Large corporations once dismissed DTC strategies as something that would create a rift with retail partners and create a large amount of channel conflict, but in recent times, this viewpoint has shifted.

Now, even large corporations realize that using a DTC channel allows businesses to personalize customer experience after the collection of customer data, propelling business growth and increasing revenue. Options such as quick testing of new products and preventing delays in product launches are in alignment with the needs of consumers, increasing customer satisfaction and diversifying the customer base.

The decision is therefore not whether or not DTC will be helpful to an organization, but how to establish a DTC channel that adds to the overall growth and trajectory of the organization. Industry leaders are already evaluating and improving their existing direct-to-consumer capabilities to maintain an edge in the market, and businesses that are not investing this time risk accelerating DTC channels and risk losing market shares to competitors.

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The rise of DTC

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DTC brands are expansive and varied, from retail corporations fully embracing relevant digital channels to brands carrying out experimentation with the use of DTC as a new model. As e-commerce continues to grow at an ever-increasing rate, these organizations must continue to establish existing DTC functions, or efficiently begin to establish new DTC capabilities.

The Covid-19 pandemic highlighted the need for the expansion of DTC capabilities. In the four months between December 2019 and May 2020, sales in the US food and beverage e-commerce sector rose by a disproportionate 67% - the same as the growth that occurred in this category in the previous decade. This was a catalyst for many large brands to re-think market strategies and product-market relationships. While the pandemic now causes significantly less disruption, the rise of DTC strategies and the use of e-commerce will remain prominent.

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Changes to marketing with DTC

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In the past, product-market fit and marketing strategies have been designed primarily to accelerate how quickly products can be sold. This naturally prioritized features such as stand-out packaging, consistently low prices, and wide-reaching marketing campaigns. When using DTC channels, these previously prioritized features are no longer emphasized, which can be daunting for organizations who have previously prioritized them. 

Instead of continuing to maintain low prices of products, businesses must navigate and mitigate channel conflict and different models of revenue as alternatives. Rather than delivering en masse to retailers, businesses must develop a supply chain that can seamlessly deliver products to consumers on an individual basis.

Wide-reaching marketing campaigns must be reimagined into precise, one-to-one marketing strategies that utilize video, images, and other digital assets. Priority must shift from eye-catching packaging to more simple, minimalistic packaging that is predominantly designed for ease and speed of delivery.

The use of subscriptions can be monopolized, creating a steady stream of revenue outside individual sales. An example is the industry-leading organization Peloton, which embeds software within treadmills and stationary cycles, allowing customers to have direct access to endless fitness programs via a subscription system. An estimated 85% of Peloton’s valuation is attributed to this subscription system, instead of the sale of each piece of fitness equipment.

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Bigger is not always better

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Traditionally, large brands held a significant scale advantage, which guaranteed a leading place within the industry. With the rise of e-commerce, smaller brands have gained the innovative ability to leverage data, benefit from shifts within the industry, and target niche demands while increasing intimacy with customers. This allows small brands to enjoy a disproportionately large share of the market without being limited by their lack of scale advantage - often at the expense of the larger manufacturers in the industry.

Strategies employed by these small manufacturers include leveraging networks instead of the use of traditional marketing campaigns, targeting niche markets using digital marketing, and using formats such as pop-up stores which create a large presence while remaining light on capital. Considering the large growth of e-commerce in recent years, this reveals a need for large corporations to stop relying on scale advantage if they wish to avoid being overtaken by small manufacturers.

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DTC for a competitive advantage

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Businesses can utilize a DTC strategy to improve their position in the global market and take an offensive stance against smaller competitors. DTC channels, when optimized efficiently, provide a competitive advantage in a diverse variety of ways.

DTC channels can become a prevalent source of insights into consumers. Collecting relevant data directly from consumers allows feedback loops to be put into place, leading to the efficient allocation of resources to optimize production and drive innovation in marketing and products. The use of personalized marketing strategies improves customer retention, reduces the cost of acquisition, and maximizes the lifetime value of consumers. Customer experiences can be personalized across channels, driving up incremental customer revenues, and allowing the business to tightly control and improve the consumer experience.

By maintaining a current portfolio of direct-to-consumer offerings, businesses can seamlessly shift between category management and management of portfolios to reinvent the model of demand. New products can be created based on customer data, allowing easy fulfillment of gaps in the market and meeting current demand. These new products can additionally be launched and tested on a smaller scale and then re-adjusted to fit needs based on feedback. This allows the organization to move away from the approach of simply selling products to customers, and offer a holistic customer experience.

With an increased global focus on sustainability in all aspects of the production line, DTC channels allow waste to be reduced. Through direct communication with customers, organizations understand customer needs before the design and production of products. This results in less inventory needing to be carried and prevents excessive production of products that will not be purchased.

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Successful use of a DTC model

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While some large brands have lagged in embracing the DTC model, there are examples of large industry leaders who have consistently utilized the DTC approach.

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Nike is known to have a prioritized investment in DTC long before this was prevalent in the industry. Currently, almost 40% of Nike’s sales are direct-to-consumer, and Nike leadership sustains a goal of reaching at least half of sales being entirely DTC by 2023. In this process, Nike has prioritized the acquisition of data analytics businesses, which allow machine learning, demand sensing, and predictive analytics to be incorporated. These analytics allow the innovative creation of new services, such as applications, as well as the personalization of recommendations and product redistribution.

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‍Kohler has created an internal alignment that prioritizes a deep understanding of the needs of customers, including education of customers regarding new opportunities that Kohler offers to customers. This incorporates an online quiz to acquire customer data, free virtual consultation on products, and a digital design service. This allows the business to implement DTC changes such as solving pain points, addressing the customer journey, and creating a customer experience that is more integrated and holistic. The use of these customer values ensures that the margins remain sufficient for funding the operational costs of DTC channels.

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Build vs Buy - Integrating DTC

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When launching DTC capabilities, organizations are faced with the choice of buying or building the necessary capabilities. If the choice is made to buy a brand with existing DTC capabilities, this is done to apply the acquired brand’s DTC approach throughout the rest of the corporation. This approach has the advantage of speed, but the acquisition of an existing brand is expensive in the short term. There are also additional challenges that go hand in hand with mergers and acquisitions, such as difficulties synergistically integrating the cultures.

The alternative is building internal DTC capabilities to establish a solid digital infrastructure within the organization. This requires a reduced financial investment upfront compared to the acquisition of a DTC company, but does require swift and decisive action to guarantee success. Investment decisions need to be planned and carried out promptly instead of in the long term to organically construct DTC capabilities that will elevate the success of the core organization.

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Considerations for DTC integration

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Technology is an essential component for DTC capabilities to be a success, and technology stacks must be adaptable with the aim of constant improvement. The decision regarding technology acquisition must be decisive and thought out before a financial investment is made. The use of a pilot approach that is tested in the market early on in the process allows data-driven learning, and the pilot approach can be monopolized and expanded if a sufficient ROI is achieved. There is no point in creating an end-to-end design over several months only to see it fail when it enters the market.

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Workforce capabilities within a DTC team will need to display data-oriented thinking and considerable agility compared to that of a more traditional brand. To quickly pilot a DTC approach, an initial team should be selected that possesses the most essential capabilities to make this channel a success. While the exact capabilities necessary for a DTC team vary widely by industry, training or hiring appropriate talent is essential.

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Operating models for DTC channels must distribute and balance decision-making and the use of budgets between the DTC team and the core organization to prevent conflict and ensure maximum revenue. Decisions need to be made regarding outsourcing and potential collaboration with third parties if outsourcing would be beneficial.

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‍DTC's vision is essential to provide clear guidance on objectives and organizational purpose. Leadership teams must provide direction on the purpose of the DTC channel to all employees, including the benefits of the change, how DTC capabilities will enhance existing business capabilities and allow innovation with products, and how the DTC channel will be integrated into sales, marketing, and operations. Expectations should be set and connected with relevant KPIs for both the retail channels and DTC channels to avoid any competition or clashing between these teams.

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References

• Alldredge, Kari, et al. “Taking the pulse of the US consumer.” McKinsey, 5 May 2022
• Allen, James, et al. “Scale vs. Intimacy.” Bain & Company, 28 August 2019
• Arora, Arun, et al. “DTC e-commerce: How consumer brands can get it right.” McKinsey, 30 November 2020
• “The Human-Tech Equation for Improving Marketing ROI.” Boston Consulting Group, 19 April 2022

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