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DTC - The future of e-commerce?
Brands are building up their direct-to-consumer (DTC) channels.
Brands such as Nike see the opportunity that DTC provides, as "Nike aims to grow its DTC share from 30% today to 50% within the next couple of years . ". McKinsey’s article on DTC e-commerce: How consumer brands can get it right goes into the benefits of a strong DTC strategy.
Is it worth the hassle?
Marketplaces and traditional trade have great benefits of scale, but brands are not keeping in touch with their customers as closely as they could. A DTC strategy is about increasing revenue while also gaining in-depth consumer insights. Some benefits apart from driving quality sales are community building, brand differentiation, and fueling innovation.
Start here: Define a goal
Consumer goods companies often face the problem of not knowing where to begin when they decide to launch an e-commerce channel. Is it more important to focus on incremental sales or to pursue other objectives like brand differentiation and insights generation? Determining what role DTC will play for the brand is crucial.
Consider Nike, whose number of distribution partners exponentially increased over the last decade, resulting in inconsistent consumer experiences that threatened the brand. However, at the end of 2020, Nike Direct (their DTC channel) accounted for at least one-third of its global sales.
Gillette is another excellent example of the smart use of DTC channels. In order to drive frequency and total spend per year, the brand encouraged shoppers to subscribe to razor-blade delivery and offer the first kit for free. Additionally, the brand managed to establish deeper relationships with customers and foster loyalty.
How does success look like? The key is in CAC: CLV.
As a rough guidance, the DTC business model is viable when the CLV is twice as much as the CAC. A successful e-commerce channel is impossible without a customer-centric approach. In order for brands to succeed, they must have all four: technology, data, analytics, and operations.
Technology is at the very core, and a basic shop platform is not enough anymore. According to this McKinsey article on "The value of getting personalization right—or wrong—is multiplying", 75% of online shoppers say they prefer a personalized experience. The most required personalization features are easy and relevant navigation, relevant product recommendations, and tailored messaging. All this adds up, and up to 25% of the revenue of DTC businesses is driven by personalization.
‘’For digitally native companies that forge a data-backed, direct-to-consumer model, personalization isn’t just how they market, it’s how they operate.’’
One of the many reasons out there for setting up a DTC business is personalization through consumer insights The challenge, however, is capturing and ingesting data from a range of sources and then gathering everything in a common data lake.
Adding a DTC channel is just the start of the transition to the new e-commerce, focused on the customer journey. But fear not, as you are not alone in the process. More and more solution providers are working on the four essential tools for your DTC strategy, like helping you gain a holistic view of your business through augmented analytics, or providing hyper-personalization tools like product recommendation engines.
“In Europe, overall digital adoption has jumped from 81 percent to 95 percent during the COVID-19 crisis” and big players that want to have a competitive advantage are making use of all this data to offer better customer service by focusing more and more on DTC and leveraging all the insights gathered.
DTC e-commerce: How consumer brands can get it right, McKinsey & Company, Nov 2020
The value of getting personalization right—or wrong—is multiplying, McKinsey & Company, Nov 2021