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Direct to Consumer, the Bread and Butter of Ecommerce

icon-calendar 2020-12-16 | icon-microphone 32m 38s Listening Time | icon-user Joseph Ianni

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Inspired from the list of business models, Joseph hones in on Direct to Consumer, arguably the most relevant and essential business model in relation to what we do here on Ecomonics.

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Tags: #DirectToConsumer #DTC #Ecommerce #E-commerce #OnlineBusinessDevelopment #Business #BusinessModels #Entrepreneurs #Entrepreneurship #Marketing #DigitalMarketing #OnlineStore #Debutify


Good to have you here, if you recall our business model episode (ep 15) we’ve been going through a veritable gauntlet of information. The one that stuck out to me the most was freeterprise, because I think a bunch of people got together and tried to come up with the most palatable name for the model, it’s good but if I think of something better I’ll let you know. Anyways, the one that SHOULD have stuck out the most and is now the impetus for this episode is Direct to Consumer. As entrepreneurs and sellers this model is one we need to know more about and that’s what we’re here to do today. 


As always, the ideal place to start is what DTC is, according to retailsolutions.io, direct to consumer allows manufacturers and brands to bypass or “cut out” retail channels of wholesale and retail, opting instead to sell directly to customers. Let’s get a few definitions in to round this out; fool.com makes the following point: The traditional supply chain includes a supplier, manufacturer, wholesaler, distributor and retailer. With these many components, within each one includes time spent negotiating, which holds up releasing a product and acquiring feedback from customers. Why this is happening is fairly obvious, even if you’re just taking the perspective of a customer, but let’s point to some data anyways. According to fool.com, a number of once mighty business empires have filed for Chapter 11 bankruptcy; Blockbuster, Borders, Forever 21, Sears and Toys R Us. If they’re not down and out, you can be darn sure they’re closing down locations. A global lockdown isn’t helping things either. In the year 2013, there was less than a 2000 point difference between openings and closings, but in 2018 there was a staggering difference of more than 5k closings over openings. The origin of this model points back to the dot.com bubble we mention here and there on the show, prior to that, one brand would likely dominate it’s respective market. According to harvard business review or hbr.com, between 1923 and 1983 the dominant brand would likely remain as such; Kodak for cameras or Gillette for razors. Once entrepreneurs like yourself got their hands on the toolset provided by the internet, new companies would rise; among them we have Warby Parker for eyeglasses, Everlane for clothing and Casper mattresses. The main defining characteristics were borrowed supply chains (which I have to admit, I’m having some trouble locking down a definition of this) web-only retail, direct distribution, social media marketing and a brand identity that’s a bit generic to be frank, it’s referred to as blanding. Prior to the internet transfusion, DTC has roots in certain industries such as farming. The case here was for people to get food, and could only travel via horse, they had to make due with the proximity they had available to them. That’s some of it, another point to mention, if you recall from our dropshipping episode (5) purchasing by mail was another instance of this. 


Fundera.com makes a specific case about the appeal of DTC to millennials, and without reading the rest I agreed. Ok let’s read the rest. Born between 1981 to 1996, millennial values are convenience, check, low cost, check, authenticity, cheeeeck, and a seamless shopping experience, check. This is all up DTC’s alley. Millennials make half their purchases online, and 70% take into consideration what the company values, compared to 52% of US adults. There’s a small, probably unintentional jab there calling one group millennials and the other as adults, but I respect the underlying humor regardless of intent. One company example they cite is Casper mattress, which as of August 17 2020 is valued at 1.1 billion. Part of their success formula is what fundera.com refers to as social responsibility, along with customer satisfaction, they offer 100 night trail risk free and recycle or donate unwanted products. Compared to generation Y shoppers, who tend to prefer affordability above all else, a tradeoff that in a traditional model would result in an inferior product by the time it hits shelves, D2C takes that problem out of the equation. 


Here are the 8 characteristics fool.com uses to illustrate the advantages of companies that use this model 1. The industry they want in has a low barrier to entry. 2. Parts of the operation can be rented and leased as necessary. 3 Are more passionate about their customers, owing to the more direct relationship. Compare that to being a brand that sells through another store, the store gets all the customer enthusiasm. 4. They have experience in understanding and utilizing first party data. Also I’m not against using the word utilize, it means to use with efficiency and practicality. I know there's irony to the way I used use so let’s just move on. I shouldn't have brought it up. 5. They cut out the middleman. 6. They know how important it is to communicate with customers directly and often deploy cutting edge CRM software. 7. They are more flexible with their prices than with legacy retailers. This is owing to the amount of costs involved in running one, overhead, staff, insurance, rent, and number 8 They gravitate more towards digital marketing, which is in line with the forward thinking of the business model. Fool.com focuses on 5 key benefits in switching to DTC. 1. As we said cutting out the middleman, the difference in profitability is as follows, if I sell a product to a wholesaler, they have to mark it up, meaning by the time the customer has purchased it, the price has doubled twice, once for you to sell to the wholesaler at markup of your cost so that you’re profitable, and then it’s marked up again by the wholesaler, so that it can be profitable. Now, me, I do have a soft spot for brick and mortar, and I’d hate to see it go away. This brings about a question about what role does a brick and mortar store play in a new age where I can do all my shopping from home? I can only ask and try to figure it out, so let me say as someone who’s done his time the good part of face to face is it better ingratiates the brand in the consumer’s mind. Listening to someone talk passionately about the product, providing on the fly advice is valuable in retaining long-term consumer loyalty. So rather than rely on the physical locations to make or break a company’s bottom line, a company already doing well online can use a physical space as an investment, like a permanent advertisement. My online luxury job had this in mind, we couldn’t execute on it, but the idea was employees would be working in the store, which was actually more of a lounge, so customers could come by to safely and securely pick up their online orders and have themselves a nice cup of coffee. I could change my mind on this in the future, but any store I set up online, I would love to imagine how it could be made physical. I just wanted to get that in there because I can’t ignore the facts, brick and mortar is not doing so well, but I for one have loads of positive memories of in-person experiences and am eager to see how it can be renewed for the future. The second point, on the five point chart is better customer connection, since all the data flows to you directly, it’s easier to analyze that data since you don’t need to factor elements out of your control, like an ornery sales person. You also have the ability to market directly through follow up emails and ask them directly about their preferences for making new products. Point number three is expanding mindshare, and quickly. Real quick, mindshare is, according to investopedia, a marketing term that describes the amount of consumer awareness of popularity surrounding a particular product, idea or company. The issue is in order to scale a brand in the then times, you had to go from local to regional to national and then international, gaining the trust of wholesalers along the way. Obviously it’s perfectly doable, and it might be good depending on the product to have stopgaps along the way so you have time to perfect your operation before scaling upwards, but it could cost you 5-10 years in time to hit the same level you could hit in a matter of months with modern scaling. I don’t know if you noticed but we’ve been moving at quantum speed, a year now has the productivity potential of several years from the early 2000s. If you go DTC, the time between formation and premiere is cut by more than half, 3/4s? Yeah 3/4 s sounds right. Number four, to control your brand’s story. Since someone has to sell on your behalf, a lot of your brand’s well being and perception is on the seller. To me this does depend on the brand itself, I don’t really care where I get Coca-Cola, and since they won't be opening any stores anytime soon, they probably don’t care. With DTC, you have full control of those four main marketing principles, product, place, price and promotion. You have more flexibility with A/B testing, maybe you can sell something for a higher margin, which would be harder to activate and understand what’s going on since there are factors outside your control. Number 5 is be everywhere, all the time. Customers expect a little more direct interaction, and you can give that to them through customer service integrations and marketing. If you want to run a sale, you can fire it up without waiting on compliance from your wholesaler. 


Alright now, let’s get some downsides in. Here’s 3 from fundera.com. 1. Supply chain issues can be difficult to coordinate with. They point to a case study of a beauty brand by the name of Glossier, according to that article, from marketingweek.com the president of the company Henry Davis was having difficulties keeping stock up to demand. His industry is competitive with a lot of big players well established, with a secure supply chain network, it got to the point where he had to write a letter to his customers to let them know they were having trouble keeping up with the supply, the customers were understanding but it’s not something that the business would endeavor to repeat. Point number 2, conversions can be a challenge. In order to acquire some of that sweet, sweet goodwill DTC brands expect to have to deploy a lot of free trials, like the one I mentioned earlier about Casper. Customers, skeptical of a new company, will try it out but it hasn’t been ingrained in their mind to commit. Point 3, requires expertise in several areas. It’s one thing to just make a product and convince wholesalers to carry it, it’s another to know how to acquire customers, sort out logistics and be forced to insource rather than outsource. 


The next article that I especially encourage checking out is hbr.org’s “reinventing the Direct to Consumer business model” which i’ve referenced earlier today. In it they characterize the landscape has changed in a number of ways; one of them being advertising, as early adopters to social media didn’t have to pay as much to advertise because of less competition and an unclear view on how valuable it actually was. They go on to say that in today’s view, companies are facing some series struggles; Casper mattress’s February IPO was 600 000 less than it’s last private fundraising round, Brandless, a DTC (they call it DTC which is more accurate) laid of 90% of its employees, Glossier suspended it’s color cosmetics line Play and Outdoor Voices CEO Tyler Haney was forced to resign as they were burning 2 million dollars monthly, taking in 40 million in sales. This is all happening now because of a ramped up competitive market, making customer acquisition difficult and advertising expensive. Companies are now considering if it’s worth selling their product through Amazon, thus completing the circle and becoming what they sought to replace. Markets such as cookware are loaded to the brim with options, such as Equal Parts, Made In, Misen, Great Jones, Caraway and Our Place, you could say there are too many cooks in the kitchen, I did, I don’t take it back. Also, big legacy players have the infrastructure to set up their own DTC line as well. Investing is a different situation too, they’ve had at least ten years worth of data from DtC companies. The key takeaway here is that DTC is at the point where the model is not ecommerce innovative, but the tactics can be. It goes on to make the following observations: 1. You need to be or have an omnichannel: there is a new wave of stores such as Bulletin and Neighborhood Goods who are physical locations and their job is to curate DTC brands on the company’s behalf. The success is not totally clear yet, but they noted that customers were less likely to return, being able to interact with the product in person first before deciding. Number 2. Differentiate through community. We established the ability to collect data from customers directly, but HBR suggests going further than that by also working with customers to develop products. 3. Expand margins through vertical integration. As a company scales, it could be difficult to maintain profitability as distribution channels expand and supply recedes, but if you were to shift from outsourcing manufacturing to going in house you’d have full control over supply. Number 4, prepare for the voice revolution. Now that we have text internet down pat, but “ok google” and “alexa?” are the first signs of a shopping experience. The article overall has a pretty negative slant towards DTC and, while I’m no economist I’m more optimistic about it than the article is, but you should get negative opinions on things as well as positive. 


So I have three tasks left to do today, I’m going to talk about how to start a DTC, how a company can transition into it, maybe not fully but perhaps partially, and lastly some DTC companies right now worth looking into. 


First, how to set this up,shopify.ca outlines the 6 steps intended for a Consumer packaged goods or fast-moving consumer goods business, aka FMCG or CPG and therefore presumes a greater scale, so let’s learn what we can and then we’ll focus on a guide closer to a small scale startup the six steps are: Goals, Timeline, Technology, Partner, Payments and Fulfillment. 1. Goals, what you got? Gain more media impressions? Harvest customer data for remarketing or RnD? Build a sustainable business line that compliments your band? Whatever it is, identifying a goal is a good place to start no matter what. 2, Timeline, According to shopify.ca, you should anticipate a deadline like a holiday, or a major conference that attracts a lot of interested attention. As a backup, you also want to anticipate a seconday deadline just in case. This lets you work backwards from that point. For ecommerce and dropshipping especially, the brunt of your focus is more likely to be on the front-end, content delivery, and you only have so many SKUs to start. Part 3, Technology, naturally I’ll be recommending Debutify, but the main point I took away from this step is that a big company may be incentivized to work with an equally big platform, that’s not inherently necessary. What’s important is the technology being able to rapidly keep up with the changing consumer landscape. This next step clearly angles towards a larger company but lets look at it carefully, which is partnership. A large company probably has a creative agency already but chances are they don’t know how to work with the tech platform selected as well, they may not be familiar with the ecommerce space. So a large company will use a platform implementation partner. Since it’s a Shopify guide, they pointed to a successful five-week launch thanks to an agency partner Guidance who set up front and backend development. Angling this towards a small operation, in a sense, you should still be considering each element you work with as a partner, whether it's Debutify, the supplier you’re dropshipping from, assuming you’re dropshipping, and anyone else you bring into the project. Number 5 is payment, for a CPG/FMCG, they expect the retailer to handle customer payments, put simply you need to make sure you have a credit card processor that can collect payments into your company’s bank account. A platform like Shopify has a built in processor, and whether you use one built in or externally, shopify recommends looking at approval rates, payout times and ease of reconciliation.  And number 6, we have fulfillment. For large enterprises, the factors they recommend looking in to are warehouse proximity, which could be of strategic value depending on where the customer base is, the second priority is packing, such as if product needs to be refrigerated, third are integrations, whether you do it directly or your agency does it on your behalf, the warehouse has to be integrated in to the ecommerce platform, so the data flows smoothly, and lastly is price, the main element a CPG/FMCG company need to bear in mind is how those costs will scale as the business does. 


Info.voodoorobotics.com also points to a number of challenges all across the company spectrum, specific for a business that's transitioning from B2B to DTC; In the Warehouse, pickers have to be more careful when selecting orders since it’s specific to a customer, the product has to be presentable to the customer, and while they can’t do anything about delivery, getting it packed safely is on them. Which transitions into packaging, in B2B you can ship products in pallets en masse, but when delivering specifically to customers you also need an area for packing, as well as having to figure out what sizes of packages you need based on product variety. Next is quality assurance, where they have to make sure the package has the correct product, is labelled properly and is not broken. Compare this to heading to a Wal-mart and seeing a box on the shelf, maybe it’s not in the best shape, but eh, at least the store has a customer service department and as well, you might even be able to haggle for a little something off. Next is shipping, again the major adjustment here is that you’re sending a lot of small packages rather than large pallets or cases, companies need to figure out what are the most cost effective options for shipping, and if they should be relying on third party delivery methods like UPS or DHL, additionally, companies need to consider dimensions, weight and how fast the box needs to get delivered, say there’s a parakeet inside. Then there’s returns, where when a product is returned to Wal-Mart, the oness is on Wal-Mart to figure out what to do with it, say the product is in poor condition, but not poor enough to refuse the return altogether, Wal-Mart can mark it down and put it in a markdown section. Receiving a return from a business to your business also implies a great deal of professional goodwill, you don’t get that as a default when dealing with customers. Moving along, you have personalization, one of the key benefits going direct is to give customers more customization in products, customers can come to your website and check out different shirts, lets say. So because this is such a major component to fully benefiting from DTC, companies need to make sure their manufacturing process, in house or partnership can handle this, not just at all, but in a way that’s feasible. With marketing, a company isn’t relying on a wholesaler to put the product images on a commercial or catalogue, but selling directly to the customer gives the company direct control over where to sell, be it facebook, linkedin or instagram. For sales, a company is transitioning from selling to a seller, to selling to a customer directly. In b2b, there’s less of that need for a salesperson to be “on brand” still professional, mind you, but you just don’t need to put on a face. The second aspect is in b2b you can guide the seller on the other side through the sales process, but in DTC the customer needs to be able to sort it out on their own. Next is how it affects Engineering, already they’re receiving feedback from other parts of the company for continued product development and improvement, but now customer feedback enters the mix, since otherwise those customers would be just as likely to provide feedback to the store they bought the product from and are less likely, or compelled, to speak to the brand. By the way, in case it wasn’t apparent, the point of the article was to illustrate how things change in every department. Next is customer service, not that I need to go over the benefits of this, the major standout change is that now there has to be one. Moving on we have management, if there’s one position with some of the most significant change it’s management, you’re now in an operation with a mix of front-end and back-end, they now need to work as ambassadors between all the departments and make sure the message is consistent, while a breakdown in communication can be troublesome within a company, moreso when dealing with another business, it can be outright devastating when a communication breakdown occurs with customers involved. Management’s new job will be to make sure everyone’s on the same page, and a promise made to customers should be mad knowing it can be kept. Two other points the article makes, while not department specific are still important, one is that the customer service team needs to have more technical expertise than you might think, it’s one thing to receive complaints and pass on ideas, it’s another to know how to process purchases manually, returns, product knowledge and instructions, what happens if it ends up delivered to someone in Quebec. The second point made is social media will be a necessary presence, and as such, the company will have to worry about negativity as well. We talked about some ways company’s have handled it, like Wendy’s from our Branding Episode (11) they address negativity by firing back. Whatever the strategy is, voodoo robotics recommends having strategies in place, anticipating known issues and having responses ready to go. You can use a service like Google Alerts to be notified of messages in relation to your business, and you don’t need to have it tagged either. One time, I made a rather snarky tweet about bus stops, I said “If you miss your stop relax and call the next one, they’re bus stops, not CIBC locations” The next day CIBC contacted me and asked if I didn’t have a location in my area. 


Now, let’s focus on starting from scratch, obviously there’s plenty of takeaways already but I want to make certain I’m providing insight for starting up. Here is a depository of instructions courtesy of coredna.com 1. Identify an everyday item and make it affordable, the example they provide is Dollar Shave Club and Harry’s Razor, having seen that with Gilette’s dominance of the market, a blade would average 6USD, whereas these two sell you the handles to varying degrees of quality, budget or luxury, with the blades averaging 1.87 each. 2. Focus your product and marketing on customer pain points. Even if a customer is getting the best value, where are they sensing grief? The example they cite is Bonobos, a 2007 pants company, they discovered men don’t enjoy going out to buy pants and furthermore, find it hard to like ones when they do. Their second discovery is European pants were too high-rise and American ones were too baggy, so they made pants that found a middle ground between those two. 3. Develop a subscription-based model. This is something I’d need to delve deeper into, but it’s recommended for DTC, if customers can subscribe to something they need, or want, it becomes one less thing they need to think about, and you’ve saved them time and money. I still subscribe to Quip, and have been for over a year. One every three months I get a refill in the mail, no muss no fuss. 4. Keep options simple, DTC brands like Casper will focus their resources on a sole quality product, and one that pleases the majority of customers. It can’t please everyone but that’s ok. 5. Take a content-first approach, the example of Glossier here is used to illustrate the passion came first. Her blog Gloss started in 2010, and once she had hit 15 million unique views it seemed like a good time to start her company. Having a strong content front end is an organic way to interact with customers, but also to collect data. For instance, picture asking a loyal and passionate fanbase what would be their ideal face wash? 400 comments later and you have organic market research. 6. Offer easy, no-fee returns. This is one I’m going to have to hit a company on hard, there’s a stylus from digital magicka, who I had asked if the stylus would work on that desk lab monitor I ordered a few months ago. The sales agent says yes! So I order it, it indeed does NOT work, and I ship it back. They should have offered to compensate me on shipping because they said it would work, instead I got nothing, and a net loss on top of it. I wouldn’t recommend being like that. 7, make use of celebrity influencers, you might not have Kylie Jenner on your rolodex, especially if you’re using a rolodex, but you are encouraged to use your network to see who you’ve got a connection to with the most clout. 8. Develop a customer incentive plan, such as refer ten friends and get a free product. 9. Create a viral video. Interesting insight on this one, because I remember seeing the Dollar Shave Club video some time ago, and it’s one of the most effective ads I can remember, specifically because I can remember. And it’s such a wacky ad that when I rewatched it now for this script, there’s bits from it I forgot about. What I didn’t know was that they had spent 10,000 dollars promoting the ad on social media. So while 10k is alot for advertising, reaching out to blogs and sites catering to your niche won't cost you anything to try. #10 is creating a virtualized experience, rather involved for starting up but I’ll talk about it anyways, the idea here is to augment the consumer’s home buying options by providing say, a virtual reality app that lets customers try products on at home, like a watch. 11 is to use a micro-influencer, another way to look at that is to imagine anyone you know or interact with could be an influencer in their own way among family and friends. 12 continues on this line by asking customers to make content, so rather than request customers to provide feedback or reviews, which you can still do, you can ask them instead to make videos of them trying the product on. 13. Is aggressive SEO, this one would be costly for a startup, they point that Casper spent a lot in Google Adwords to make sure they hit the top, if you have the money for it, SEO is proven to be effective. 14. Is to use infographics and memes on social media, I can safely say, infographics are hard to ignore, while I might not end up being a customer, an infographic is a short and sweet way of educating me on a subject. The issue I have is I would be skeptical of the information and would be happier knowing there are sources to backup the info I can click on. 15. End to End customer experience, so you might have a plan for how to get customer’s attention and funnel them into selling, but if you want to see your customer satisfaction rate go up, one example by coredna.com is Bonobos, who have a 24 hour response rate for emails, 90 percent of emails were rated “great” and 90 percent of calls were responded to within 30 minutes. For starting up, that might be asking a lot out of an up and comer, so manage customer expectations like “we will respond within 48 hours” and focus on emails first since they are usually the least time pressure. Once you’re ready to use chat, or have your chat system in place whether its AI, people or a mix, customers tend to expect chat responses much quicker than email but also appreciate the immediacy of chat much more. The article does have a couple more insights for you to check out, but I think there’s plenty here to consider already. 


Finally, we’ve already explored a lot of businesses throughout this episode, but let me point to a few more just for good measure and I do want to take a moment and commend Casper mattress on their success. The first I want to talk about is Almina, I wanted to make sure I got in one that uses dropshipping.. The article by the way is from Glossy.co, which I mentioned earlier. The owner Angela Gahng focused on a DTC model so she could find a balance between quality and affordability, and found that while it was effective, growth was difficult because acquiring customers for the website was costly for a small business. She was approached by W Concept, who found her on Instagram, offered her a dropshipping based partnership. Once things had gotten in place, she found business was expanding rapidly, customers would order clothing by Almina concept through W concept, who are a global marketplace, then Almina concept will fulfill the order via dropshipping. Gahng at one point had to contact her factory in Seoul Korea to resupply certain products that were selling out quickly. The second one is Card Against Humanity, a game I love to play but am not great at winning, you’d think with my english level I’d do well in a game of words, but I assure you depending on the crowd it might not make a lick of difference. CAH sells on their website directly, but of course they’re available in stores as well. The article from blog.hubspot.com points out that because the audience and the brand are so in sync, the brand can mess with the crowd and the crowd gets it. CAH did a black friday sale where they charged 5 dollars for nothing, and earned 71 000 dollars as a result. The final one I want to talk about is The 5TH, since you’re listening to this, it’s done numerically, 5TH, and their strategy would be a little obvious if you adopted it pound for pound but my gosh is it smart. For the first two years of it’s operation, the store would be open 5 days a month, giving them time to build anticipation as well as control supply and demand. As of 2017 you can shop whenever you want, but they have the story to fall back on. One major takeaway I picked up from this research is that, if you consider how much product is purchased in stores, the relationship between those major brands and the stores that sell them is a B2B model, they need to convince the store to sell it rather than convince the buyer to buy it. What about you, what was your takeaway from all this? If you want us to delve in to a subject feel free to let us know, podast@debutify.com 


Written by

Joseph Ianni

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