The large production runs required by retailers, coupled with long lead times and impatient investors, are causing many entrepreneurs to second guess today’s saturated retail environment.
The high startup costs and low margin of error make selling to retailers look less attractive for new brands because selling online is fairly simple these days, and millions of shoppers are opting to avoid stores all together for the convenience of click-and-ship options.
The Current Retail Landscape Is Challenging
A reported 9,300 U.S. retail closings were announced in 2019, and there has been a lot of consolidation in the retail industry, leading to fewer distributors, more competition and less negotiating power for many brands.
Business terms with retailers may require newer companies to lower their prices, restrict shelf space, limit exposure or the number of stores a product can appear in, and push customers to retails stores without providing customer data back to the brand. Also, because of the large orders and long lead times, starting with bigger retailers requires a significant upfront capital investment in product that could sit for months.
Other risks brands face include retailers opting to end contracts or adding a similar product to their own private label and selling it at a cheaper price. If you have not built up a brand and established strong customer affinity, then prospective consumers may pick the private label over yours.
Price, assortment and merchandising are all areas that companies can’t control in retail, but they can control them when selling direct to consumer (DTC). This has led to a number of startups skipping retail altogether when launching their brand.
Launching A DTC Brand
I’ve found that direct-to-consumer relationships can fuel all areas of a business, including product development, pricing, customer relationships and more. Here are a few benefits of the DTC model:
Your best customers are your current customers. Why invest in marketing that drives people to retailers without the benefit of receiving purchase data to cultivate the customer relationship?
The opportunity to collect customer data and insights gives brands a clear view of who their ideal customers are as well as those ideal customers’ purchasing behaviors. It allows you not only to save cash on market research, but actually turn a profit because your data is backed up by sales.
Resell, Upsell And Cross-Sell
Brands miss out on resell, upsell and cross-sell opportunities when taking a retail-only approach. DTC brands can test various offers and cocreate their upsell and cross-sells with their customers for pennies since all the testing is done with existing customers whose dollars fund the research (as opposed to hypothetical sales so typical to traditional market research).
As a result, mapping out your brand’s customer journey and getting a better understanding of the channels, messaging and number of touches needed to drive a purchase is essential. However, you cannot do that without understanding who your customer really is.
Controlling customer data and the point-of-purchase environment allows brands to create tailored, immersive experiences that lead to a competitive advantage. Additionally, there are opportunities to create customized products for the most loyal customers, as loyal customers may be willing to pay more for customized and personalized products created based on their feedback. Warby Parker took this approach during the 2018 holiday season, opting for limited edition products instead of heavy discounting during Black Friday and Cyber Monday.
Beyond products, DTC allows for personalization in advertising and communication because every customer interaction can be tracked. Personalization then leads to better service and support, stronger relationships with customers and better retention, which all help to strengthen brand loyalty.
Pricing, Speed To Market And Reach
DTC brands have more control over pricing and discounts, which can lead to better margins and perception about the value of your products.
Another huge benefit to the DTC model is the fact that you can get instant feedback from customers on products, packaging, marketing and more. Brands can test products quickly and get customer feedback before investing in large production runs.
Finally, a DTC approach allows you to go beyond the footprint of retailers. This means that customers all across the country (and the world, in some cases) can enjoy your product.
After you master DTC, you can approach retailers in a position of power where you have leverage in the negotiations. You can look to your customer data to show them why you will be successful in their geographic footprint, and you can use sales data to convince them to carry products that they wouldn’t normally entertain.
Ultimately, the nature of the relationship changes when you are not desperate to get your product in the store, and that is the only way to create sustainable relationships in the long run. Instead of living in fear of the unknown with your brand, take control of your business using DTC to build out your brand before engaging with retailers.
If you have a brand that is looking to develop a DTC strategy, make sure to visit Direct to Consumer Mastery for more assistance.