The Economics of Direct-to-Consumer Brands

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The Economics of Direct-to-Consumer Brands
<a href="https://pixabay.com/users/mohamed_hassan/">mohamed_hassan</a> / Pixabay

Ah, the good old days.

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The days when enterprising youngsters set up lemonade stands and counted their profits in pennies and the not-so-enterprising simply succumbed to the siren song of passing ice cream trucks.

In-demand products delivered to eager customers. Payment plunked directly into the palms of merchandisers. No middleman mess-ups or markups.

Those simple transactions exemplified the seller-buyer relationship in its purest form: direct-to-consumer marketing.

Lemonade stands may be few and far between in 2021, but their modern equivalents are making a strong comeback.

The Big Shift

The last few years have seen a marked consumer shift to direct-to-consumer (DTC) brands.

You’ve heard the expression “cut out the middleman”. That, in a nutshell, is what DTC brands are all about.

They supply their products directly to the consumer, bypassing retailers or other traditional distributors – where sellers often face point-of-sale competition.

Control is key to the DTC model. Businesses can set price points, shape their branding, and take sole ownership of sales and customer data. In other words, they’re able to maintain control of their entire enterprise from production to purchase.

This allows them to reduce costs, interact directly and build relationships with consumers, and provide a smooth and seamless customer experience – which generates customer loyalty and ongoing revenue.

Who Wants In?

Thanks to the current abundance of technological tools, it’s possible to source products, and process orders from the comfort of your living room. The low barrier to entry makes this an extremely attractive option for start-ups.

It’s produced more than a few Cinderella stories.

Just a few years after startup, the Dollar Shave Club was already ripe for the picking –  so megabrand Unilever plucked them up for $1 Billion.

But the DTC space has also attracted giants like Nike, which recently switched its focus to something resembling a DTC model. They’ve established their own DTC stores – in direct competition with their third-party retailers.

Nike knows a good thing when they see it.

Consumer Rules

The DTC model is particularly timely because more consumers than ever are shopping online.

And they’re sitting in the driver’s seat.

They aren’t interested in clicking “where to purchase” buttons to find third-party retailer links. They expect to be able to buy from the same site they’re getting their product information from.

They want curated product choices and an accessible, personalized, streamlined shopping experience.

The DTC model meets that need through direct customer interaction.  They’re able to focus on consumer tastes and interests – rather than be limited by third-party stipulations.

The Price is Right

Traditional marketers of consumer packaged goods (CPG)  have to devote a significant portion of their budget to simply bringing their products to market – and it can take months to make that happen. That means it can take months before the product even begins to generate revenue.

In addition, doing business with third parties inevitably incurs significant costs  –  including everything from paying for shelving space to paying sales staff.

The DTC model has proven to be much more cost-effective. Because it sells directly and targets a niche audience, it can release more quickly on a smaller and less expensive scale. DTC businesses have lower overhead: they don’t have to pay distributors, sales reps, and other third parties.

Because they’re not dealing with middlemen, they can set their own pricing. They can afford to offer niche and high-end products at more reasonable rates  – which means a better return on investment.

And of course – since a DTC company’s staff may be comprised of a single person – the cost that is traditionally incurred by retail enterprises in hiring and onboarding staff, and replacing them due to attrition is minimal.

A Winning Proposition

The DTC model offers multiple benefits. It allows businesses to:

  • Shorten the supply chain and reduce time to market, because there’s no middleman
  • Strengthen their relationships with customers because they’re dealing with them directly
  • Have greater control over branding, because it’s not in the hands of retailers
  • Optimize targeting efforts, because their marketing strategies are focused on digital spaces. Oftentimes, a business website or app will do.
  • Offer subscription-based pricing, which both retains customers and generates a consistent revenue stream
  • Take sole ownership of customer and sales data, which allows them to analyze trends and personalize campaigns

Do You Know Where Your Customers Are?

Think of location-based advertising as a digital form of its precursor, the direct mail campaign.

Based on data they’ve gathered from previous customer interactions, marketers can now direct micro-targeted and customized marketing towards consumers in a specific location. When they pinpoint customer location, they’re able to make contact at strategic times to optimize messaging.

These contacts –  like text messaging and app push notifications – can be triggered by specific consumer actions, such as entering a store or making a purchase.

So, for example, if you sell mattresses, you can target customers who have visited a MattressFirm or other mattress stores in the last two weeks.

Use Your Influencer

Casper Mattress made good use of theirs.

After Kylie Jenner posted a picture of her Casper Mattress purchase on Instagram, it generated over 800,000 likes – and doubled Casper’s sales.

Not everyone has a Kardashian in their corner – but there are plenty of non-celebrity bloggers with sizeable social media followings. Influencers bring with them an already-engaged audience base, and their endorsement can engender a sense of trust while enhancing brand awareness.

Finding and working with one whose content aligns with your brand can sharpen your focused marketing efforts – and result in a very productive relationship.

However, make sure you have a solid guidelines document that ratifies the kind of content that influencers create for your brand, what time of the day they post, and how many times they talk about your brand – this ensures maximum returns on your influencer marketing spend.

Make Your Stand (Lemonade not Required)

All in all, it’s a very good time to consider the DTC approach. (If it’s working for brands like Apple and Nike, chances are it’s a smart move.)

The direct-to-consumer model dovetails perfectly with the shift in consumer tastes and behavior of the past few years. Shoppers have gone digital, and DTC brands are in a perfect position to tap into them.

They’re able to connect with consumers in more personalized ways, and more effectively promote their vision and message.

For consumers, it means being able to interact directly with sellers, access customized choices that will meet their needs, and enjoy a seamless customer experience.

And when brands offer a positive customer experience, they get return customers.

Those kids and their lemonade stands were really on to something.

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