Direct-to-consumer

This article is about a model of selling physical products online. In media and entertainment industry, "direct-to-consumer" may refer to a business of delivering audiovisual contents to consumers over internet (for example, streaming service).

Not to be confused with Direct-to-consumer advertising, Direct marketing, Direct trade, or Direct selling.

Direct-to-consumer (DTC) refers to selling products directly to customers, bypassing any third-party retailers, wholesalers, or any other middlemen. DTC brands are usually sold online only and specialize in a specific product category: Casper, Warby Parker, Everlane, Harry’s, Outdoor Voices, AWAY, and Dollar Shave Club. Some direct-to-consumer brands have opened a limited number of physical retail spaces in adjunct to their main e-commerce platform in a clicks-and-mortar business model.

History of Direct-to-consumer

Direct-to-consumer became immensely popular during the dotcom boom of the late 1990s when it was mainly used to refer to online retailers who sold products and services to consumers through the Internet. (Kenton, 2019)

But looking at physical exchange of goods/services, this model dates way back in time, when the modes of transportation we are using today were unknown and electricity was not yet discovered. People back then consumed mostly locally due to large geographical distances, which they could overcome either on foot or by horse, but both usually took them days. Therefore, they established relationships with closest goods and service providers and this is how Direct-to-consumer model first looked like.

If we look, for instance, at the farmers as a business, it could be argued that they had a small but loyal pool of customers and operated on a small scale. The relationships were tight and healthy, because the switching costs for customers were pretty high, as said, due to geographical barriers and small number of competitors. Furthermore, there was much more space for personalization of business processes as farmers (among others, such as shoe repair master) knew exactly who their customers were and what they wanted.

But as various faster modes of transport emerged and as villages expanded to cities, everything became much more interconnected. Before that, customers didn’t think about buying from businesses from distant foreign villages. But now, they started to think about what pays off more to them, especially if local food/service providers thought their businesses cannot be disrupted by no one else and dropped their guard. Consumers asked themselves whether costs of buying locally are still so much lower then the costs of buying from a foreign farmer with better food. They asked themselves whether it is not worth spending additional resources on transport to get their shoes fixed so that they last long without tearing apart, compared to fixing them every other month at local shoe repair? This is how Direct-to-consumer model eventually became much more dynamic and wider.

As cities continued to spread and as new modes of transport kept emerging (steamboat, first cars, trains …), plus taking into account expansion of road infrastructure and inventions such as electricity and everything that came after it, consumers were able to choose among wide variety of goods and service providers, most of which they could reach with way lower costs than before. Respectively, the relationships between business and consumer changed. They were not based on personal ties between the two, but rather on characteristics of transaction and what it meant to each of the parties (quality and/or convenience of the good/service for customer and profit and/or good word for the business). This means that a citizen who haven’t had his/her hair cut in months, won’t go to one particular barber just because he/she knows him and wants to boost his/her business, but more because of the quality of the service he/she provides.

With the passage of time, internet emerged and disrupted the Direct-to-consumer model severely. Many different types of goods and services were now not few blocks or kilometers away, but rather few mouse clicks. Additionally, the number of the same product/service providers increased even more, making the differences in their performances narrower. Now, the businesses had to put additional effort to win customers, who had power in their hands and to whom businesses had to adapt even more. Extra effort was needed on the field of marketing (consumer/market analysis, reshaping of 4P’s, etc.), CRM and so forth, to stand out from competition and secure as much sales as needed to keep the business alive, as switching costs for consumers have reached all-time low. This is how Direct-to-consumer model slowly acquired shape that we know today.

Advantages & Disadvantages of Direct-to-consumer

The principle advantage of Direct-to-consumer is its focus on customers which provide stronger brand loyalty. Good relations with the customers are a necessity in this situation and bring more loyal customers and keep a high retention level . Another major advantage of Direct-to-consumer are lower costs as it has reduced the number of different business components like employees, purchasing cost, mailing confirmation, renting or establishing a physical store . Also, with Direct-to-consumer concept of business huge audience worldwide is reached more easily and exhibits unlimited marketplace .This concept sells the products directly to the customers without the need for intermediaries and by that remove third party clients in the middle of the process. More, it made business administration easier, without complicated recording of inventory, shipments or business transactions. It also enables smaller companies to become competitive with successful and large companies as well as grow faster through this model. They can be competitive in terms of price, availability of the products and quality since costs are lower .

The main risks in the online Direct-to-consumer are expanding liability risk, cyber risk and more complex supply chain.Firstly, selling directly to customers exposes a business to risks that are previously or normally bore by distributors such as wholesalers and retailers. For instance, the business has to concern themselves with shipping, labelling, or cybersecurity. The latter is one of the main risks of running a Direct-to-consumer ecommerce firm, due to the sensitivity of handling consumers’ data. Data privacy and security became one of the priorities, especially in online businesses. The main concern is not only higher exposure to security breaches but problems such as selling personal data etc. Finally, conducting e-commerce Direct-to-consumer business increases the complexity of the supply chain itself, which might pose additional difficulties for the firm itself. For example, changing business from B2B to Direct-to-consumer means that instead of selling to only a few distributors you now have to sell the products to many individual customers. This means that the company is now in charge of delivering products to their customers' doorsteps which increases the complexity of the distribution chain and poses additional risks.

Direct-to-consumer model in practise

The Direct-to-consumer business model can be applied in many different ways, for instance, the entire company or just some product lines can adopt such a model. An example of such a company is Away, an e-commerce company that produces expensive travel accessories and was valued at 1.4$bn in 2019. Their main product, sold mainly online and in some brick and mortar stores, are high-end suitcases. In 2015 they sold more than 300,000 suitcases at lower prices than their competition due to the adoption of Direct-to-consumer business model. Besides that, Away's success can be credited to their deep understanding of their customers as travellers.

Secondly, only one product line can adopt the Direct-to-consumer business model, for instance Seventh generation adopted such a model. This company is now a part of the Unilever and are offering a wide array of different personal care products. Although the company is not entirely Direct-to-consumer they offer a line of feminine hygiene products directly to consumers and are thus improving their experience. They offer the customization of monthly subscription of the previously mentioned product. Initially the buyers solve a quiz, by which the Seventh generation than tailors the monthly box to buyers needs. Furthermore, another Unilever's subsidiary adopted such a Direct-to-consumer business model. Maille has been selling its mustard products through retailers since 1723 but after the acquiring of Unilever, they have started to sell directly through their website.