What Is A Direct To Consumer (DTC) Business Model?

What Is A Direct To Consumer (DTC) Business Model

DTC (direct-to-consumer) sells niche products directly to consumers. This is in contrast to traditional retail, which involves listing them on an online storefront such as Amazon. Amazon takes a percentage of every sale. According to an eMarketer report, it’s a lucrative business model that has already generated $111.54 trillion dollars in sales. How can you make this work for you?

Leonard Schlesinger, in his HBR article, pointed out that “customer acquisition costs (CAC), increase across the board,” DTC brands must plan for vertical integration (by, for example, creating their own manufacturing operations rather than contracting it out), in order to maintain margins and survive past Series B. It is important to keep operations in-house or vertically integrate if you want to be a successful DTC business.

What Is the Direct-to-Consumer (DTC) Business Model?

Direct-to-consumer is an eCommerce business model that allows you to sell directly to your customers without the use of brick-and-mortar shops, wholesalers, or platforms such as Amazon and Etsy. All sales are made directly to the brand, without any intermediaries or the traditional supply chain.

DTC vs. B2C Models: How Are They Different?

Consumer brands use DTC models to sell direct to consumers and ship their products from company warehouses. A business-to-consumer model (B2C) is where the manufacturer of the product sells it to a wholesaler, or retailer who then sells it back to the consumer. If you purchase a new HP laptop online, it would be a DTC transaction. The same laptop you bought from Walmart would be considered B2C because HP would need to sell it to Walmart first.

DTC models are typically less expensive than B2C models for both the manufacturer and the end user. DTC companies are able to save money over the long term because they don’t have to pay a selling fee.

The DTC Model is strictly online, B2C businesses can have an online or brick-and-mortar shop, or both. B2C businesses have more sales opportunities and visibility online, but they also pass on their operational costs to consumers, sometimes, similar goods are sold at a higher price than DTC businesses. As such DTC businesses often offer goods at a cheaper price than B2C companies.

Also read: Top 15 Dropshipping Suppliers for eCommerce Business

Benefits of the DTC Business Model

DTC business model offers many benefits. It gives you, the seller a high degree of control over your online shopfront. This model allows you to have complete control over your customers’ experiences, lowers barriers to entry, and provides higher profit margins that B2C businesses.

Control the customer experience

You can customize the customer journey for your company by controlling the entire sales process through your website. If your company is committed to maintaining high customer relationships, you can create customer service bots that connect customers with representatives who will answer any questions. You can also highlight if your brand has a flexible return policy on every landing page. You can create loyal customers by having more direct control of the customer experience than if you are a faceless retailer using a third-party platform.

Direct-to-consumer is a model where you work directly with customers as both a supplier and sales representative. You’re dependent on a sales representative for other sales models like B2C. You can be your own sales rep and manage the entire sales process.

It is easier to start a business

DTC businesses are also easier to start. DTC businesses have a lower entry barrier. It can be as low as $25,000 to start a DTC company. Because there is no middleman, this means that sellers have lower distribution costs. You don’t require a lot of resources to get started. You only need an eCommerce platform such as Shopify, and a product to start selling directly.

DTC brands are directly sold to customers. This allows you to collect valuable data and see exactly what is and isn’t selling. This allows you to quickly pivot strategies and take advantage of product growth, or retool an ineffective offering. These are vital skills for growing your business.

Higher profit margins

You sell consumer packaged goods (CPGs) at wholesale prices, but lower than retail. The seller can then help to offset the last-mile delivery cost. DTC models are more efficient and have lower costs. This allows you to sell your products at a lower price than retail while still maintaining a higher profit margin than many B2C companies. This can make it easier to manage all aspects of your business, including helping to offset the costs of last-mile delivery and developing new products.

The margins of Nike saw a dramatic shift when it changed its distribution model to focus more on the direct-to-consumer market. 62% were the margins for the DTC channel, while 38% were its wholesale margins. Analyst Jamie Merriman of Reuters estimates that Nike’s overall gross margins will increase by 3.3% if Nike’s DTC business grows.

Also read: Distributed Order Management: What Is It, Characteristics & Benefits

Tips for Starting a DTC Business

It can be difficult to start a DTC business. However, by building a strong brand story, being selective when you start and making the most of your data, you can make your business grow.

Develop a brand story that appeals to your target market

Strong brand narratives can be powerful. Research has shown that the brain responds to narratives and detailed descriptions better than any other stimuli. This is something to keep in mind as you craft your brand’s story. According to HubSpot has a few components.

Find the “why” behind your brand’s existence. What is the purpose of your DTC business? This will help you to establish a niche for your business and give you a mission statement.
In some way, challenge the status quo in the market. You can differentiate yourself from the rest by challenging established brands, technologies, or thinking patterns. This will help you to build a brand identity.
Identify the conflicts within your brand’s story. How can you help your customers share your biggest challenges? It’s all about creating an engaging brand for consumers. Conflict keeps people engaged and involved in the brand experience.
Finally, find the solution to your earlier challenges. Your DTC brand is the solution. Every conflict must have a solution. Your ending is your chance to show your customer how your product or services can solve their problems.

You can offer a limited selection of products at first

You can quickly test your distribution model by limiting the product range. You can’t launch your product without a proper distribution strategy and a reliable way to get products to consumers. Instead of spending your product budget on many products, you should focus on the key products and ensure that you can get them to the consumers quickly.

With a limited product range, try to be as niche-oriented as possible. You will not be able to compete with B2B or B2C businesses as you are more niche, and can’t always offer superior, handcrafted goods.

Take advantage of your first-party data

First-party data refers to customer data (information) that is directly collected from customers. As the seller, you have this data. You can use it to tailor your customer’s experience or optimize your website, which can in turn generate more revenue. Two great ways to use first-party data are customer-site interactions or personalization.

You can track customer interactions to see which pages and page elements convert well. You can also take action to improve these touchpoints or page elements because you have the site and site data.

If the offer is tailored to customers, they are more likely than others to click on it. This can help increase revenue. When you make personalized experiences for customers, they are twice likely to add items to their cart. They also tend to spend 40% more than they planned. You might segment customers by their interests to only send them product coupons or create recommendations for specific market segments that have purchased certain products.

Shipping and Delivery: An Essential Part of the DTC Customer Experience

Your ability to ship and deliver your product is what makes your DTC business a success. This also applies to your delivery transparency which includes live order tracking and simple pricing models. All this comes at a moment when DTC business customers are demanding more.

  • 43% of consumers are concerned about shipping and delivery costs.
  • 88% of consumers value real-time order tracking.
  • 99% of consumers believe that fast delivery is essential when shopping online.
  • 80% of consumers would like to see delivery dates when they check out, but only 40% of retailers show them.
  • 54% of millennials that ordered online in 2018 paid more to get faster shipping.

Warehouse management and last-mile delivery are all part of fulfilling the above customer expectations. Customers want their product fast. This is difficult when you are searching through unorganized warehouses. Warehouse management software is crucial in getting your products to customers. It helps you keep your warehouse organized, protects your products, and manages your product inventory. Your warehouse is also an important point in your business. It’s where the carriers pick up their packages before setting out for last-mile delivery.

Warehouse management will become more important as the DTC business model matures. With route optimization tools and warehouse management, your drivers will have more packages per trip, and their delivery vehicles will travel less. This results in more orders being fulfilled, and lower last-mile shipping costs, such as higher shipping fees.

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