You may have heard of brands selling “direct to consumer” – but what does this mean exactly, and what are the benefits and pitfalls for a brand?
In essence, selling direct to consumer (DTC) is where brands engage directly with consumers instead of selling exclusively via third party retailers (such as high street department stores). Sometimes these are brands that have traditionally sold their products via third parties, and are now starting to sell DTC too. For example, Nike is increasingly focussing on DTC sales – its most recent sales results were positive which was partly attributed to its DTC business, with the number of Nike stores increasing from 919 in May 2016 to 985 in May 2017. Another trend is for completely new brands – start-ups – to sell products that traditionally have been sold via third party retailers only. For example, US start-up Dollar Shave Club (now owned by Unilever) sells razor blades and related products on a subscription basis.
There’s plenty of advantages to the DTC model. One of the main advantages is that it allows brands to develop a direct relationship with the end customer and gather data about who their customers are, their buying decisions, and what they think about the brand and its products. This kind of data allows a brand to react more quickly – you know immediately if the red t-shirt is selling well, but not the blue one, and therefore to order more red t-shirts. Another key benefit for a brand is gaining control over what is sold and when, pricing, promotions and (through advertising) the brand’s identity itself. These benefits can – if properly leveraged – enable brands to increase their profit margin.
This is especially the case for brands that give their customers a reason to buy direct rather than via a third party retailer by differentiating its offering in some way – as Brian Yarbrough, a research analyst at Edward Jones said with reference to Nike, it’s about a brand controlling its own destiny. To give a few examples: Nike offers its customers the ability to customise trainers, which would not be practical for most third party retailers to offer. Dollar Shave Club’s subscription model is convenient for many customers, as it saves them having to buy razor blades on a monthly basis. Some DTC brands such as Lego are also attractive to consumers due to the wide range of items they can offer, including hard to find, sale, and exclusive products.
Of course, there are challenges too. The initial lack of customer insight can make it difficult to plan a DTC strategy – if you don’t know much about your customers, how do you know what the best way to sell to them is? System and process changes are inevitable too, and are costly to implement. For example, different IT systems (and potentially different types of software licences) will be required for transactional websites, apps and retail stores, as well as additional services such as logistics and customer services. These new IT systems will generally need to be more resilient, secure and effective than existing systems in order to meet customer demand and expectations. A different approach to logistics is also required in order to dispatch individual orders (rather than pallets) within the timeframes that customers expect.
From a legal perspective, dealing with consumers directly means complying with a whole raft of consumer-facing legislation, including in respect of data protection, product returns, pricing and advertising. For a brand wishing to sell across the European Union, the rules can be quite varied from one country to the next. Some of these laws are surprisingly complex to interpret and comply with, and in general the legislation is not particularly static. Over the last few years UK consumer legislation has undergone significant change – for example, the introduction of the Consumer Rights Act 2015 – and more change is anticipated (see here, for details of future changes). In any case, regardless of whether compliance has or even can be fully achieved, any business dealing with consumers can end up spending disproportionate amounts of time and resource attempting to resolve consumer disputes.
These challenges are clearly worth overcoming though, as the number of brands pursuing a DTC model shows.