D2C: A Complete Guide to Direct-To-Consumer Business Models
Find what you need
- What does D2C mean?
- Challenges of direct-to-consumer
- Sustainable packaging for direct-to-consumer companies
- Eco-friendly direct-to-consumer examples
- How to start
Direct-to-Consumer is a business strategy where businesses sell their products directly to consumers. No middlemen, just straight business.
Such a business model offers convenience, cheaper prices, and a more streamlined experience. But it also comes with its challenges. Before pursuing this business model, you must be aware of the unique issues that may arise with this type of strategy and how to avoid them. Here’s our guide.
What does D2C mean?
D2C stands for direct-to-consumer, which, at the simplest level, 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 adopted this model for a long time through their brick-and-mortar retail stores, but this latest trend is different. Up-and-coming D2C brands sell to their end consumers via their eCommerce shops, where customers learn, shop, purchase, and engage directly with their favorite brands.
Although not all eCommerce is direct-to-consumer (if an online shop uses Amazon or Etsy, for example, this follows the traditional merchant → retailer → consumer pipeline), the growth of eCommerce has largely fueled the growth of this business model. 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.
eCommerce companies looking to make modern changes might consider pivoting toward this more direct business model. Not only will it cut costs associated with middlemen, but it may very well be the eCommerce approach of the future.
Why are so many companies pursuing this business model?
The D2C eCommerce business model offers a variety of benefits, primarily more control over your business and product. When selling directly to your customers, they are the only ones you need to worry about. Here are some of the most significant benefits of the direct-to-consumer business model.
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 also have a lot more control over pricing. For example, if you sell coffee through the Kroger chain, you can’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. But, with a D2C model, it’s all up to you.
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 various 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 eCommerce businesses with information-rich websites and passionate social media presence 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. By choosing this eCommerce model, you, too, can become a leader in your industry to enact positive change.
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 have much more control when you ship directly to your consumer (especially if you don’t use a 3PL partner for fulfillment). If you want your customer’s first impression of your products to be 100% recycled, recyclable packaging, you can do that!
More agility in developing and testing new products, services, and marketing strategies
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 demands, 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, produce, and sell only fifty shirts before launching your whole algae line. You can also focus your marketing efforts, such as 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
You probably don’t know who buys your products when you sell through retailers. 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 more. Some examples of data you have access to:
- Website heatmapping: With heatmapping 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 stats: If you have an online store, you also have a newsletter or customer email communication strategy. If so, you’ll see how many customers open your email marketing, how many clicks, what they click on, and who is engaging. This data is gold as it can help you target the right messages to the right customers and 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—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 lets you quickly adjust your advertising messages and budget and gives you insight into users’ search history.
- Product recommendation quizzes: Various software solutions 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
So, if D2C is so great, why isn’t everyone doing it? The answer is simple: it’s a lot of work.
Although direct-to-consumer companies have much more control over their products, marketing, and pricing, this control comes at a price. They also have to be in charge of creating their website, gaining traffic to that website, and cultivating brand recognition. Starting that from scratch poses a huge talent, especially if you’re a small team. You’ll have a lot of creativity to get your business off the ground. Here are some of the biggest challenges facing direct-to-consumer companies.
In traditional models, companies sell their products to retailers that have already done the legwork to get customers into their shops, whether online or brick-and-mortar. If a company sells clothes to Macy’s, for example, they’ll know that a steady stream of potential customers will see their products daily. They’ll still need a solid strategy to entice customers to purchase their brand rather than the other offerings available, but the hard part—getting customers to view their products—is already done.
Conversely, direct-to-consumer companies must compete to get customers to visit their websites to see the available products. Once a customer arrives there, the competition is far less than a traditional retailer since that company’s products are the only ones to choose from, but you must get the customers there first.
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 highly effective at building and growing brand awareness and a community. In fact, 85% of Gen Z shoppers say that social media impacts their purchasing decisions.
- Paid advertising: Many eCommerce brands launch and grow through paid ads. Whether through Facebook, Instagram, Google, Pinterest, or digital display ads, this type of sale 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 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.
Beyond marketing, D2C brands must store, package, and distribute their goods. Brands that sell through retailers enjoy a more hands-off approach. They 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 directly to the retailer.
Conversely, D2C brands must receive, store, and then fulfill their orders, picking, pulling, packaging, and shipping them accurately. As part of this process, these 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.
(3PL partners can make this part easier. Click here to learn more about 3PL partners and how to find one that can meet your sustainable packaging needs.)
D2C brands sell one product 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 orders with their manufacturing partners for a set (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 need 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.
Missing out on the traditional market
D2C online stores miss a considerable chunk of the market. While these brands are successfully disrupting many industries, from shoes to apparel to healthcare, most consumers' standard mode of operation is to purchase from a brick-and-mortar or online retailer.
For this reason, many brands have pursued D2C and traditional retail models over time. Some legacy brands that started by selling through retail have shifted their business model to include D2C. As is common in any business approach, the key is diversification. While some companies have found success solely operating as direct-to-consumer, most companies find a balance between this type of model and traditional approaches.
Sustainable packaging for D2C brands
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 offers this, and we are 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 packing 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, our customer success team 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.
Eco-friendly direct-to-consumer 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. They are a family-owned coffee company from Portland, Oregon that holds sustainability in equal regard to the quality of their coffee.
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 100% recycled custom shipping box in their signature red color, boosting their brand in a way that’s kind to the planet.
Founded in San Diego (and successfully featured on Shark Tank), Sand Cloud sells gorgeous Turkish cotton towels in various sizes, colors, and patterns. Their claim to fame is that their towels are more sand-resistant and quick-drying than a standard towel while still being thin enough to fold comfortably into your bag.
Sand Cloud strongly focuses on protecting marine life, donating 10% of its profits to relevant causes. 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. They delight their customers with pretty pink, 100% recycled custom poly mailers.
Ritual is a monthly subscription of multivitamins 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 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 smaller shipments.
How to start
If you have a glimmer of an idea for a product, you might wonder, “How do I start?” Here are our top 7 tips to get you started.
- Choose the right platform for your shop based on your immediate and long-term goals, your comfort with website management, and your investment in your brand.
- Set 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.
- Get the word out: Ensure the world knows they can buy your goods online. Social media, newsletter marketing, paid advertising, SEO, influencer marketing, and customer referrals are broad and diverse strategies to pursue.
- Work out the logistics: This includes shipping, packaging, inventory management, your fulfillment process, and more. These are the less sexy but extremely critical operational decisions.
- Crush 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.
- Figure 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.
- Build that branding: Figure out how you want to stand out as a brand, including your logo, style, attitude, and more.
Looking to elevate your D2C experience through sustainable packaging? Contact us today, and we’ll help you get started!