In recent years, the landscape of retail has shifted significantly. Today’s consumers don’t always choose the traditional retail path. Some instead opt to purchase online from brands that they personally connect with. Often times, these brands are digital-first direct-to-consumer companies that control everything from sourcing and production to manufacturing and distribution, essentially leaving out the middle-man.
The direct-to-consumer model
DTC brands are characterized by the way in which they maintain full control of their value chain, eliminating the need to contract other companies to run segments of their operation. Due to this structure, these companies have the ability to respond to feedback with meaningful changes, often regardless of level or scale. DTC brands often place emphasis on digital brand building and exceptional customer service, focusing on delivering maximum value to the consumer.
With the rise of DTC, the consumer mindset is changing. The change in retail has become even more prominent since the COVID-19 outbreak. Customers now expect elements of the DTC experience – personalization, a hassle-free buying experience, and increased transparency. DTC brands respond quicker to their customer’s needs, which has changed the standard in which consumers expect their products to be delivered.
This new model of business is something that traditional retailers can learn from DTC businesses. It’s worth exploring the key differences between traditional retailers and DTC brands, and how traditional retailers can implement DTC trends.
Differences between traditional retail and direct-to-consumer
Last year, 22 big traditional retailers including Forever 21 and Barneys filed for bankruptcy. From the ongoing retail apocalypse to the recent pandemic, traditional retails are finding it difficult to stay afloat in this volatile landscape. Contrastingly, many DTC companies are still finding success. According to Matt Alexander, the founder of DTC company Neighborhood Goods,
The new models coming in that are more customer-focused and data-driven are really driving a lot of change and forcing legacy retailers to step up their game.
In fact, Scalefast’s 2020 DTC Hype Report found that 19% of customers believe DTC brands are more consumer-centric than traditional retailers, and almost 15% reported a better user experience and higher-quality products when choosing the DTC route. However, nearly 16% of consumers think making DTC purchases is riskier.
By implementing DTC strategies to improve customer relationships, user experience, and overall quality, traditional retailers can attract more business while retaining the advantages they hold as established businesses.
How DTC brands succeed
There are plenty of ways in which DTC brands do things differently than traditional retailers. The following are just a few of the main differences between the two:
- Prioritize personalization – According to Gartner, of the top ten DTC brands, 70% offer a product quiz to maximize personalization, and 60% let consumers take the quiz before even creating an account. Some DTC brands also allow customers to customize their products. Function of Beauty offers customized hair products for various hair types and goals. They also allow customers to choose their preferred colors and ingredients. By increasing personalization, traditional retailers may be able to increase customer acquisition and retention. A recent Epsilon survey indicated that 80% of customers are more likely to support brands that emphasize personalization. This group is additionally 10x more likely to be more valuable to brands, shopping 3x more frequently than other consumers.
- Increase transparency – DTC brands often champion transparency, sharing mission-focused messages from their founder, highlighting their values, and providing information about product sourcing and sustainability. Each of these points serves to increase connection with customers and boost authenticity, thereby growing brand loyalty. A 2018 RetailMeNot survey found that 66% of respondents think more brands should take a public stand on important social values. Additionally, 61% felt that they would recommend their friends a brand that aligns with their social values. Many DTC brands have responded to this trend accordingly, using multiple channels to highlight corporate social responsibility initiatives, sustainability efforts, product improvements, and more.
- Create a community – Today’s DTC brands are also making an investment in the community. Brands are creating loyalty programs, encouraging customers to share their experiences on social media, and building ambassador programs. Well known DTC brand Warby Parker did just that by sending potential buyers five different pairs of glasses to try on and encouraging them to “share and compare”. Essentially, customers were prompted to post their options on social media, use the hashtag #WarbyHomeTryOn, and get feedback from friends, which ultimately provided free advertising for Warby Parker. Warby Parker later found that prospective customers who did this were 50% more likely to purchase from them.
In a Global Trust in Advertising survey, Nielsen found that 92% of customers around the world feel that they trust earned media, such as recommendations from people they know, over all other forms of advertising. Promoting a community experience may encourage customers to advocate for the brand, thus increasing customer acquisition.
- Invest in retention – Another important investment is in retention. Often, customers are curious and eager to try out new products, but may not purchase repeatedly, contributing to low customer lifetime value. Many DTC companies have therefore employed subscription-based models. According to a 2018 McKinsey report, the subscription e-commerce market has grown over 100% year-over-year for the past five years, and 15% of online shoppers have signed up for at least one product-based subscription service. Of all total e-commerce subscriptions, 55% offer curation services, 32% offer replenishment services, and 13% offer increased access. By developing a subscription model that falls into one of these categories, traditional retailers may be able to improve customer acquisition and retention.
- Utilize data – DTC companies also recognize the importance of utilizing customer data. In doing this, brands are able to learn about their consumers and act upon their needs, serving to increase personalization and inform product development. HelloFresh is an example of a leading DTC brand that has prioritized this. Matt Fitzgerald, VP of Marketing at HelloFresh stated,
We listen to our consumers so closely every week, and now we have six years of data on recipe preferences, culinary preferences, ingredient preferences, seasonal preferences, and we’re using that to make the product better and more customizable, to lead to stronger personalization in the future.
Winning with data
Large retailers have already begun to adopt elements of the DTC model.
In recent years, Nike has developed a “Consumer Direct Offense” strategy in the hope to drive growth, accelerate innovation, and deepen one-to-one connections with consumers. This move has helped Nike see a 30% rise in share price and 44.7% margins delivered. In 2020, Nike forecasts that Nike Direct revenue will be $16 billion, an increase of almost $10 billion from 2015.
By leveraging aspects of the DTC model, traditional retailers may be able to achieve similar successes and further build their companies. With the help of data, DTC brands are leading the way. Retailers can start to make use of their data and strengthen their position in this volatile market with better predictions and smarter decisions.