What is direct to consumer selling?
D2C (direct to consumer) is simply a way of selling directly to consumers and bypassing wholesalers, third-party retailers and other middlemen. Today, most companies using this model sell their products online. In the past, people often purchased products directly from producers, such as farmers and craftsmen. Later, mail order businesses would sell products directly to consumers through magazine ads, catalogues and direct mail promotions.
As e-commerce platforms started developing in the late 1990s, the direct to consumer business model moved online. In the United States, some of the biggest names in DTC are Casper, Warby Parker, Harry’s and Dollar Shave Club. In Australia, top D2C companies include Koala, Pilot, Kin, LVLY, DRNKS and Bailey Nelson. In addition, big brands – such as Pepsi, Nike and Lindt – have been expanding into this channel.
What are the benefits of direct to consumer?
Getting products sold through traditional channels was an expensive and time-consuming process. If you create or import a product, you need to convince wholesalers and distributors to carry your products in order to get them into retail stores. These intermediaries need to be convinced that their retail partners will give them shelf space before taking on new products. The extremely high competition for retail shelf space means that many products never make it into retail shops.
With DTC, you bypass these hurdles of getting into the market by going online. By cutting out the middleman, you can offer lower prices to consumers. You can experiment, update and add products without having to go through the process with intermediaries again. You can communicate with consumers directly, so you can inform them about your products and get constant feedback on what’s working and what needs to be improved.
Direct to consumer versus wholesale model
While there are many potential benefits of going D2C, there are still good reasons for going the wholesale route for some businesses. Here we look at the pros and cons when comparing the two models.
Advantages of the wholesale model
Bulk orders – when you choose the wholesale model, you sell in bulk so the cost of fulfilling orders is much smaller than from individual orders. Although you can only charge wholesale prices, your variable costs will be lower.
Leverage existing customer base – when you sell wholesale to existing retailers, they will have an existing customer base. If you want to reach a niche market, and a retailer already sells to that market, you can accelerate the process by working with retailers. For new businesses without an existing customer base, it can be costly to reach these customers and it requires more time.
Meet customer preferences – the preference for online versus in-person purchasing depends on the type of product you’re selling. For example, research from Statista showed that while more people prefer to purchase TVs, video equipment and computers online, a significant percentage of people prefer to purchase food and beverages, clothing and skincare products in person. Although there is a trend to more online consumers purchases (which has increased during the COVID-19 pandemic), you will want to consider consumer preferences when choosing a model.
Bypass online competition – while choosing the online model can minimise barriers to entry, the direct to consumer model won’t eliminate the competition. In addition, when you develop a highly successful DTC product it’s likely that competitors will attempt to copy you to capture some of the market share.
Benefits of the direct to consumer model
Better cash flow – going directly to the consumer means you get paid quicker, resulting in a shorter cash conversion cycle and better cash flow. When selling directly to consumers, you get paid immediately when the order is placed or shipped. When you sell to wholesalers, you issue an invoice and wait to get paid. Even if you offer 30-day payment terms, many businesses pay their invoices late, so you can end up waiting much longer to get paid.
Research by Illion shows that businesses pay their bills 11 days late on average. This number is worse for situations where large businesses purchase from small businesses (13.27 days late on average). When you add the average to the standard 30-day payment terms, that’s 41 days on average waiting to get paid.
Customer understanding and connection – when you sell directly to the customer online, you create a range of ways for ongoing communication. This includes emails for product updates, helpful information, and promotions. You can get feedback directly from customers and conduct surveys for improving existing products and developing new ones. In general, the direct-to-consumer model gives you full control over customer communications.
Depending on your product, you can adopt a subscription model where the customer receives products every month. One example is Naked Wines which offers monthly wine subscriptions where customers get a selection of wine from independent products each month.
Greater control over product, pricing, brand, reputation – when selling through wholesale channels, you give up control, including how your products are displayed and priced. This can include discounting your products if they fail to meet sales expectations. Also, negative in-store experiences can tarnish the image of your products. These factors can have a negative impact on your brand.
Get to market faster – following the direct-to-consumer model gives you more flexibility. Instead of having to find potential wholesale buyers and then convince them why they need to carry your product, you can move fast by getting the work out to your existing customers or through other channels such as social media.
On average, it takes 18 to 36 months to get a product from the inception stage to being stocked in a retail outlet. When you go directly to the consumer, you can reduce this time by not having to go through the sales and approval process with retail outlets. Also, many retailers are risk-averse, so they are less likely to take on innovative products without a sales history.
Direct to consumer success stories
A growing number of businesses in Australia are starting up with a D2C model or adding to complement existing channels.
Mike Halligan and Doug Spiegelhauer started Scratch to create quality Australian dog food as an alternative to those made with dodgy meat and cheap ingredients. Using a direct-to-consumer approach makes it possible to eliminate retail markups. They provide informative content on their website and tailored advice on matching the best food for each dog’s needs.
Read Scratch: A business for pup and planet to get the full story.
After opening Bella Bronze tanning salons on the Gold Coast and Brisbane, Jasmine Scarr branched out by creating her own brand of spray tan formulas. She spent three years creating her first product and now has a range of Bella Bronze products, which are sold directly to consumers.
Learn more about Jasmine’s story in Bella Bronze Tan: the business glow up.