How consumer brands can get their DTC strategy right

For any brands that have considered setting up a direct sales channel in the past and decided against it, now is the time to reconsider. COVID-19 has accelerated profound business trends, including a massive consumer shift to digital channels. In the United States, for example, the increase in e-commerce penetration in the first half of 2020 matched that of the previous decade. In Europe, the share of consumers using digital channels rose from 81% to 95% during the crisis COVID -19.

Many companies actively launched new DTC programs during the pandemic. For example, PepsiCo and Kraft Heinz have launched new DTC offerings in recent months. Nike's digital revenue grew 36 percent in the first quarter of 2020, and Nike plans to increase the share of its DTC revenue from 30 percent today to 50 percent in the near future. "The accelerated consumer shift to digital will continue," said John Donahoe, a veteran of Silicon Valley who became president and CEO of Nike in January. Our consumer sentiment research shows that two-thirds of consumers plan to continue shopping online after the pandemic.

What's stopping you?

The vast majority of consumer brands are used to selling through intermediaries, including retailers, online marketplaces and specialist distributors. Their experience with direct customer relationships and e-commerce is limited. As a result, they are often reluctant to open an e-commerce channel, even though the opportunities it offers are obvious. Only 60 percent of consumer products companies feel at best moderately prepared to take advantage of e-commerce growth opportunities. Here are some concerns expressed by top executives worldwide:

• "I worry about order fulfillment. What if we disappoint online shoppers? I do not think they will have the patience to allow us another try. We only have one shot at getting it right.
• "There are so many variables. You have to have a pricing engine. Payment. Order tracking. Delivery. Returns. There's no end to it, and we have never done it all before."
• "Will not DTC cannibalize all my other channels, possibly at a higher cost? What if it affects our profitability?"
• "Building an e-commerce channel would eat up a lot of resources, and I am not sure it would bring in much revenue. We have bigger fish to fry.
• "We are great at making things, and we are good at managing partners. But when it comes to selling direct to consumers, we do not really know where to start.
• With a thoughtful strategy that clearly identifies opportunities and the ability to effectively convert customers at a reasonable cost, consumer goods companies can address these concerns and tap into a profitable new source of growth.

Making the economy work

There's value in driving sales while gaining deeper consumer insights. But is it worth the effort if the profit margin does not match the company's goals? To make e-commerce a profit center and not a loss-maker, companies need to effectively manage the economics of DTC in terms of revenue and costs.

Sales

Leading brands are concerned about their sales goals in the DTC business and how best to achieve them.

• Role of the DTC channel. First, define the role you want DTC to play for the brand. Is the company primarily aiming to generate additional sales? Or does it have other goals, such as brand differentiation and insight generation? Or a combination? Nike, for example, is investing in DTC to further establish its brand. As the number of third-party distributors increased over the years, the brand was in danger of being diluted due to inconsistent customer experiences. In 2020, Nike reported that one-third of its global sales were made through Nike Direct.2 Similarly, 75 percent of online shoppers say they prefer a personalized experience. For example, fashion brands such as Maje, Sandro and The Kooples offer exclusive online pre-sales to registered online shoppers.
• Assortment. Many brands are choosing to customize their DTC assortment to meet the specific needs of their industry and their customers. PepsiCo and Kraft Heinz, the new Web stores launched this year, offer only large items or packages. This is to ensure that baskets are large enough to offset shipping costs, to avoid conflict with other channels and to offer convenience to customers who prefer to buy certain items in bulk. In contrast, high-street fashion brand & Other Stories releases an exclusive, online-only collection each season to differentiate its e-store. Successful DTC providers typically limit their online portfolio to those products that offer a good balance between sales potential, operational feasibility and consumer value.
• Pricing. As a general rule, online prices should be in line with retail prices. However, price premiums can be justified by additional benefits, such as free delivery and returns, exclusive merchandise, or product personalization. Some suppliers have developed unique online pricing schemes to increase purchase frequency and total spend per year, especially in categories with high repeat purchase potential. Gillette, for example, encourages customers to subscribe to razor blades by offering the first set for free. An added benefit of this model is that it allows Gillette to build a closer relationship with its customers and foster their loyalty.

Cost

Best practice companies manage all elements of the online shopper journey to keep DTC costs under control.

• Pre-purchase. Marketing costs can be optimized by making the most of both paid and owned media investments, such as your own social media channels and outbound customer relationship management (CRM). Key efficiency indicators to keep an eye on include customer acquisition cost (CAC) and marketing return on investment (MROI) at the individual customer level.
• Delivery. Partnership fees, such as referral fees, are an important driver of supply chain costs. Large companies will want to enter into master agreements with logistics providers for all of their brands. Lighter product packaging for online assortments and flexible shipping options such as click-and-collect or delivery to partner retailers can help reduce shipping costs. In France, clothing brands H&M and Decathlon work with Mondial Relay, a leading distribution network that allows customers to pick up their orders at kiosks and grocery stores.
• Post-purchase. Acquiring a new customer can be up to five times more costly than retaining an existing one. For this reason, managing customer lifetime value (CLV) is critical to the profitability of the DTC business. Consumer brands want to maintain relationships with existing customers and engage them with new touchpoints. A great DTC experience typically creates a "lock-in" effect that leads to superior profitability. L'Oréal, for example, encourages customers to sign up for its online loyalty program, Worth It Rewards. The more information subscribers offer, the more rewards they receive in return. Over time, product recommendations and offers become more targeted, which encourages subscribers to make more purchases, which gives L'Oréal more information-a virtuous cycle.

Creating customer-centric capabilities for success with DTC

DTC requires a wide range of specific capabilities in addition to a compelling customer offering. These include technology, operations, data and analytics, and a flexible operating model. The common denominator? Customer centricity.

• Technology. Technology decisions are driven by significant factors: Cost, flexibility, security, support, and compatibility with existing systems. While these factors are important, too often they crowd out the most important consideration of all: the customer experience. Leading companies are co-developing their online store with customers, building it iteratively by testing and refining critical front-end interfaces, such as the checkout process, in rapid pilots. They also invest in technical skills to connect the back-end of the e-commerce store with the rest of their IT architecture-including warehouse management, inventory synchronization, and order fulfillment-to ensure excellence throughout the checkout process. Some technology teams go even further, connecting the order management system directly to the handheld tablets carried by pickers in the delivery warehouse to provide real-time visibility. Depending on a company's technology maturity, available talent, and industry situation, there are several ways to build the purchasing platform: PepsiCo has developed PantryShop.com and Snacks.com entirely in-house. In contrast, Kraft Heinz uses Shopify.
• Data and Analytics. Gaining consumer insights is a common reason for starting a DTC business. The challenge is to gather data from a variety of sources and consolidate it into a common data lake that can support analytical models. Best practice companies focus their analytics on specific use cases that drive value so that analytics models have a clear focus, such as interaction preferences, purchase drivers, customer satisfaction, and potential signs or triggers of churn. They also invest in the capabilities to derive insights and commercial actions from these models. Regardless of their specific DTC goals, all companies will want to implement strict data protocols to protect sensitive information and ensure compliance with current and future regulations.
• Operations. DTC requires logistics that are vastly different from what supply chain managers at most consumer brands are used to. In the early stages of DTC, brands often outsource logistics to ensure quality, speed, and the flexibility to scale up or down operations as needed. Consumer brands that have their own retail networks often use their stores as e-commerce fulfillment centers. Nike, for example, lets online shoppers pick up their purchases at Nike stores. During the COVID -19 crisis, Nike also introduced contactless curbside pickup at select stores. When optimizing operations for the purchase process, it is important to consider other stages of the customer journey, such as the returns process. Two out of three shoppers say they would not buy from a retailer again after a negative experience with returns.
• Agile operating model. Consumer brands need to be able to adapt their operations to rapidly changing customer preferences. Building an agile operating model allows small, cross-functional teams to work in short sprints to improve products and services based on customer outcomes. Using this approach, a housewares company built its end-to-end DTC business in just 13 weeks.

Before investing in technology or hiring an agency to build the web store, companies need to ask themselves the following questions:

• What is the role of DTC in the channel strategy? Will it help drive sales? Generate insights? Combat churn and stabilize market share? It is important to provide clarity and evaluate relevant trade-offs, such as linking with other channels and existing channel partners.
• What is the assortment and pricing strategy? DTC requires a clear view of assortment and pricing as part of a broader channel strategy.
• How will you build the necessary capabilities? Brands do not have to tackle everything on their own, but they do need to comprehensively weigh the benefits of buying, building and working with partners.
• There are several ways to begin the DTC journey. For brands just getting started with e-commerce, using online marketplaces and established apps can be an effective way to find out what works well online. Other brands that are more digitally advanced may want to expand their online presence to appeal to consumers and gain insights into what works well, but are waiting to launch e-commerce. However, with customer buying behavior changing so rapidly, brands urgently need to answer the critical questions and figure out how best to engage with their customers online.

Consumer brands have sought to build direct relationships with their end customers for a number of reasons: to gain deeper insights into consumer needs, to maintain control of their brand experience, and to differentiate their offerings to consumers. Increasingly, they are also doing so to drive sales.