I'm sure you've heard the DTC acronym before, but were afraid to ask what it means or where it came from.
Let's start with the basic definition (bear with me): a brand selling directly online to customers. Or cutting out the middle man. Or owning the customer relationship. Or reducing time to market.
But how does this differ from any other sales channel? Simple, the desire to own both the supply chain and relationship with the customer. On paper this might look like a small nuance. So why are direct-to-consumer brands getting so much attention? Simple. The impact is huge.
How big is the opportunity? The numbers below clearly show the growth in direct to consumer sales are heavily outpacing the market (this is not just true of the US, we’re seeing the same globally). These numbers are also pre-Covid. Given the change in consumer behaviour during lockdown, and many success stories coming from DTC brands during this time, we would expect the growth to accelerate further.
Traditionally a new brand looking to get their products in the hands of consumers would turn to supermarkets, department stores and the likes of Amazon.
Harley Finkelstein, Shopify COO, stated “The direct-to-consumer revolution is poised to eat the world of retail – and it’s only getting started.... By the time you buy a jacket at your local department store, the markup can be as much as 10 to 12 times the cost of production. It’s no wonder shoppers have been trained to wait for sales or sift through discount bins. At the same time, selling through a department store is all about volume; makers settle for paltry wholesale prices just to have a chance to appear in-store, cutting deeply into their margins”.
How strong are DTC margins? Typically twice as strong, with many even higher.
Let us not forget the second part of the definition: the direct relationship with the customer. Selling through middle-men gives no direct access to customers. Without this, every sale would be like acquiring a new customer over again. Costly and with little to no opportunity to build loyalty. A sure fire killer for a new startup.
But direct-to-consumer is much more. There are two more characteristics that really differentiate DTCs from traditional brands. They are 1) socially engaged and 2) global from day one.
Instagram, Facebook, TikTok and SnapChat are the playgrounds of DTCs. Here they have a huge audience to tap into. Building one on one relationships with customers. Getting immediate feedback on what customers like and dislike. Even helping to generate ideas on what new products to develop. All the assets to develop a loyal shopper.
The community they are able to create is extremely valuable. Turning each shopper into a micro-influencer. Sharing their new purchases and reviews with their own friends and followers. This is much cheaper and effective than traditional paid advertising.
DTCs are borderless. They don't fall into the trap of lengthy and costly global expansion strategies. They simply flick the switch on their webstore platform or Instagram account. Giving them a huge audience at their reach. True, this doesn't give them immediate global success. However it provides so many valuable insights on which markets to focus their attention.
We're only scratching the surface here. But the next time you hear the words direct-to-consumer, at least you'll feel part of the conversation. P.S. look out for a future post where we'll give you a handy guide to all those pesky three-letter acronyms!