At the beginning of the pandemic, Direct-To-Consumer (DTC) was on everyone’s lips. From yet-another-generic-approach to try in ecommerce, it turned into an important business model disrupting the industry. No middlemen, a promise for a seemingly infinite pool of customers, low overhead did their job in convincing retailers that DTC is their go-to strategy in the face of the global lockdown.
DTC sales in the US only doubled over the course of the pandemic and are forecast to reach $174.98 million in 2023, compared with $76.68 million in 2019.
Statistica
The pivot towards e-commerce during the COVID-19 was understandable. Many have managed to capture the business of consumers and connect directly with customers integrating technologies into their operations. Retailers realized that it’s not only about sales but also about the excellence in service which leads to the longer customer LTV. And while others were successfully integrating their new e-commerce strategy of disintermediation, some businesses learned the lesson of DTC the hard way — losing profitability and unable to patch the cracks in their commerce operations.
DTC Players That Got It Right
Investing in DTC can be costly and quite exhausting, but those who do it well reap the fruit of their labor even beyond the pandemic. Nike is the first to catch the eye. Having announced the Consumer Direct Acceleration strategy in 2020, the brand saw 40% of its sales, or $16.4 billion, coming from its DTC channel Nike Direct.
Many other successful cases of DTC lie in start-ups and small businesses that carve out their own niche online and win dedicated fans rather than generic customers shopping in the mass market. Take Dr. Squatch, for instance. They used their customer insights and differentiated the product assortment online and the one hitting the supermarket shelves. The art and humor on their soap packaging really made the difference. And the famous Super Bowl ad moved the DTC brand even further into the spotlight.
What do these successful DTC cases have in common? First, they clearly define the role of the DTC channel in their brand. For Nike, it was business agility and closer contact with customers. For Dr. Squatch, it was personal branding across sales channels.
Second, best-practice DTC companies always have a clear-cut e-commerce strategy. They may have less-than-stellar financials, but their customer service is always outstanding. They remain customer-centric across all business verticals, including technology, operations, and data analytics that drives value. In most cases, such companies work in cross-functional teams and in iterative sprints to ensure they react to the changing customer preferences and act on the acquired customer insights.
Why DTC Isn’t All It’s Cracked Up to Be
In a rush to gain customer loyalty, many DTC brands have miscalculated the odds and crashed into the harsh reality. First, DTC requires a substantially different setup when it comes to logistics. Cutting out the middlemen, retailers take the burden of establishing the fulfillment centers and handling supply chains alone, which not all e-commerce players are capable of doing.
Many brands began to crumble with the rise in shipping rates on containers: what might have cost a brand $5,000 to ship something from China became $25,000 in 2021. Even more went down as the time to deliver products from Asia to the warehouse in the US increased. After all, no customer would want to wait for a few months to have their item delivered.
DTC players also have to tackle the rising customer acquisition costs (CAC). As a rule, successful DTC businesses should reach a CLV-to-CAC ratio of 2:1. But with soaring Facebook and other social media ad prices which DTC brands rely on to reach customers, DTC profitability decreases posing a challenge to scale.
Take a look at Warby Parker. Investing a few dollars in their Facebook campaigns helped this DTC darling gain brand awareness in the past. But this strategy just stopped working. The company’s net loss totaled $91.1 million in 2021 due to a jump in operating costs. Apparently, these weren’t only Facebook ads to blame; but the losses indicated the need to pivot and reconsider the marketing and growth strategy for the eyewear brand.
A jump in operating costs also included the supply chain disruption. As the pandemics settled in, the cost to import raw materials from China multiplied by 10 — the pressure not all DTC companies could sustain. So some brands, like Sarah Flint of handcraft designer shoes, increased the product prices to accommodate the costs. Too bad, it came at the expense of reducing customer lifetime value (LTV).
Lessons Learned: Look Before You Leap
I don’t mean to seem discouraging in any way. DTC is an extremely lucrative business model and, if implemented right, might help companies reach their goals in terms of outstanding customer experience. Just mind a few things:
- DTC businesses should invest in a flexible tech stack to help them stay afloat and align their online store with the changing customer requirements.
- The nature of certain e-commerce niches, like industrial automation, just doesn’t allow going DTC. Sometimes you’re better off staying in your B2B or B2C than transitioning into a completely new operational model.
- DTC shouldn’t necessarily be the end all be all. You can set up a DTC unit within your larger business and make it a part of the connected commerce journey. This way, you can test the waters of the venture and gather insights from your customers without risking it all.
- Don’t be afraid to ask for help. There are hundreds of e-commerce consulting agencies that will advise you on your DTC growth strategy for a rather reasonable price. For you, it might be the chance to learn from the mistakes of others, not yours.