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Brands like Nespresso, Nike, and D2C startup Bloom & Wild have leveraged the direct-to-consumer e-commerce model to their advantage by building slick websites, supported by edgy branding and effective marketing.
The pandemic only fueled the D2C trend, with iconic brands like Heinz and Coca-Cola jumping into the space as lockdowns drove consumers online. Even B2B businesses are turning to D2C, including UK-based food delivery company Brakes, which saw its hospitality revenue disappear overnight at the start of the pandemic. Brakes launched a D2C Food Shop in a week using its existing infrastructure.
Clearly, D2C has become a crucial area of e-commerce, with eMarketer predicting that this area of retail will be worth nearly $175 billion by 2023, up from almost $77 billion in 2019.D2C startups set the pace
So what makes D2C business succeed? Let’s look at one of the originals – Dollar Shave Club.
“No one would have thought people would buy something as simple online,” Paul Smith, Global Industry Principal of CPG at SAP, tells me.But razors were becoming increasingly expensive. Back in 2011, Dollar Shave Club aimed to simplify the market by offering blades at a fraction of the price ($1), delivered to your door every month. Its launch campaign consisted of a tiny marketing budget that skipped traditional advertising channels and focused on online with a video that went viral – Our Blades Are F***ing Great – and has been watched over 27 million times.
It’s a refreshing change from traditional brand advertising, which has been dominated, until now, by the CPG giants. Smith believes the established CPG brands need to become more digitally focused and targeted, by concentrating on more personalized engagement and performance marketing.
How it’s done: 3 keys to D2C success
What exactly are the building blocks of a successful D2C company?
- A simple idea capable of disrupting an existing stale market
- Excellent branding and innovative marketing
- Offering the customer a reason to stay either by replenishment (in other words, convenience) or loyalty through a membership to an exclusive “club”
Dollar Shave Club was so successful in these three key D2C business objectives that it caught the eye of Unilever, which bought the D2C startup for a whopping $1 billion in 2016. The same goes for UK snack box delivery company Graze, which is now available both in retail stores and online. Graze was also snapped up by Unilever in 2019.
The fact that these two D2C startups have been acquired by one of the biggest CPG companies in the world proves how valuable and disruptive they have become. Beauty entrepreneur Marcia Kilgore’s latest venture, Beauty Pie, is another example.
Beauty Pie, which has gone down the membership model, offering consumers high-quality beauty products at cost price. Don’t be surprised if the L’Oreals and Estee Lauders of the world are shaking in their highly fashionable boots.It’s not because CPG companies couldn’t replicate any of the traits of a modern D2C company when they put their minds to it. It’s the customer data these D2C startups have generated, which is gold dust to CPGs.
So perhaps we need to add a fourth point to what makes up a successful D2C company: Capturing customer data and leveraging it to their advantage.
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The power of data
D2C startups are data obsessed. As new online companies, they’re able to harvest customer information from the outset, from user registration details (often from social sign-ins), through to web statistics and surveys capturing visitors on their experience. Major brands have taken note.
Thanks to digital transformation efforts in recent years, Nike has been able to harness data to create a loyalty engagement model where customers are incentivized to purchase through early product releases, personalized products or simply free workouts online. This all creates brand affinity.
“Nike has said the majority of its business will be D2C within three years, and it’s already at 40%,” says Smith. “It’s more profitable for Nike to own that customer, because, typically, a percentage of every sale has had to go to the retailer.”
Even during the height of the pandemic, with its retail doors closed, these efforts protected the brand from the worst of the apocalypse felt by the wider retail industry. In the second quarter of 2020, Nike revenues were up 9% to $11.2 billion, while Nike Direct sales increased 32% year-on-year to $4.3 billion, with double-digit growth across all geographies.D2C startups branch out into retail stores
While some of the biggest brands are stepping away from retail, the powerful data sets harvested by the original D2C startups are giving them the trading power to move towards the store as an extra revenue streams.
Brands like Graze and Harry’s Razors are available in physical stores because they have the data to know exactly who and where their customers are to inform Sainsbury’s or Boots where to stock their products.Smith explains that the reason many of the CPG incumbents haven’t jumped wholeheartedly into this space is because they’re worried about cannibalizing sales with existing retailers partners.
“This means having to think about how to produce products that are differentiated for D2C and that don’t undercut retail partners,” he said. “But if you are a new D2C company gaining traction, with a wealth of customer data, you have great negotiating power with the retailers – there’s simply nothing to lose.”
