Direct-to-consumer: new rules for retail?

More and more brand manufacturers are breaking with distribution channels that have been established over decades and are selling their products themselves to the end customer. Traditionally, wholesalers and retailers sell branded goods to the user. But why are these distribution channels changing now?

Direct-to-consumer – this is what’s behind the trend

The Internet has fundamentally changed trade; what was once considered to be the most efficient way now often ends up in a reduction in profits. An international study by Sana Commerce shows that manufacturers with their own web shops have an instrument for direct sales that did not exist in the past – half of the manufacturers surveyed sell goods that they produced themselves to the end user; another 24 percent hope to be able to sell via their web shop directly to end customers in the future. These direct sales are referred to as a direct-to-consumer strategy.

The reason for this change is that with a classic sales model, part of the profit is lost on each sales level. With the possibilities of direct sales, it no longer makes sense to sell in this way. According to the Sana Commerce study, 64 percent of European retailers and manufacturers are convinced that taking a direct approach to end consumers will be even more frequent in the future. Manufacturers and wholesalers in particular see each other as their main competitors in direct sales to consumers.

What are the pros and cons of a direct-to-consumer strategy?

For brand manufacturers, a direct-to-consumer strategy is mainly about gaining control. In the following four areas, manufacturers can have more control when selling directly to the customer:

#1: Customer experience

If a wholesaler sells your product to a retailer, you have no control over how that product is sold. With the direct-to-consumer approach, you hold the reins and have a direct overview of all successes and failures.

#2: Relationship to customer

Direct sales enable brand manufacturers or wholesalers to build trust with end customers and convince them to buy. This possibility is sometimes completely absent in traditional sales.

#3: Customer data

In e-commerce in particular, customer data is a central aspect. This is because customer data helps e-commerce providers to measure a number of aspects during the purchasing process. Suppliers can use the data to calculate the customer lifetime value, for example, and use it to implement individually tailored marketing measures.

#4: Margins and profits

Particularly as a brand manufacturer entering a new market, you would normally have to deal with wholesalers, suppliers and other intermediaries who are already established and have a strong negotiating position. If you can skip these intermediate steps in your supply chain and address your end customers directly, your margins and profits will increase.

Does the direct-to-consumer approach sound interesting? Of course, to be completely honest, implementing this is not quite that simple.

First of all, it is a major investment to establish a direct-to-consumer brand. It is also important to gain expertise in areas that were not yet part of your core business.

Practical experience: How direct-to-consumer works in e-commerce

More and more new brand start-ups are pursuing a direct-to-consumer strategy. One internationally known company is the mattress start-up Casper, which has revolutionized the market with a greatly simplified online offering. Instead of selling several mattresses made of different materials with special advantages, Casper initially offered only one mattress.

What happened to the usual obligatory testing of the mattress? It’s a thing of the past with the online provider. Instead, end customers order their mattresses online and may test them at home for 100 days. German mattress manufacturers such as Bett1 and Emma are similarly radically breaking with traditional sales strategies in the mattress business. Due to cost savings along the supply chain, the online start-ups’ product prices are often significantly lower than those of their competition. However, a stronger focus on direct sales is by no means just a strategy for young start-ups as the sporting goods market leader Nike has shown. With a restructuring away from third-party providers towards direct sales via their web shop, Nike caused quite a stir. The sports brand’s focus on its digital direct-to-consumer channel is paying off; Nike exceeded Wall Street analysts’ expectations with their change of course in the last quarter of 2018.

For companies that have traditionally established other distribution channels, changing to a direct-to-consumer approach is radical and should be well considered. What motivates your end customer to change his behaviour and order his products directly from you? Is it the direct communication that you offer your customers? Or does your customer get a particularly convenient shopping experience with you?

Complete control over pricing

If you are rethinking your own sales strategy, it is recommended that you price manage in detail from the very beginning. In doing so, Nike managed to gain greater control over the pricing of its own products and slightly increase its profit margin in the process.

The best way to master cost-intensive restructuring is to continuously strategically set your own prices with regard to competition. How do you achieve sustainable profits? What market position do you want to achieve with your pricing? Active price management can provide you with  answers.

Active price management is based on valid, high-quality data from your market. blackbee Insights provides you with daily updated product and price data. Insights helps you find the best price for your products while keeping an eye on the market and your competitors.

 

blackbee Insights offers you an individualized solution for efficient market analysis in e-commerce. Would you like more information on our solution? Then contact us now —we look forward to hearing from you.