What Retailers Have Learned from DTC Strategies (and vice versa)
Imagine your top VIP customer. Imagine you know everything about her: what she likes, what she doesn’t like, what her favorite color is, what flavors she loves (and which she hates).
Now take all of that information, bundle it up, and make the perfect product and deliver it to her exactly when she’s expecting it. Did she buy it?
I’m guessing she did.
Now, what if you had the opportunity to create hyper-focused products for all of your customers? Would you do it?
What if you could deliver more than just a product, but an entire experience where each individual customer felt that you were talking directly to them? Or that they were a part of something larger? Where you can build lifetime customers based on brand authenticity? What if you owned that direct relationship that brought customers into your world and you into theirs?
What would that open up for you?
The direct-to-consumer model, otherwise known as D2C or DTC, refers to selling products directly to consumers by removing third-party distribution methods or middlemen.
When you think about the term D2C, your mind probably goes to recent startups – digitally-native vertical brands (DNVBs) like Warby Parker, Casper, Bonobos, Dollar Shave Club, Glossier, Peloton. Many DTC brands started selling their products online with no physical presence or storefronts whatsoever. However, the term D2C has evolved and is now used as a way to describe a particular distribution channel – one that many traditional brick-and-mortar retailers and even CPG brands are jumping towards.
Why? Because customer values are changing and so are their expectations – largely brought on by the pandemic. Consumers expect brands to market to them directly, to create channels of direct communication and distribution. But it’s not just the legacy brands taking a page out of the DNVBs playbook. The approach is happening in reverse, as well, as digitally-native brands are laying bricks for their own stores or taking up space within other retail shops.
“New research shows that 55% of consumers prefer to buy from brands directly, while a further 40% of shoppers say they will purchase from a D2C brand in the next five years.” 1
So what’s the right strategy? Who’s primed to win?
The answer: all of them, depending on how you look at it. Let’s dive in.
The value proposition for DTC from a DNVB standpoint
It’s pretty simple. Digitally native brands are market disruptors with one differentiated product to take to market. Starting off, most didn’t have the capital to build brick-and-mortar stores, nor did they need to; that wasn’t the goal (talk about being primed for the pandemic).
With innovative marketing strategies and a model that enables them to own the entire funnel, DNVBs focused on user acquisition through digital channels. The result was access to a litany of consumer data that allows them to forge personalized relationships and deliver on customer expectations. By having products and offerings apart from the masses and full control over the brand experience, DNVBs have been in a position to cut through the noise simply by eliminating it. That is, until now.
With lowered barriers to entry, competition in the D2C space has become so saturated that it has forced DNVBs out of the digital-only model and into the physical world. Consider the mattress industry. Casper came in and completely disrupted the way mattresses were sold – and they did it with a great marketing strategy. Today, there are hundreds of mattress competitors in the DTC space. With that, the cost to acquire new customers online becomes prohibitively high. Casper came to realize that they could no longer sleep on the notion of only selling online. The same is true for others.
When things get physical
From pop-ups to the “store-within-a-store” model, DNVBs have been finding ways to experiment with low-risk physical environments. This affords them a new vehicle to attract customers before fully investing in their own brick-and-mortar locations. The latter is proving to be a sure bet for many.
“When you’re in the online-only world, you can’t bring people into your space and your brand the same way you can with a physical store.” – Michael Presyman, CEO, Everlane 2
While some are adopting showroom-only models to act as an extension of their brand, they also enjoy the benefits of creating a more convenient experience, as well. That is to say, providing customers with the ability to take home products on the same day offers advantages that delivery options can’t.
Returning to the most valuable aspect of traditional DNVBs, the ownership of everything – the mounds of physical and digital 1st-party data, consumer experience, customization of that experience – is the tie that binds. Owning the customer relationship enables the creation of additional data points and allows brands to communicate with customers in a way that feels authentic and meet them where they want to be met.
“Direct brands have used advanced customer data metrics to personalize the entire brand experience, allowing for marketing campaigns that drive at the heart of the individual’s wants and needs. This set of tech solutions has optimized the relationship with the customer through automation of processes and sufficient scalability in volume and sales channels.” 3 Annie Little, The Drum Network
The digitally-native market will continue to ascend as more brands become mainstream and develop a wider presence through opening physical stores as their “next-at-bat” approach. It will be a new model for many, but one they can’t shy away from for too long if they want to scale profitably.
So what about traditional retailers? What do they do about DNVBs making divots on their turf?
Expanding the online legacy: traditional brands’ coming of age
The pandemic shook up the business models of many traditional retail-reliant brands accustomed to selling to their customers through physical stores as their main revenue source. With thousands of store closures in 2020 and even more expected in 2021, brands had no choice but to shift into the digital space, whether they were ready for it or not.
Many established brands are still trying to crack the DTC model with the biggest challenges stemming from a lack of experience in the channel and overall agility. However, others like Nike hit the ground running and saw performance peaks in 2020. Nike has understood the value of customer data for some time now and has continued to flex its muscle with investments in data generation and application via acquisitions of Zodiac (2018) and Datalogue (2021). The result has been a strategy to deepen the connection with their end consumers via community and personalization at scale.
“It was definitely architecting a new retail…But it started with our consumer, and we knew that consumers wanted a more direct relationship with us today.” 4 – Heidi O’Neill, President of Consumer and Marketplace, Nike
Sowing the seeds
There has been a big shift among CPGs, as well. Given that consumers are the customers of the retailer (i.e. grocery store or other wholesale stores) and not the brand itself, the ability for CPGs to create a relationship with the consumer is a smart – albeit challenging – long-term move considering their inability to do so historically.
By creating a direct channel and becoming more data-driven, CPGs such as PepsiCo, Kraft Heinz, Ocean Spray, Clorox, and even legacy beauty brands such as Clinique are beginning to reap the benefits. This direct relationship with consumers doesn’t only benefit the direct sales channel, but their retail channels as well.
Bimbo Bakeries – owners of Entenmann’s, Sara Lee, and Thomas’ Baked Goods – launched its own site on Shopify and through the collection of valuable consumer data, the company expects the site to benefit its retail relationships as it leverages the data to create higher-quality products to be sold on shelves.5
Building the feedback loop
The above example illustrates the power of feedback loops when it comes to product development. The “store-within-a-store” model is also a reinforcing loop that creates a win-win for both the wholesale retailer and the brand itself. The reason: generating increased brand equity.
The approach generates more awareness, convenience, and ultimately brings more customers back to owned and operated channels.
For example, take the mini-stores ULTA is launching inside Target. ULTA doesn’t have unlimited space to sell their full catalog of products at Target stores. However, the incremental exposure to new audiences generates enough interest that if customers are looking for specific items that aren’t available, they are likely to land back at the ULTA store or website.
Expanding off that example, let’s look at fashion retailer AllSaints. They have an e-commerce site, brick-and-mortar locations, and mini stores inside Bloomingdale’s. They don’t sell their entire collection in Bloomingdale’s, nor do they sell all of their products in their own stores. Some products are online-only, others are in-store only, and some may even be exclusive to their partnership with Bloomingdale’s. Also, to point out, this partnership is great for Bloomingdale’s because they capture more market share and increase the lifetime value of their customers.
For Bloomingdale’s customers who purchase an AllSaints product, AllSaints (likely) won’t get access to that customer data. The best they can do is hope the exposure and positive brand experience will pull the customer toward their online / mobile presence or their own brick-and-mortar stores. AllSaints gets to determine if the tradeoff between reach and ownership is justified.
So, how can location play a role in identifying this customer? While they may not have transactional information, AllSaints could deploy beacons at their mini stores which would interact with an AllSaints app user for retargeting via email, real-time push notification (within the app), or custom audience creation for digital retargeting. This creates the opportunity to increase the lifetime value of that customer via upsell opportunities and, hopefully, increases true brand loyalty. All Saints then owns that direct relationship again (aka the flywheel).
Brands are getting more and more creative with their partnerships, and it’s genius. Let’s take Chipotle and e.l.f. Cosmetics, for example – an unlikely beauty and avocado mash-up.
While there are advantages for both companies, it begs the question: who is set to gain the most value from this collaboration?
From a customer acquisition standpoint, Chipotle was able to dip into a whole new audience that otherwise may not have been their prime target. Similarly, e.l.f. had the ability to chip away at a customer base who would have otherwise never considered their products.
The common thread? The premise behind the collaboration stems from a growing passion among Millennials and Gen Z around sustainability and ethical practices – resonating themes behind both companies’ missions. Bringing e.l.f. shoppers into the conversation around Chipotle’s mission to cultivate a better world through responsibly-raised food is a great foundation to build a more loyal fan-base for both companies and their customers that crave the best ingredients at affordable prices.
Furthermore, by making this collection available exclusively through their own websites, Chipotle and e.l.f. are able to leverage the data that comes directly from their site visitors and transactions to better inform their DTC strategy.
So how can collabs like this use physical-world data to influence a DTC strategy? Utilizing their app, e.l.f. Cosmetics can track the number of users who visited a Chipotle after the launch – and vice versa. By monitoring visitation and sharing data between groups, each company could look for other adjacent but independent brands where unique and interesting partnerships could boost brand recognition in a symbiotic way.
Physical insights for a digital ecosystem
Direct-to-consumer no longer means digital-first or digital-only. The holy grail of omnichannel – a model that was once only possible if you had a large retail footprint with dedicated teams to implement – is now being adopted by the minute, in masses.
Omnichannel commerce requires data from many different sources. Historically, the biggest gap from a brand’s data stack was reliable physical world data. Today, consumer preference and adoption of mobile applications enables the collection and utilization of high-quality location data across channels – not just within a native mobile app itself. By giving consumers a reason to believe, interact, and connect with your brand, you justify opportunities to enrich their customer experience and, therefore, personalization using the data they generate on their own behalf.
So now the question expands to: Did they buy it? I’m guessing they did.
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