D2C: A Guide to Direct-To-Consumer Business Models
Jun 9th 2022
D2C: A Complete Guide to Direct-To-Consumer Business Models
Table of Contents
- Direct-to-Consumer (D2C) Defined
- Benefits of D2C
- Challenges of D2C
- Sustainable Packaging for D2C Brands
- Examples of Eco-Conscious D2C Brands
- How to Start Direct-to-Consumer Selling
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Direct-to-Consumer (D2C) Defined
D2C stands for direct-to-consumer, which - at the simplest level - simply means that a brand sells directly to its end customers rather than selling through retailers.
Consider some of the world’s most well-known brands, such as Crest Toothpaste, Nike, and Loreal. If you’ve ever purchased their products, it has likely been through a retailer such as Kroger, Walgreens, or Nordstrom. In recent history, this has been the most common way for consumers to connect with brands.
Over the past decade, D2C has started changing this paradigm by cutting out the middleman - the retailer. Companies like Gap and Apple have been D2C for a long time through their brick-and-mortar retail stores, but this latest trend is different. Up and coming D2C brands are selling to their end consumers via their eCommerce shops, where customers learn, shop, purchase and engage directly with their favorite brands.
Is D2C the same as eCommerce? Is all eCommerce always direct-to-consumer? No. Amazon - a retailer and middleman - made eCommerce a standard way of shopping worldwide. If you’re shopping on Amazon, Etsy, Kohl's, or any website like this, you are still shopping the traditional Brand -> Retailer -> End Consumer business model.
When you go directly into Nike’s website (or the website of a small, independent brand you just learned about through a friend) to make your purchase, this is the Direct-to-Consumer business model in action.
That said, the growth of eCommerce has largely fueled the growth of D2C. As more and more consumers shop online (a trend that skyrocketed during the pandemic), brands that have built solid consumer-facing online stores have received some of this traffic and sales. Since EcoEnclose offers sustainable packaging to help D2C eCommerce brands ship their orders thoughtfully, the remainder of this article will focus on D2C online retailers (not direct-to-consumer brick and mortar businesses).
What is “pure-play” D2C versus legacy brands D2C? D2C companies like Peloton, HelloFresh, and Warby Parker set out to build a novel and disruptive business model that engaged directly with customers. These are “pure-play D2C companies.” Other brands, like Nike, Adidas, and The Clorox Company, are capitalizing on recent shopping trends by building out the D2C component of their business.
Regardless of the type of direct-to-consumer business, we are talking about (pure-play versus legacy), there is no denying that this model is on the rapid rise. While D2C still accounts for a relatively low percentage of overall retail sales, eCommerce (which D2C drives a substantial portion) continues to grow. In 2021, eCommerce accounted for 19.1% of overall retail sales.
Benefits of D2C - Why are So Many Companies Pursuing This Business Model?
The D2C eCommerce business model offers a variety of benefits.
It is easy to get started: All you need is your product, your website, your packaging, an area of your home or garage to fulfill orders, and a way to get to the post office or the UPS store.
This list is a general oversimplification of what it takes to start a D2C business. Brands need marketing and sales (accomplished through various paid advertising and more organic methods). They need customer service and inventory. Direct-to-consumer companies have more control over their ability to start their business and sales.
More control over price and a higher gross margin
In traditional models, brands sell to retailers who then markup products 50-100% to sell to end customers.
If your product sells for $10 per unit, you may only get $5, and your retailer gets $5. If you sell that product directly to your customers on your website, you can charge the full $10 they are used to spending, and you have just doubled your revenue per product sold. Or you can sell it for less. By selling it for $7.50, your customer sees a lower price point, and you still make more money per unit than you would have if you sold through a retailer.
You tend to make more money per unit sold in a direct-to-consumer business model and have a lot more control over pricing. For example, if you sell coffee through the Kroger chain, you couldn’t adjust your price every week or run a very last-minute sale to help drive conversion or move product. Price adjustments and discounts take more time, partnership, and consideration of the other competitive products on the shelf alongside yours.
Sell with your brand story, not just with your price and label design
When customers shop at a retailer, they will generally compare the attributes and pricing of various products from a wide range of brands. On the other hand, once a potential customer has landed on your website, you have their attention and focus. You can tell your story, showcase the unique attributes of your products and supply chain, and even showcase videos and testimonials. Because of this, sustainability can become your advantage if you are a D2C business.
We have seen firsthand that D2C businesses are uniquely suited to be at the forefront of sustainability and conscious consumerism. We have seen firsthand that eCommerce businesses with information-rich websites and passionate social media presences are the ones that have made aggressive and meaningful progress when it comes to producing innovative, forward-thinking decisions for the benefit of the planet. This recognition of the power that D2C eCommerce brands play in creating positive change drives our mission - to make eCommerce a regenerative force for the planet.
More control over your packaging
Traditional brands need to make packaging decisions that align with the requirements of their retailers. If a retailer requires all apparel to come in clear poly bags, you must ship your goods in plastic. You must adhere if your retailer needs your products packaged in plastic jugs and specific master pack sizes. When you are the one shipping directly to your consumer (especially if you don’t use a 3PL partner for fulfillment), you have a lot more control. You may be able to skip the poly bag. You may be able to cut or reduce your primary packaging. If you want your customers’ first impression of your products to be 100% recycled, recyclable packaging - you can do that!
More agile in developing and testing new products, services, and marketing strategies
This makes D2C a lot more fun! Let’s say you run an apparel brand and recently learned that you can print your shirts with carbon-negative algae ink. If you sell through retailers, you’ll have to develop your product, get a purchase order from your retailer(s), produce enough inventory to meet the demands of your retailer, and then sit back and see if it will sell. If you sell D2C, you have so many more options. You can presell these algae ink shirts and see if customers are excited about them (and then produce them to order if that works in your supply chain). You can create a limited run and produce and sell only fifty shirts before launching your whole algae line. You can also focus your marketing efforts - offering it only to your social media followers or a subset of your most loyal customers.
Similarly, if you want to experiment with helping customers finance their purchases with you, you can quickly plug in an app like Affirm and see if this increases conversion. Or you can offer an add-on service to help customers use your products effectively. This type of customer engagement and service testing is impossible if you sell through retailers.
Customer data that can help you personalize your website, marketing, and products
When you sell through retailers, you probably don’t know who is buying your products. Your retailers may get this information, but they don’t often share it with brands (particularly smaller, independent brands that don’t make up a significant portion of their sales). On the other hand, when you sell through your website, you learn so much! All that information helps you build better products, personalize your messages to customers more nuancedly, improve your website, and so much more. Some examples of data you have access to:
- Website Heatmapping: With heat mapping software, you can learn what topics, images, and areas of your website generate the most interest and what gets ignored. At a minimum, this information can help you reorganize your site. But used more thoughtfully, this data can help you determine what new content to write, what products need better promotion, what products to sack and develop, and so much more.
- Website Conversion Funnels: You can learn where customers are dropping off (or “bouncing”) on your website and apply this information in various ways. For example, suppose customers are bouncing on particular product pages. In that case, this may tell you that customers are interested in the item, but your pricing is off, or that you aren’t doing a good job marketing its attributes on the product page.
- Newsletter Open and Click-Through Rates (by customer, by segment): If you have an online store, hopefully, you also have a newsletter or customer email communication strategy. If so, you’ll be able to see how many customers open your email marketing, how many clicks, what they click on, and who within your audience is engaging. This data is gold! It can help you target the right messages to the right customers. It enables you to learn what your community engages with, which can help you build more robust products and more effective marketing messages.
- Analysis of Paid Ads and Keyword Data: Many eCommerce brands acquire customers through paid ads - either pay per click (PPC), paid social media ads, or display ads. These are excellent data sources because you get real-time, highly quantitative data that (1) enables you to adjust your advertising messages and budget quickly and (2) gives you insight into users’ search history.
- Product Recommendation Quizzes: Various software solutions exist that can help you create product recommendation quizzes. These quizzes can help your customers navigate your product set to find the best solution for their needs. They can also become valuable reservoirs of data for you. As customers take your quiz, they share information about their needs, challenges, preferences, solutions they have tried in the past, and so much more.
Challenges of Direct-to-Consumer Selling
If D2C is so great, why isn’t everyone doing it? Why do the vast majority of product sales still happen through retail channels?
Great question. Despite the myriad benefits of direct selling, most purchases happen through retailers like Amazon, Walmart, Target, Kroger, Costco, Macy’s, and Best Buy. Why?
We’re biased and think D2C is way more fun than traditional selling and that D2C gives much more opportunity to build a genuinely thoughtful and sustainable business. But, there are undeniable benefits to selling through retailers instead.
D2C brands manage all of their marketing and customer acquisition. This cost can be high - sometimes much higher than sharing your margin with retailers. For example, if a brand sells to Macy’s, it must get on the racks. Then, customers that Macy’s brings in will find their products. Similarly, if a brand sells through Amazon, they need to wait for customers to go to Amazon’s site (which many people do) and search for their particular product type.
While these sales processes are not necessarily easy and are fraught with competition, they can be much easier than a single, small independent brand competing to get a customer to land on their website. D2C brands typically acquire customers through a few channels:
- Organic Search and SEO: When companies rank for critical keywords in their industry, their website comes up in user search results. Showing up in these results drives “organic” traffic to their site and hopefully converts some customers.
- Social Media: Many new, independent brands find social media to be highly effective at building and growing brand awareness and a community. For example, despite the recent setbacks beauty brand Glossier has experienced, the social media community it built before launching any products drove its preliminary (and accelerated) success.
- Paid Advertising: Many eCommerce brands launch and grow through paid ads. Whether through Facebook, Instagram, Google, Pinterest, or digital display ads, this type of sales has the benefit of being highly quantifiable. If you know your customer lifetime value is $300, and your margin is 50%, you make $150 in gross margin on every customer you acquire. With this in mind, you know you can spend up to $150 to acquire each new customer (though you ideally would spend a lot less than that if you want to build a profitable and sustaining business). This precise quantitative analysis allows startup and established D2C brands to invest heavily in paid ads as the primary fuel for their growth engine.
Traditional brands that sell through retailers take a very different approach. Rather than investing (sometimes very heavily) in acquiring each customer one by one, these brands build a sales force that establishes relationships with retail channel partners to secure large Purchase Orders with these retailers (and then get premium shelf space). Retailers invest heavily in getting customers into their doors (or onto their websites). In this situation, brands still need to invest in marketing to build brand awareness that helps move their goods (because they need to achieve specific sales velocity levels to stay on retail shelves). However, these efforts may not be as expensive as the investments required to drive direct traffic to a small brand’s website.
D2C brands have to store, package, and distribute their goods. Brands that sell through retailers produce their products and often have them shipped directly to their retail partners’ distribution centers. As a result, customers see them, try them on (when relevant), buy them and (occasionally) return them - all directly with the retailer.
Brands may never even see these products. This distribution model is far more hands-off than direct-to-consumer.
In contrast, D2C brands have to receive, store, and then fulfill their orders, picking, pulling, packaging, and shipping them accurately. As part of this process, D2C brands also have to manage their process for returns and exchanges. This process is much more operationally intensive, can be fraught with minor hiccups and issues (which create the need for a strong customer service team), and add the burden of shipping to the transaction.
D2C brands often use 3PL partners to manage their fulfillment and returns. Click here to learn more about 3PL partners and how to find one that can meet your sustainable packaging needs.
D2C brands sell one at a time, making it more difficult to get economies of scale early on. When brands sell through retailers, they eagerly await their first few sales - purchase orders for a set volume of products. Brands can then turn around and place their purchase order with their manufacturing partners for a set (and often large) number of items. This process means they are ordering with a known buyer on the other side of the transaction and can usually order at higher volumes which can mean lower costs due to these economies of scale.
On the other hand, D2C brands need to produce an uncertain amount of inventory, especially early on when they do not have an established history or pattern of sales. As a result, cash-strapped businesses will have to manufacture their products in smaller orders, which may make costs higher than if they were selling to a retailer who has placed a purchase order.
D2C online stores miss a considerable chunk of the market. While D2C brands are successfully disrupting many industries - from shoes to apparel to healthcare - the standard mode of operation for most consumers is still to purchase from a brick-and-mortar or online retailer.
For this reason, many brands pursue D2C and traditional retail models over time. Some legacy brands that started by selling through retail have shifted their business model to include D2C. Other recent startup brands launched via D2C and, after gaining a foothold of success and a customer community, have expanded into traditional retail sales. This chart shows how Nike has straddled both D2C and their legacy sales strategy over the past ten years.
Sustainable Packaging for D2C Brands
The packaging needs of D2C eCommerce brands are unique.
For many eCommerce companies, the shipped package is their first physical touchpoint with their customer. And, unlike almost every communication companies send their customers, their packaging has a 100% open rate - making it an essential canvas for brands to showcase their values and ethos.
Because D2C brands are typically at the forefront of the sustainable business movement, we have made it our mission to help eCommerce companies be proud of how they ship. This means:
- Sustainable and Cutting Edge: Conscious brands need genuinely circular packaging, with the highest levels of post-consumer waste possible and as readily recyclable as possible. EcoEnclose not only offers this, but we are also consistently improving our products, increasing recycled content levels, improving strength, adding algae ink, and more.
- Options and Choices to Meet Functional Requirements: Some D2C businesses need boxes and mailers. Some companies want to be plastic-free, and others need eco-friendly poly mailers. EcoEnclose has hundreds of packaging solutions so companies can find the options that meet their needs.
- Custom Packaging Branded with Your Message: Custom packaging is becoming a more and more critical step to differentiate your brand. With EcoEnclose, you can custom brand your shipping boxes, mailers, tissue paper, and tape or add customized accessories like notecards and stickers.
- Ongoing Support: Eco packaging isn’t necessarily simple - there are a lot of variables to consider. Luckily, we have a customer experience team that cares deeply about your business and the planet and loves helping you make proud packaging choices.
Our custom packaging case studies tell the stories of many companies who have worked with us to transform their packaging strategies to align more closely with their sustainability goals.
Examples of Eco-Conscious D2C eCommerce Brands
Coffee is something most people are used to buying from the grocery store. However, brands like Nossa Family Coffee have vastly changed this by building an ethical and transparent supply chain, offering superior quality products, and sharing their brand story successfully. According to their website, “Nossa Familia Coffee is a Portland, Oregon-based roaster founded in 2004 by Brazilian native Augusto Carneiro. Augusto has always felt a deep sense of pride for his family's work growing coffee in the highlands of Brazil since the 1890s, and he formed Nossa Familia to bring his family's coffee to Portland.”
Nossa Familia Coffee is a Certified B Corporation; they give 1% of sales back to charity and thoroughly assess their environmental impact annually. While Nossa sells coffee to other coffee shops and retailers, most of its sales generate through its coffee shops and its online sales of coffee beans. They've created a beautiful custom 100% recycled shipping box in their signature red.
Founded in San Diego (and successfully featured Shark Tank), Sand Cloud sells gorgeous Turkish cotton towels in various sizes, colors, and patterns. Their claim to fame is that their towels are sand-resistant and quick-drying than a standard towel while still being thin enough to fold comfortably into your bag. Spoiler alert - these towels are the real deal! They are perfect for a beach trip and have successfully solved a long-standing challenge for beachgoers.
Sand Cloud strongly focuses on protecting Marine Life, donating 10% of its profits to relevant causes. Additionally, their towels come from 100% organic Turkish cotton. While they sell through both wholesale channels and D2C, stories about their launch and growth showcase how important a role their direct-to-consumer website sales have been since their launch, particularly after their Shark Tank show. They've custom designed a recycled poly mailer in their signature teal.
Nadine West is part of a new trend - apparel subscription services. Once a month, Nadine West sends its customers a selection of clothing and accessories based on their unique style profile. Customers keep what they want, send back what they don’t, and pay for what they use. Nadine West is committed to making its styles accessible and affordable.
While sustainability isn’t necessarily core to their brand ethos, they have committed to sustainable packaging. Their business model is an excellent example of where D2C can truly shine. Upon joining, their customers take a style quiz, allowing Nadine West to customize what is sent to each subscriber fully. They delight their customers with pretty pink 100% recycled custom poly mailers.
Ritual is a monthly subscription of multi-vitamins and protein powders, primarily designed for women and children. They have focused intensely on transparency, ingredient traceability, data-driven and science-backed product formulation, and sustainability. Their business model is also an excellent example of D2C at its best. Ritual constantly uses its website (and its broader online presence) to showcase what makes its offering unique and customer-centric. On their site, you can trace ingredients, learn why they chose different inputs, read research on the impact their products have been shown to have in tests, and manage your monthly subscription.
Their packaging is also unique - an innovative 100% post-consumer waste clear pill bottle for vitamins and a gorgeously designed 100% recycled padded mailer for their smaller shipments.
How to Start D2C Selling - for New and Existing Brands
You might be wondering, when you have a glimmer of an idea for a product you want to sell directly to end consumers or an existing product you’re selling through marketplaces or brick-and-mortar retailers - how do I even start a D2C business?
There are a few steps that we’ve outlined in a guide to transitioning your business to eCommerce. The guide covers a variety of steps, including:
- Choosing the Right Platform: Choose the right eCommerce platform for your shop based on your immediate and long-term goals, your comfort with website management, and your investment in your brand.
- Setting Up Your Online Shop: Get the nuts and bolts in order (i.e., your merchant account, payment processor, shipping services, etc.). Take great product photos and develop appealing descriptions. Have a solid and user-friendly organizational structure.
- Marketing and Getting the Word Out: Make sure the world knows they can now buy your goods online. Social media, newsletter marketing, paid advertising, SEO, influencer marketing, and customer referrals are broad and diverse strategies to pursue.
- Working Out the Fulfillment and Logistics: This includes shipping, packaging, inventory management, your fulfillment process, and more. These are the less sexy but insanely critical operational decisions.
- Crushing Customer Service: Retail stores have in-person customer service and interactions. Online shops require multi-channel customer service - email, phone, and chat. You need a clear and easy return policy and process.
- Figuring Out Financing: Building a successful online presence takes time, and you m may need to finance this transition, whether with your cash, outside investors, or an elaborate bitcoin system.