When starting a company or new product line, you must choose the best business model for making sales. Direct-to-consumer (DTC) is a business model that focuses on interacting with and selling to your customer directly, without dealing with retailers, wholesalers, or other middlemen.
Direct-to-consumer sales can be a great way to sell products and keep margins high, but it can take more effort than other sales models. We’ll break down what you need to know.
What is Direct-to-Consumer?
Direct-to-consumer sales mean your company sells products to your customers without dealing with intermediaries.
For example, some companies might make products and sell them to a distributor or retailer, and that retailer then adds a markup and sells that product in its stores. Those companies are selling to middlemen rather than to consumers.
A company using a DTC model skips the retailer and sells to customers through its stores, including online retail. This method of sales gained significant popularity during the dot-com bubble thanks to the rise of the internet and increased consumer willingness to make online purchases.
How the Direct-to-Consumer Model Works
Direct-to-consumer works exactly how it sounds. Your company directly interacts with the consumer and controls every step of the sales and fulfillment process.
You handle marketing, customers come to you to make purchases, and you accept payment. Your company also manages the supply chain, from receiving raw materials to delivering products to the customer’s door.
The vast majority of businesses using DTC utilize an omnichannel marketing strategy and rely on ecommerce sales, which places a heavy focus on things like social media and the customer experience. While DTC businesses can have physical stores, it’s much less common thanks to the success and relative ease of ecommerce platforms.
Most direct-to-consumer brands have very defined business models and target audiences. For example, Dollar Shave Club and Harry’s are both DTC companies selling a specific consumer packaged good—razors. Casper, another popular DTC brand, focuses on mattresses and bedding. DTC businesses can stay focused on their successful products by keeping product lines simple.
Pros and Cons of Direct-to-Consumer Selling
There are many benefits to using a direct-to-consumer model.
Control over the customer experience: DTC brands don’t need to rely on third parties for any aspect of their business. They can track, influence, and control how customers interact with their brand from start to finish. They can also use customer data to learn how to draw in new customers and strengthen existing relationships.
Direct communication: Companies sell directly to customers and can build relationships, making customer service easier, helping DTC companies understand shifting needs, and improving retention through customer feedback.
Control over fulfillment: DTC companies control every aspect of the supply chain and ship products to customers. They aren’t reliant on a distributor or retailer that may use slow or unreliable shipping methods.
Higher profit margins: Direct-to-consumer firms don’t have to worry about partnerships with retailers or distributors, giving them room to earn a profit. Instead, direct-to-consumer companies can keep prices low and retain a more significant profit from sales by pricing above wholesale and below retail prices.
Better customer support: With direct sales, you have all the information on a customer’s purchase history. You can also store data on previous support requests to keep track of all of the times a customer has asked for help, which can improve future support.
However, DTC sales aren’t perfect, and this model can make running a business more complicated in many ways.
It’s all on you: Your company is responsible for the entire customer journey. If your business is great at making widgets, it must also be great at advertising, interacting with customers, making sales, and the logistics to get the product to your customers. If you use a retail model, all your business has to do is make the widgets and ship them to a retailer.
Higher risk: The more tasks your company handles, the more points of failure there are. You also have to consider risks such as fraud, liability, or cyber-attacks, which other parties primarily absorb within traditional retail channels.
Scaling is more challenging: To scale a direct-to-consumer brand, you need to expand your company’s production, fulfillment, customer service, and geographic reach. With traditional retail models, your wholesale and retail partners can handle some of these tasks for you.
More competition: Direct-to-consumer businesses often focus on single product lines and have low barriers to entry, which means you’ll face much more competition in saturated markets.
Higher costs: Managing every step of the supply chain means paying for staff to handle those tasks, paying for web hosting, hiring marketing affiliates, and other higher costs. If you’re struggling to generate revenue, direct-to-consumer sales may be too costly to implement.
Why DTC Has Become So Popular with Merchants
There are a few reasons that direct-to-consumer sales have become so popular in recent years.
One is simply that expectations for customer relationships have increased. Customers don’t want to feel like they’re working with a faceless brand that doesn’t care about them. To create loyal customers, you need to generate a feeling of personalization and connection.
Direct-to-consumer sales are a great way to generate brand loyalty in your customers because it gives you the best opportunity to interact with consumers and build personal relationships.
Another reason is that most direct-to-consumer businesses use digital channels rather than physical brick-and-mortar stores. Online sales have grown massively since the beginning of the COVID-19 pandemic—between 60% and 70% of consumers shop via multiple channels and involve social media in their purchasing habits.
The DTC model relies heavily on online sales. Many companies using DTC sales are digitally native brands that have never used traditional retailers, such as department stores or big box stores like Walmart. Given that such a vast percentage of Americans participate in online shopping, the DTC model gives companies access to the largest portion of the market.
Even non-digital native brands have hopped on the DTC bandwagon. For example, Nike saw 35% of its revenue come from direct-to-consumer sales in 2020 and increased that to 39% in 2021.
DTC also unlocks unique opportunities that are harder to accomplish through traditional sales channels. One interesting example involves Wizards of the Coast, the company behind the trading card game Magic: The Gathering, which recently began making direct-to-consumer sales. Its new, unique trading cards are only available online at certain times and in limited quantities.
Offering similar time and quantity limited sales through traditional retailers would be much more complex and add complications such as determining the product quantity to send to each retailer to ensure optimal sales.
The Final Word
Direct-to-consumer sales involve brands interacting with and selling directly to their customers rather than selling their products to traditional retailers or wholesalers. DTC offers better opportunities for building customer relationships and can allow businesses to capture higher margins on sales.
However, the DTC model can add complications, like dealing with fulfillment and difficulties scaling. Many digitally native brands use DTC sales, but you should consider whether the model is right for your business and choose accordingly.
