Complete Guide to the Direct to Consumer Business Model vs Traditional Retail
Aug 14 2020
With COVID-19 forcing physical stores to close, the need for online retail has never been more clear. On top of the pandemic, the efficiency of the direct to consumer model is helping to further drive retail's shift to the internet. Technology has certainly opened up the opportunity to cut out the middleman in ways that weren't possible just a few decades ago. What does the switch to a DTC business model entail, and is it the right choice for your business? We'll answer those questions and more in this post
Before we get started, let's quickly define what a DTC business model is. Traditionally, you would sell your products to a retailer, who would then sell them to customers. This was beneficial long ago when customers had to go to physical stores to buy products. Mail-order catalogs could sell direct, but that required more infrastructure than most businesses had available to them, so most mail-order catalogs were still operated by large retailers. Now that customers can buy directly from a company website, the reliance on physical stores is weakening, making it practical to skip the middleman and sell direct to customers.
How is the direct to consumer model different from traditional retail?
With the definition out of the way, let's talk about why companies find the switch worthwhile. There's the obvious benefit of cutting out the middleman, but there are a number of other advantages that come from the DTC model as well.
Shortened supply chain — With no retailer between you and your customers, the supply chain is at least one link shorter.
Reduced time-to-market — The shortened supply chain, combined with the freedom to act independently of the whims of retailers, allows you to bring your products to market even faster.
Stronger long-term relationships with customers — Anytime people deal directly with one another, their relationship is strengthened as a result. This is no different with you and your customers. Cutting out the middleman will allow you to forge closer ties with your customers and increase their lifelong value.
Greater control over branding — Retailers often have branding guidelines in place that DTC will free you from. They also often advertise products sold in their stores on their own. While this free advertisement can be good, it takes some control of your marketing away from you.
Digital-centric — Because DTC brands rely heavily on internet traffic to make their sales, their marketing effort tends to be very heavily focused on digital spaces. Digital advertising is highly targeted and provides a great ROI.
Subscription-based — One of the fastest growing pricing models is subscription-based pricing. DTC brands are typically subscription-based because it creates a consistent revenue stream for your business and is retention focused, which is extremely important for the success of a DTC company.
History of the direct to consumer business model
The rise of the direct to consumer model is relatively recent, at least as a primary means for companies to do business. In this section, we'll take a look at how, and why, DTC sales got their start as a major force in business.
Personal computing: the first retail space to go DTC
Giant personal computer manufacturers such as IBM and Apple realized their computers came in a dizzying array of configurations that most retailers weren't keeping in stock. As soon as technology allowed, switching to DTC sales allowed them to offer all of those choices to consumers with much less friction than would have been required before. Apple took this a step further by creating their own retail stores where they could sell direct to consumers but still benefit from a physical retail space in heavily traveled shopping areas.
Rise of the first successful DTC startups
With the viability of the DTC model firmly established, it wasn't long before startups were founded specifically as DTC businesses. Companies like Warby Parker began selling eyeglasses directly to consumers. Mattress company Casper, Everlane Clothing, and beauty product supplier The Honest Company all joined in to make up the first generation of DTC from the start businesses.
More and more startups jump into the DTC space
The success of these startups showed entrepreneurs two things: first, that DTC could be a successful model, and second, that you didn't need expert-level knowledge of the product you were selling in order to become a success in the DTC market. This led to companies like Dollar Shave Club joining the DTC space in an effort to bring more products that were considered overpriced into the affordable range that the DTC model allowed for. A few years after their founding as a spunky startup, Dollar Shave Club was purchased by mega-brand Unilever for $1 billion.
Big brand retailers test the DTC waters
With large brands such as Apple and IBM kicking off the trend and Unilever spending $1 billion on a DTC company of their own, other once retail-only manufacturers have begun to take notice. Nike famously switched focus to more of a DTC model recently, joining Apple in creating their own physical DTC stores that now compete directly with the footwear retailers they once relied on.
DTC brands transition back to traditional ecommerce retailers
Huge ecommerce retailers like Amazon and Walmart now make it easy for anyone to place products on their virtual shelves. In many cases, the manufacturer themselves can even handle the shipping. This arrangement brings back the middleman, but has proven an attractive option for many DTC brands. They keep a large amount of control and give up less percentage of the profit than they would to a traditional retailer, but still get the benefit of having their products on a marketplace that has a larger customer base than they could reach otherwise.
Why the market is moving to direct to consumer
Although each company who makes the decision likely has many individual reasons, there are at least three major factors that play into the switch to DTC business models by startups and major brands alike.
Margins from multichannel retail are shrinking — Large online retailers like Amazon, which we've seen are still used by mostly DTC companies, have taken large amounts of business away from brick and mortar stores. This results in those stores being more picky about the products they sell and reduced margins on those products that they do decide to carry.
Changes in consumer expectations — There was a time, in the early days of the internet, that going to a manufacturer's website and having to click on a 'where to purchase' button to find links to third-party retailers was acceptable. Today, consumers expect to be able to make a purchase from the same site that they're reading about a product on.
Advancements in technology — You can now source products, take orders, and handle fulfillment all from the comfort of your home computer. This makes it easier than ever for enterprising people to create their own DTC stores, and lowers the barrier to entry for startups and existing business alike.
4 2020 direct to consumer brands and their business models
There are far more DTC brands than we could cover in one blog post, as the business model is currently exploding in popularity, but we wanted to cover some major players that we haven't already discussed, and talk a little about how they are leveraging DTC.
The Sill — Getting the perfect houseplant to compliment your decor used to mean heading down to the local home and garden shop and hoping they had something you liked in stock. The Sill changed that when they brought a complete selection of potted plants to the ecommerce world. Like some other DTC brands, The Sill also has physical locations in select cities.
Billie — Razor company Billie did for women what Dollar Shave Club did for men. They have since grown to include a wide range of beauty products that give women higher quality for lower prices, just as DTC was meant to do.
Death Wish Coffee — Gourmet coffee grounds are big business, but you won't often find them in your local grocery store. Death Wish Coffee solved this distribution problem by taking their unique brand of extra strong coffee directly to consumers.
Ritual — Unhappy with the state of the multivitamin industry, Ritual set out to create a vitamin with transparently-sourced, high-quality ingredients. They now have a range of products that cover multiple nutritional needs and sell directly to consumers through their website.
ProfitWell: the subscription growth secret weapon of DTC brands
Subscription-based pricing can be one of the most profitable ways to manage pricing, but you need to understand how the model works. With free tools like ProfitWell Metrics, you'll be able to track all the important KPIs that you need to understand in order to maximize your subscription revenue. With additional tools such as the AI powered Retain for improving customer retention, Price Intelligently to leverage machine learning for optimal pricing, and Recognized for audit proof revenue recognition, ProfitWell has a range of extended products that provide the secret weapon in subscription growth for major brands.
In just a few years, DTC has gone from a model with one of the highest barriers to entry and morphed into a model that is easy for everyone to adopt. Small startups and big brands alike are discovering the power and flexibility that going direct to their customers affords them. As technology makes doing business online even easier, we expect to see continued growth of the DTC model.
By Patrick Campbell
Founder & CEO of ProfitWell, the software for helping subscription companies with their monetization and retention strategies, as well as providing free turnkey subscription financial metrics for over 20,000 companies. Prior to ProfitWell Patrick led Strategic Initiatives for Boston-based Gemvara and was an Economist at Google and the US Intelligence community.