and differential value proposal will always remain in the ‘C’ of Customer Experience.
D2C means building on experience
If companies should already be customer-centric, in the case of D2C strategies it becomes mandatory. Customer experience means putting the customer at the centre. The product is the heart of the customer relationship: reducing processes and friction throughout the purchase cycle, as well as enriching it with new digital functionalities. What are the best brands doing?
- Content customisation.
- Apps that provide extra value to the product.
- Omni-channel flows through digital solutions.
- Digital loyalty programs.
- Possibilities of product customisation.
- Funnels that mix on and off.
- Customised narrative with content, experts and locations.
In Spain, Codorniú has been able to exploit this concept by choosing designs, including texts, dates and messages to create a unique and differentiating product for their cava bottles.
D2C means exploiting all marketing possibilities
Through different strategies, such as defining global distribution and price tactics or adapting the offer to the customer’s habits and points of sale. What good practices can be emulated?
- Flash sales promotions.
- Subscription models.
- Inclusion of premium services.
- Launch support in marketplaces like Amazon or AliExpress.
- Extra benefits for the client (fast shipping, gifts, discounts).
- New models of orientation and customer service.
Bonobos has been making its team of “ninjas” (its customer service representatives) visible for years as the main responsible for offering a truly unique and personalised customer service strategy. For a brand that currently has a turnover of more than $310 million and gets 90% of positive recommendations in its support reviews, it could be said that this is still its best value proposition.
D2C means going quickly from marketing to performance
From image campaigns to performance campaigns. From recognition to conversion. Brands have started to change their mentality towards the search for the economic transaction and are beginning to do so in more formats and channels than ever before. The catalogue of digital tools will continue to grow:
- Search, SEO, PPC.
- Social performance.
- Programmatics and retargeting
- Social networks as social selling channels.
- CRO and A/B testing.
D2C means creating a custom MarTech Stack
A set of technological solutions (or Martech) that allows the optimisation of the relationship with the client through the automation of processes and with sufficient scalability in volume and sales channels. The list of tools and functionalities is easy to list but much more unlimited when combined:
- Integration of eCommerce with CRM solutions
- Integrations with third parties (marketplaces, external catalogues, etc.)
- Audience profiling and clustering.
- Lead scoring and nurturing.
- Data centralisation
- Checkout recovery flows.
At the same time, everything will be easier in an API-driven world. Tools like Zapier allow connection between apps to easily automate tasks from triggers and response actions among more than 2,000 apps, including eCommerce apps like Shopify, Amazon Seller or Magento.
Towards the future of D2C
O2O. Why not start in digital and end in physical?
Online-to-offline strategies have been developing mechanics to generate traffic to physical stores for some time, but they are also an unavoidable first intermediate step for all those brands that seek to maintain their physical sales channels at the same time that they begin to channel efforts towards D2C or towards omni-channel strategies.
On the other hand, this will continue to raise entry barriers in favour of the digital natives who are gradually beginning to walk the road backwards. Alibaba has already invested more than $8 billion in physical retailers in China as part of its strategy of strengthening and with a plan of “new retail” based on O2O, taking advantage of the use of technology and cross data.
Subscription eCommerce. Another trend that will be key for D2C.
Brands such as Dollar Shave Club in the US create custom packages that are automatically sent on a quarterly or semi-annual basis. They are easy to program and the value proposition is to “forget” about having to repeat the same transaction over and over again.
The variety is practically infinite. There are others, like Ipsy, which generates cosmetic packages or kits for about $12 a month, or HelloFresh, which offers pre-programmed menu packages for $8. In Spain, brands such as Wetaca have already begun to try out weekly subscription services, seeing the success they have had so far outside our borders.
The growth of the eCommerce subscription has even begun to encourage the appearance of software solutions such as Zuora, Bold Commerce or Recurly, to be able to manage and implement it on existing services.
Cause-oriented D2C brands. Recovering the process and transparency.
The new generations will play a fundamental role in the growth of D2C. Gen Z and Gen Y are more environmentally aware than ever, and are looking to commit to brands that are not only greener and more sustainable, but also demonstrably socially aware (and contributing, of course).
Those brands that position themselves with transparency throughout their business strategy (production, supply chain, supplier relations, etc.) will in the long term capitalize on that trust and credibility with much greater probability. D2C allows companies to have total control over these factors, and at the same time a greater capacity to prolong this positioning without friction throughout its journey.
The road to D2C definitely offers a lot of opportunities compared to traditional channels, but for years, brands have believed that designing the product and its experience was precisely their lowest priority. An essential challenge that they have not been able – or known how – to solve from traditional channels, and now, faced with the need to sell at all costs, they are beginning to want to have it under their control again.