Think of Apple and Tesla. You know that you can buy a new iPhone or a Tesla by going directly to the brand that creates these products. This is something that just a couple of decades ago was not a possibility, especially in the automotive industry.
If you’ve ever purchased a product at a store, you know that these products are coming from manufacturers. However, the relationship the manufacturers have with retailers or stores is not a simple one; it involves different layers of communication between manufacturers, distributors, redistributors, and retailers, all the way down to the consumer. Each one of those layers adds another degree of separation between the consumer and the manufacturer. Now imagine a scenario where as a consumer you can interact directly with the manufacturer. This is something that more and more manufacturers and brands want to be able to do, and this is the essence of the direct-to-consumer model.
Understanding the transition to direct-to-consumer
Even though more and more manufacturers see these direct-to-consumer models as an opportunity to increase insights into their brands, in the market, this is a shift that does not happen with the flip of a switch.
Companies embracing this model essentially have to move away from the conventional retail paradigms requiring manufacturers to discover new ways to reach their customers. This not only means that they have to implement new methods, systems, processes and controls but also, in some cases, redefine their existing ones with distributors and retailers.
Why embrace the change?
There are many reasons why manufacturers would prefer this model. Some are drawn by the benefits or the opportunity to have tighter brand control, whereas others are pushed into it by market dynamics or competitive pressures. Equally, others are driven by the potential for increased profit margins and a deeper understanding of customer insights that can be used to improve their brand awareness and even bring new products into market.
Differences between direct-to-consumer (D2C) and traditional retail models
The traditional retail model means that manufacturers will create products, distributors will distribute them, and retailers will basically retail those products. This model means there is a lot of compartmentalization where systems are set up for B2B transactions and interactions between each one of these players.
If you’re a manufacturer that is currently working with distributors and retailers, you know what this looks like and things like promotions, rebates, and incentives are things to consider every day. By contrast, the direct-to-consumer model is more organic. Here, manufacturers need to adjust their processes and systems to the changes of individual consumer demands which is a very different endeavor to that of the B2B world.
Navigating the challenges of the D2C model
A direct-to-consumer model is not just about selling products directly to consumers, it’s about understanding how these changes will impact the operations of the organization. This means that the changes will reflect the complexity of dealing directly with customers, something that distributors and retailers in the traditional model usually take care of.
Direct interactions with customers involve the much higher expectation of delivering an experience to the consumer. This is an experience that retailers are aware of, but most manufacturers don’t have visibility into how to provide. This goes beyond a personal experience to also ensuring the presence of the brand in its associated market.
Companies are used to setting up marketing campaigns for their products and to enhancing brand recognition. In this case, it’s not about changing their campaigns but about letting customers know about the new ways they can access the products they know and love. Basically, they are evolving into making the brand more accessible.
Having a robust e-commerce platform will be paramount. In most cases, customers will expect to be able to access the brand’s website and place orders directly with the manufacturer. Companies that use existing technologies to ease this type of operation will fare better than the ones that limit access to their products to physical stores.
Supply chain challenges
It is estimated that currently more than 50 percent of all manufacturing supply chains can deliver directly to consumers. This should not be a surprise. With the way Amazon has impacted consumers’ expectations to access products within two days, more and more manufacturers embracing the D2C model recognize that being able to support that demand is very different to what they were used to in a traditional model.
Selling directly to consumers opens a new arena in the legal sense. Having awareness of regulations that place a burden on the manufacturer to meet these laws can signify an additional cost they were not used to dealing with.
Benefits of shifting to a D2C model
Improved customer insights
This is one of the best outcomes of a D2C model. Visibility into what the consumer base prefers or wants can be a goldmine of information that can be used to improve all the tracks within the organization from production and pricing to marketing, delivery, and new product development.
Increased brand awareness control
One industry that has embraced the D2C model is wine and spirits. More and more wine producers will enable consumers to access the most premium brands within their portfolio through digital channels. This has allowed them to better control their premium brands while still working with distributors and retailers for their more common products and brands.
Personalized consumer experience
Consumers like personalization and the buying experience is not immune from that expectation. Manufacturers need to sell not just the product but the experience to ensure their brand is linked to the individual.
If you’ve ever been to a restaurant where the chef prepares a dish based on the preferences of the consumer, you know each bite is relished. Adopting such an approach will play in your favor as the consumer will not only promote the product but the experience as well.
Adaptability to market changes
Traditional models require a lot of moving parts to adapt to market changes; a bit like trying to turn a large ship at sea. D2C models allow the manufacturer to swiftly change direction as market demands shift.
Quickly adjusting pricing, launching new promotions, even pivoting to different product offerings or evaluating different versions of the same product can be more easily managed with a D2C model and the outcomes can be quickly used to improve market positioning.
For a list of the sources used in this article, please contact the editor.
Jose Paez is a Solution Strategist at Pricefx with 14 years of experience as a pricing practitioner. In his career, he has led in every aspect of pricing from analysis and optimization to pricing strategy, definition, and execution. Pricefx is the global leader in SaaS pricing software, offering a comprehensive suite of solutions that are fast to implement, flexible to configure and customize, and friendly to learn and use. Based on cloud-native architecture, Pricefx delivers a complete price optimization and management platform that provides the industry’s fastest time-to-value and lowest total cost of ownership. Its award-winning innovative solution works for B2B and B2C enterprises of any size, in any industry, in any part of the world.