Published October 10, 2021 D2C business model: Why some companies soar and others fail wildly

D2C business model: Why some companies soar and others fail wildly

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Imagine yourself on the 10-meter platform, ready to jump into the pool. Everyone around you is shouting: Jump, jump, jump. You’re not sure why you should jump, but know that if you don’t do it right, it’s going to hurt.

Replace the pool with direct to consumer and that’s what I see happening in the CPG industry. Everybody is talking about the D2C business model, and how you must do it now. Some CPG manufacturers are rushing to launch D2C websites, upsetting their B2B2C customers and collecting only five orders per day. Others see massive growth.

Why are some companies are so successful in D2C and others are tremendous failures? The new business model might not be for everyone – at least not without transforming their operations.

D2C business model: 4 steps to a success

There are critical considerations that a company needs to work through before embarking on a D2C journey. Let’s examine some of the most relevant that can guide us to success.

  1. Define your value proposition
  2. Have a clear, documented objective
  3. Estimate customer acquisition cost and customer lifetime value
  4. Learn from consumer interactions and adapt

Direct to consumer: What’s your value prop?

The core of a successful D2C business model is the value proposition. Why would a consumer want to buy your product directly from you?

A strong value prop will drive viral growth, where consumers will recommend your products or services to others, bringing customer acquisition costs down close to zero. In contrast, a poor value proposition will require additional sales and marketing, which will increase costs, putting the business at risk.

Some apparel and footwear companies with a successful D2C business base their value proposition on product choices, offering an incredible assortment of products and sizing options, and in some cases, giving consumers the option to customize the finishing touches of a product. This is something consumers can’t find in a store nearby.

Other companies like Dollar Save Club and Beauty Pie started with a value proposition based on price. They found a niche where traditional brands and retailers had massive marketing expenses and large markups. These D2C startups offer good products at a  fraction of the price in a category where consumers tend to make recurring purchases.

A price-based strategy isn’t for everyone. Well-known brands with a strong network of retail partners can’t use price as a competitive advantage without jeopardizing their operations. But if there’s a white space in the market, someone will take it.

Some companies offer niche products to an under-served customer segment. Others base their offering in environmental or social responsibility. As the market and consumer preference evolve, there will always be an opportunity.

What do you want to get from D2C?

A D2C strategy can have different objectives. Some companies are looking for a new revenue stream while others want to build consumer preference and trust. And some want to gain consumer insight that they can later use for marketing and product development.

A company can have different strategies for their brands. But most importantly, they need to have clear, well-communicated objectives and metrics if they want to get the most out of this new business.

Some companies are treating the D2C business as independent startup, with testing and iterations to discover what moves consumers and how they should play. As in any new business model, agility is the name of the game.

Not for the faint of heart: D2C challenges 

Even before all the D2C excitement, the consumer products market was already complicated. Some of the challenges include managing in-store experience, optimizing logistic networks, balancing supply, demand, and production capacity, and adapting to shorter product development cycles.

The D2C business model adds more challenges.

D2C companies normally use two metrics to do a quick health check of the business: customer acquisition cost (CAC) and customer lifetime value (CLV). According to analysts, CLV should be at least 3x CAC when the D2C business scales.

In most cases, traditional CPG manufacturers don’t have the competencies to acquire new customers (consumers) and to extend their lifetime value. Since this is core to a D2C business, it’s not something that can be subcontracted. Rather, it requires hiring and developing new talent.

Fulfillment is also a challenge, but I’ve seen CPG brands team up well with third-party logistics companies (3PLs) and other partners on this matter.

CX, personalization, and automation can help pave the way 

Let’s examine a few ways technology can help companies with the two key D2C metrics, CAC and CLV.

CAC:

  • Creation of consumer profiles can help you understand what consumers want and need
  • AI and machine learning can help optimize digital marketing spend, improve direct marketing campaigns, boost new product development, and increase new customer conversion rate.
  • Great customer experiences increases the customer referral rate, which helps reduce CAC.

CLV:

  • A pain-free transaction, from browsing to receiving the product, can drive repeat purchases
  • A personalized e-commerce experience with tailored product suggestions and offers increases average order value.
  • Learning from the consumer journeys will help deliver better products and services

To keep operational expenses as low as possible, most activities should be automated to gain the benefits of scale. For example, if you need an employee to review every order, then you’ll need to hire more employees as more orders come in, increasing operational costs and putting the health of the business at risk.

D2C business model is the future 

For the record, maybe I’m a dreamer, but I believe in a D2C future for CPG manufacturers. They will use more sophisticated logistic networks to enable efficiencies, avoiding waste of natural and monetary resources. They’ll deliver the right product to the right consumer at the right price.

It will be a long journey, and as in every journey, will happen one step at the time.

Old direct-to-consumer marketing playbooks don’t work today.
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Javier Flores

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