How to Make the DTC Model Work for You
May 3, 2022
The DTC (direct-to-consumer) model sells niche products directly to consumers, as opposed to traditional retail which means listing them on a storefront like Amazon, which takes a certain percentage of each sale. It’s a lucrative model that has generated $111.54 billion dollars in sales already, according to an eMarketer report. So how do you make it work for you?
In his HBR article, Leonard Schlesinger pointed out that, “As customer acquisition costs (CAC) increase across the board, [DTC] brands must plan to vertically integrate (by, for instance, creating their own manufacturing operations instead of contracting it out) in order to preserve margins and survive past Series B.” Keeping operations in-house (or vertically integrating) is a key to success as a DTC business, and OptimoRoute helps DTC businesses do this by enabling them to use in-house delivery.
Jump to the section that interests you most:
- What Is the Direct-to-Consumer (DTC) Business Model?
- Benefits of the DTC Business Model
- Tips for Starting a DTC Business
- Shipping and Delivery: A Critical Part of the DTC Customer Experience
- Control Delivery (and the Customer Experience) With OptimoRoute
What Is the Direct-to-Consumer (DTC) Business Model?
The direct-to-consumer business model is an ecommerce business model that works by selling directly to consumers without using brick-and-mortar stores, wholesalers, or platforms like Amazon or Etsy. All sales go directly to the brand itself, skipping distributors and most of the traditional supply chain.
DTC vs. B2C Models: How Are They Different?
DTC models are used by consumer brands sell directly to consumers, shipping their own products from the company’s warehouses. In a business-to-consumer (B2C) model, on the other hand, the company that makes the product will sell it to a wholesaler or retailer, who then sells it to a consumer. For example, if you buy a brand new HP laptop from the HP website, that would be a DTC transaction. If you buy that same laptop from Walmart, that would be B2C since HP would have to sell the laptop to Walmart first.
DTC models typically cost less than B2C models, both for the manufacturer and the consumer. DTC companies can save money in the long run because they don’t have to pay a seller’s fee.
The DTC model is strictly online, whereas B2C companies can have a brick-and-mortar store, an online store, or both. B2C companies have more potential points of sale and online visibility, but they pass their operational costs onto consumers, oftentimes charging more for similar goods than a DTC business. As such, DTC businesses can often provide goods at a lower price than B2C companies.
Benefits of the DTC Business Model
The DTC business model provides numerous benefits because it offers you, the seller, a high level of control over your online storefront. It allows you to take full control over your customers’ experiences, lowers the barriers to entry to start your business, and offers higher profit margins than B2C companies.
Control the entire customer experience
Because you own the entire sales process on your website, you can tailor the customer journey to fit your brand. For example, if your company is dedicated to maintaining a high customer relationship, you can create customer support bots that quickly connect customers to representatives who will answer their questions. Or, if your brand boasts a flexible return policy, you can make sure to highlight that on each landing page. This level of granular control over the customer experience allows you to create loyal customers, as opposed to being a faceless retailer on a third-party selling platform.
In the direct-to-consumer model, you’re working directly with the customer as a sales representative and supplier. In other sales models, like B2C, you’re at the mercy of a sales rep. Being your own rep means you can own the entire sales process and provide superior customer service, as opposed to being reliant on another store’s policies and sales teams.
Easier to start a business
DTC businesses are easier to start up, too. There’s a lower barrier to entry associated with DTC businesses—it can cost less than $25,000 to start a DTC business. This is partially due to a lower distribution cost for sellers because there’s no middleman taking a cut of your profits. It’s also due to the fact that you don’t need many resources to start. All you need is an ecommerce platform like Shopify and a product, and you can start selling directly to consumers.
DTC brands sell directly to customers, which means you can collect valuable data and immediately see what is and isn’t selling. This enables you to pivot strategies fast and capitalize on product growth or retool a floundering offering, both of which are crucial skills as you begin to grow your business.
Higher profit margins
You sell consumer packaged goods (CPG) at prices below retail but above wholesale. Sellers are then able to help compensate for the cost of last-mile delivery. Since DTC models require fewer resources and therefore have lower costs, you can sell your products at lower prices than retailers while still maintaining higher profit margins than most B2C companies. These higher margins can help you in all aspects of the business, such as helping to compensate for the cost of last-mile delivery or in developing a new product.
When Nike shifted its distribution model to be more focused on the direct-to-consumer market, it saw a massive shift in its margins. Margins for its DTC distribution channel were 62%, compared to its wholesale margins, which were only 38%. Analyst Jamie Merriman, writing for Reuters, estimates that Nike’s overall gross margins could increase by 3.3% by 2022 if Nike’s DTC business continues to grow.
Tips for Starting a DTC Business
Starting a DTC business can be a challenge, but by creating a strong brand narrative, limiting your selection as you begin, and using your data to the fullest, you can help your business thrive.
Create a brand narrative that will appeal to your target market
Brand narratives are powerful. Research shows that our brains respond to detailed, evocative descriptions and narratives better than any other type of stimuli. Keep this in mind when you’re crafting your brand’s narrative, which, according to HubSpot, has a few components:
- Answer the “why” of your brand’s existence. Why does your DTC business exist, and what problems do you help solve? This helps you establish a niche and gives you a guiding mission for your company.
- Challenge the status quo of the current market in some way. Challenging established brands, technologies, or ways of thinking helps you differentiate your own brand and helps you build an identity as a company.
- Identify the conflicts in your brand’s story. What are your greatest challenges, and how do your consumers share your challenges? This is all about building an engaging consumer brand—and conflict keeps people involved and engaged in the brand experience.
- Finally, identify the solution to the challenges you posed earlier. That solution is, of course, your DTC brand. Every conflict has to have a resolution, and the ending to your story is your chance to show how your product or service can solve your customer’s own challenges.
Offer a limited product selection at first
A limited product line ensures you can test out your distribution model before anything else. Without a proper distribution model and a reliable, quick way to get products to customers, you can’t get your product off the ground. So instead of blowing your product budget on a number of different products, focus on your key product or products, and then ensure you can efficiently get them into the hands of the consumer.
Try to be as niche as possible with your limited product selection. Being niche means you won’t compete as heavily with B2B and B2C companies, which can’t always compete with superior, hand-crafted goods.
Take advantage of your first-party data
First-party data is customer data (information) collected directly from the customer. You, as the seller, own this data and can use it to create tailored experiences for your customers or optimize your site, which, in turn, can generate more revenue. There are two great ways to utilize first-party data: customer-site interactions and personalization.
Tracking customer interactions lets you see what pages or page elements are converting and which ones aren’t. And because you own the site and the site data, you can take action to improve these touchpoints and page elements.
Customers are more likely to click on a promotional offer if it’s tailored specifically for them and therefore are more likely to buy the products, which can increase your revenue. Customers are twice as likely to add items to their cart and 40% more likely to spend more than they planned when you create tailored experiences for them. For example, you might segment by customer interests and only send customers with certain interest groupings product coupons, or you can create recommendations for market segments who purchased specific products.
Shipping and Delivery: A Critical Part of the DTC Customer Experience
Your DTC business lives and dies by your ability to ship and deliver your product, alongside your delivery transparency, which includes things like live order tracking and simple pricing models. This all comes at a time when customer demands from DTC businesses are becoming more and more robust:
- Shipping and delivery costs are important to 43% of consumers.
- Real-time order tracking is important to 88% of consumers.
- 99% of consumers say fast delivery is important when shopping online.
- 80% of consumers want to see delivery dates at checkout, and only 40% of retailers actually show them.
- 54% of millennials who shopped online in 2018 paid more for faster shipping.
Part of meeting the above customer expectations involves warehouse management and last-mile delivery. Customers expect to have their product as soon as possible, which is easier said than done when you’re searching through an unorganized warehouse. Warehouse management software is critical in getting your products to consumers because it ensures you stay organized, ensures products stay protected, and helps manage your overall product inventory. The warehouse is also a critical point for your business: it’s the final step before last-mile delivery, where carriers pick up their packages and set out for delivery.
As the DTC business model matures, warehouse management is becoming increasingly important for keeping up margins. Warehouse management, along with route optimization tools, ensures your drivers have more packages per trip and less mileage on their delivery vehicles. This, in turn, means more orders fulfilled and less upfront last-mile delivery costs such as higher shipping rates.
Control Delivery (and the Customer Experience) With OptimoRoute
OptimoRoute is a route optimization tool you can use to cut planning times by as much as 80%. With OptimoRoute, you can save significantly on fuel costs by automatically mapping the quickest route to your destinations. Route optimization can save you up to 20% in mileage and boost order capacities by as much as 100%—all without having to increase your fleet size.
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