direct-to-consumer

What Is Direct-to-consumer? The Direct-to-consumer Business Model In A Nutshell

Direct-to-consumer (D2C) is a business model where companies sell their products directly to the consumer without the assistance of a third-party wholesaler or retailer. In this way, the company can cut through intermediaries and increase its margins. However, to be successful the direct-to-consumers company needs to build its own distribution, which in the short term can be more expensive. Yet in the long-term creates a competitive advantage.

Understanding direct-to-consumer

Some estimates suggest eCommerce sales will surpass $6 trillion by 2024, with approximately  $175 billion occurring via the direct-to-consumer model in the United States alone.

Direct-to-consumer is a strategy where a business sells directly to consumers through an online medium. The approach is in stark contrast to more traditional B2B strategies, where a manufactured product may pass through a wholesaler, distributor, and retailer before it is purchased by the consumer.

Manufacturers operating under the D2C model must necessarily wear the hat of the wholesaler, distributor, and retailer in addition to meeting their production and fulfillment responsibilities. So why would a manufacturer take on more work voluntarily? There are two answers to this question, and both are related to the evolving needs and expectations of modern consumers.

For one, consumers prefer to go directly to the source when purchasing from a specific brand. For example, a golf fanatic is more likely to visit the TaylorMade website than they are a traditional sports retailer when looking for more information. When more consumers are going direct to TaylorMade, this also means the company can no longer rely on third-party sports retailers to adequately sell its products. Essentially, TaylorMade may be forced to adopt the direct-to-consumer model and make its products available for direct sale.

Advantages of the direct-to-consumer model

While it is clear manufacturers may have to take on extra work, there are nevertheless quite a few benefits to adopting the direct-to-consumer model:

  1. Customer data – manufacturers who sell to a retailer or wholesaler are less exposed to important purchasing data regarding their products. The D2C model helps manufacturers learn more about their target audience, resulting in smarter product development and increased awareness around consumer trends and demand.
  2. Customer experience – selling direct to the consumer means the business has control over the entire buyer journey. The business will learn where consumers shop and how they prefer to pay. By interacting with consumers directly, the business can offer more responsive customer support and develop targeted and consistent marketing campaigns using SMS or email, among other channels.
  3. Brand engagement and reputation – many businesses who sell through a retailer have little say in how their products are presented. Retail salespeople may have limited interest or knowledge in promoting their range, which can lead to a poor first impression of the brand itself. In the D2C model, manufacturers ensure the company brand and associated products are painted in the best light possible.

Direct-to-consumer examples

Here are three companies utilizing the direct-to-consumer model:

  1. Glossier – a cosmetics company founded by blogger Emily Weiss, who built a strong relationship with her readers before developing products to sell to them. By asking consumers what they wanted directly, Weiss was able to bypass selling her goods in traditional cosmetics retailers.
  2. Dollar Shave Club – a company that was started because its founders were tired of paying for expensive razor blades in supermarkets. Dollar Shave Club sells cheap razors direct-to-consumer on a subscription basis.
  3. Casper – a manufacturer and direct seller of innovative mattresses, pillows, sheets, weighted blankets, and even dog beds. Casper enables consumers to avoid buying these items from aggressive salespeople in traditional furniture stores.

More examples of the D2C approach

To solidify the concept of D2C, we have listed a few more examples below.

Reformation

Reformation is a sustainable fashion company that started operations in Los Angeles in 2009. 

With a mission to bring sustainable fashion to everyone, Reformation wants its customers to know that it makes the people who manufacture clothes a priority. To realize this mission, the company constructed its own factory in Los Angeles to create a safe, fair, and healthy working environment for employees.

With many of its competitors manufacturing their clothes in cheap and sometimes exploitative labor markets, Reformation’s D2C approach has allowed it to build a strong brand following in a short period of time.

Nanit

Nanit is a D2C manufacturer of baby sleep monitoring devices that can also track the health and wellness of the child and allow the parents to celebrate growth milestones.

The industry was perfect for the D2C approach since these devices required specialist manufacturer knowledge to develop and then market to consumers. The company has raised $75 million to date, with much of the capital invested and research and development and global expansion.

As both the manufacturer and the seller, Nanit can offer expert after-sales support to customers. The company also operates a community forum where new parents can share the collective experience of raising a child and ask questions.

Bombas

Bombas is an apparel manufacturer with a particular focus on socks. While its competitors looked to differentiate their products with design, Bombas decided to fix the engineering issues that seemed to be inherent to most socks on the market.

According to company founders Randy Goldberg and David Heath, it took almost two years of testing to fix issues such as slipping, chafing, and an uncomfortable sensation from the toe seam, among other problems. While Bombas socks are more expensive than most others, Goldberg likened the company’s pricing strategy to that of Starbucks, which improved the coffee experience so much that it was able to sell it at a premium.

Today, Bombas is a certified B-Corporation that matches every customer purchase with a donation to someone affected by homelessness. The brand is now worth around $100 million.

Quip

Quip is a D2C brand that sells oral care products such as floss, dental gum, mouthwash, and electric toothbrushes. The company was started to improve poor dental health among millennial consumers, with 30% only brushing their teeth once a day with many others are simply afraid to visit the dentist.

To make oral care more appealing, Quip sells beautifully designed products with a strong digital marketing strategy that appeals to its core demographic. Like other D2C brands that sell personal care items, Quip’s products are available for a small monthly subscription.

In recent times, Quip has also started selling its products in retail chains such as Target. However, the importance of D2C for Quip and ensuring it stays relevant among consumers is not lost on the company. Quip VP of growth Shane Pittson once noted in an interview that D2C allowed the company to build a supportive customer base and high-quality products based on constructive feedback, with over 80% of customers completing a post-purchase survey.

Key takeaways:

  • Direct-to-consumer (D2C) is a business model where companies sell their products directly to the consumer without the assistance of a third-party wholesaler or retailer.
  • Despite requiring extra work and involvement, direct-to-consumer has several benefits for manufacturers. They include more transparent customer buying data, a higher-quality customer experience, and increased brand engagement and reputation.
  • Examples of businesses employing the D2C model include Glossier, Dollar Shave Club, and Casper. 

Connected Business Model Types

Asymmetric Business Models

asymmetric-business-models
In an asymmetric business model, the organization doesn’t monetize the user directly, but it leverages the data users provide coupled with technology, thus have a key customer pay to sustain the core asset. For example, Google makes money by leveraging users’ data, combined with its algorithms sold to advertisers for visibility.

Attention Merchant Business Model

attention-business-models-compared
In an asymmetric business model, the organization doesn’t monetize the user directly, but it leverages the data users provide coupled with technology, thus having a key customer pay to sustain the core asset. For example, Google makes money by leveraging users’ data, combined with its algorithms sold to advertisers for visibility. This is how attention merchants make monetize their business models.

Marketplace Business Models

marketplace-business-models
A marketplace is a platform where buyers and sellers interact and transact. The platform acts as a marketplace that will generate revenues in fees from one or all the parties involved in the transaction. Usually, marketplaces can be classified in several ways, like those selling services vs. products or those connecting buyers and sellers at B2B, B2C, or C2C level. And those marketplaces connecting two core players, or more.

Wholesale Business Model

wholesale-business-model
The wholesale model is a selling model where wholesalers sell their products in bulk to a retailer at a discounted price. The retailer then on-sells the products to consumers at a higher price. In the wholesale model, a wholesaler sells products in bulk to retail outlets for onward sale. Occasionally, the wholesaler sells direct to the consumer, with supermarket giant Costco the most obvious example.

Retail Business Model

retail-business-model
A retail business model follows a direct-to-consumer approach, also called B2C, where the company sells directly to final customers a processed/finished product. This implies a business model that is mostly local-based, it carries higher margins, but also higher costs and distribution risks.

B2B2C

b2b2c
A B2B2C is a particular kind of business model where a company, rather than accessing the consumer market directly, it does that via another business. Yet the final consumers will recognize the brand or the service provided by the B2B2C. The company offering the service might gain direct access to consumers over time.

Crowdsourcing Business Model

crowdsourcing
The term “crowdsourcing” was first coined by Wired Magazine editor Jeff Howe in a 2006 article titled Rise of Crowdsourcing. Though the practice has existed in some form or another for centuries, it rose to prominence when eCommerce, social media, and smartphone culture began to emerge. Crowdsourcing is the act of obtaining knowledge, goods, services, or opinions from a group of people. These people submit information via social media, smartphone apps, or dedicated crowdsourcing platforms.

Open-Core Business Model

open-core
While the term has been coined by Andrew Lampitt, open-core is an evolution of open-source. Where a core part of the software/platform is offered for free, while on top of it are built premium features or add-ons, which get monetized by the corporation who developed the software/platform. An example of the GitLab open core model, where the hosted service is free and open, while the software is closed.

Open Source vs. Freemium

open-source-business-model
Open source is licensed and usually developed and maintained by a community of independent developers. While the freemium is developed in-house. Thus the freemium give the company that developed it, full control over its distribution. In an open-source model, the for-profit company has to distribute its premium version per its open-source licensing model.

Freemium Business Model

freemium-business-model
The freemium – unless the whole organization is aligned around it – is a growth strategy rather than a business model. A free service is provided to a majority of users, while a small percentage of those users convert into paying customers through the sales funnel. Free users will help spread the brand through word of mouth.

Freeterprise Business Model

freeterprise-business-model
A freeterprise is a combination of free and enterprise where free professional accounts are driven into the funnel through the free product. As the opportunity is identified the company assigns the free account to a salesperson within the organization (inside sales or fields sales) to convert that into a B2B/enterprise account.

Franchising Business Model

franchained-business-model
In a franchained business model (a short-term chain, long-term franchise) model, the company deliberately launched its operations by keeping tight ownership on the main assets, while those are established, thus choosing a chain model. Once operations are running and established, the company divests its ownership and opts instead for a franchising model.

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