- In 2019, D2C e-commerce sales reached 14.28 billion USD. D2C e-commerce sales are projected to reach 17.75 billion USD in 2020 and 21.25 billion USD in 2021-an increase of 24.3% YoY.
- In an October 2019 survey, 25% of American internet users stated that in the next five years they plan to purchase 1-19% of their goods from D2C companies
- The biggest D2C brands include eyewear manufacturer Warby Parker, men’s grooming brand Dollar Shave Club, and mattress company Casper.
- As of Q2 2020, the fastest growing D2C brand in the United States was furniture brand Outer, with a quarterly visits growth of 659.1%.
- Shopify is a success story of a foreign e-commerce platform that has helped brands from 175 countries sell in the US and elsewhere.
- Why have D2C brands failed and how can they adapt?
Pre-pandemic, the world was already becoming increasingly digitized through the increased dependency on the internet, the adoption of smartphones and mobile devices, and the increased usage of social media. One of the other ways that the behavior of humans was already shifting pre-pandemic, was the increased usage of e-commerce and buying from direct to consumer (D2C) brands. All means of doing business face-to-face unprecedentedly disappeared in totality back in March. As we approach the end of 2020, while brick and mortar businesses slog towards and up and down recovery, COVID-19 is firmly in its second wave with no end in sight. More than ever, the world is dependent on technology and D2C brands to buy everything ranging from clothes to food, to furniture. Businesses always need to adapt and pivot to keep up with technology and customer behavior. One of the ways they can do that is through adopting D2C models.
What Is D2C?
D2C, sometimes referred to as business-to-consumer, is a way for brands to sell their products directly to customers, rather than selling through a third-party retailer, wholesaler, or middlemen
D2C brands are usually sold online through e-commerce platforms, and specialize in a specific product category. Clothes, accessories, luxury brands, furniture, food and beverage, and consumer packaged goods are all sectors that have increasingly adopted D2C business models over the last decade.
Why Adopt a D2C Strategy?
Brands were adopting D2C business models long before the pandemic. But why have they done this and why are they continuing to do this?
First and foremost, brands are adopting this model because it helps them gain valuable insights into the behavior of its consumers. By understanding its consumers better, this enables brands to build a more tailored approach to not only marketing, but also to customer experience. Consumers today are more demanding than ever before. They have access to more information to research their purchasing decisions and have zero tolerance for a poor customer experience. To meet these demands, brands are increasingly adopting D2C models to expand beyond the established retail model, reach consumers directly, and learn more about their preferences and behaviors. Consumer preferences are also shifting. Just over 10 years ago, consumers could only buy high-quality products from well known brands and well known retailers. Nowadays, consumers can buy products that are of similar quality, if not better, from D2C brands. Name brand recognition does not hold the same weight that it used to, and consumers put less emphasis on paying a premium for brand name or for a specific retailer. According to a survey from e-commerce marketing platform Yotpo, if an item is out of stock, 40.55% of consumers said that they would turn to a less familiar brand to find the product they need.
Second of all, with the internet, the playing field has been leveled. Brands have never had more power and resources to start from scratch and compete with giants. By implementing a D2C strategy, whether relying on third party platforms such as Shopify or establishing their own branded online store, brands can increasingly compete with established giants. Amazon and Walmart, have significant market power and resources- this is indisputable. However, if there is a D2C brand that comes around with a tailored and high-quality customer experience, no matter how powerful they are, they can’t compete. According to the aforementioned survey from Yotpo, 65% of shoppers using Amazon said they couldn’t get everything (32.75%) or anything (32.25%) they really needed from the retailer. In fact, because the playing field has been so leveled by D2C, well established brands such as Kraft Heinz, Coca-Cola, Mars and Pepsi are increasingly collaborating with D2C startups in order to reignite growth and directly sell to their consumers. Companies will damage their long standing brand equity if they fail at mastering e-commerce, logistics, and customer experience.
Additionally, with the rise of e-commerce, developing a D2C strategy is crucial. Consumers are simply shopping online more and more, and an effective D2C strategy enables companies to better adapt to this trend. In fact, worldwide, retail e-commerce sales are forecasted to grow from $3.53 trillion in 2019 to $6.54 trillion in 2022.
To put this in further perspective, e-commerce sales accounted for 14.1% of all retail sales worldwide in 2019. This figure is expected to reach 22% in 2023.
Additionally, according to an October 2019 survey, 25% of American internet users stated that in the next five years they plan to purchase 1-19% of their goods from D2C companies
Furthermore, in the United States, D2C e-commerce sales reached 14.28 billion USD in 2019. This number is projected to reach 17.75 billion USD by the end of 2020 and 21.25 billion USD in 2021-an increase of 24.3% YoY.
Lastly, D2C is simply more cost effective and profitable. Take a clothing manufacturer for example. A clothing manufacturer may make fashionable jackets, yet only make a fraction of the final retail price. This jacket manufacturer may incur $15 of cost of goods sold expenses to make the jacket. Then the manufacturer may sell the jacket to a retailer for $20. This retailer will then turn around, and sell the jacket for $100. With today’s changing climate due to COVID-19, combined with rising labor costs, why would manufacturers even bother reaching out to retailers that cut into their profits, when they could just sell it directly to consumers? When executed well, the D2C model gives manufacturers higher profit margins, while avoiding the traditional retail route.
What D2C Brands Have Succeeded?
Today’s biggest D2C brands include well known names such as eyewear manufacturer Warby Parker, men’s grooming brand Dollar Shave Club, and mattress company Casper. Warby Parker is valued at $1.75 billion, Dollar Shave Club was acquired by Unilever for $1 billion, and Casper is valued at around $750 and went public. Other well established strong D2C brands also include Harry’s, Glossier, Bonobos, and Barkbox. These first generation D2C companies largely grew due to borrowed supply chains, web-only retail, direct distribution, underpriced and undersaturated social media marketing, and a specific visual brand identity easily adaptable to digital media.
As of March 2019, these were the leading categories of D2C brands purchased by American internet users in the past vs. will likely try in the future.
These stats from a year and a half ago show that 52.1% of respondents purchased something from a D2C brand in the personal care & beauty brand segment, while 57.1% said that they planned on purchasing clothing & apparel from a D2C merchant in the future.
How Are D2C Brands Trending?
Now let’s take a more recent survey from Q2 2020, and see what D2C brands are trending, and if this fits the narrative of the March 2019 survey.
According to this survey from SimilarWeb, the fastest growing D2C brand in the US was actually a furniture brand! Outer, which sells all-weather outdoor furniture, witnessed a quarterly visits growth of 659.1%. In fact, Outer launched only one month before the March 2019 survey, which makes this rapid ascension all the more staggering. Furthermore, in the March 2019 survey, the home and furnishings sector ranked only 6th in both past purchases and planned future purchases. Outer is already profitable, and attributes much of their growth due to demand from COVID-19. In June, they secured $4.3 million more in additional funding in order to expand their product offerings and evolve into an outdoor lifestyle brand.
Following Outer, children’s clothing brand Cubcoats’ quarterly visits increased by 337.3%, footwear manufacturer Hari Mari quarterly visits increased by 259.5%, bicycle manufacturer Priority Bicycles’ quarterly visits increased by 255.1%, and skincare manufacturer Youth To The People’s quarterly visits increased by 212.3%.
According to Shopify, US consumer packaged goods (CPG) sales during the pandemic increased by 8.5 billion, and are forecasted to grow 40% by 2021.
Are Foreign Manufacturers Selling In The US?
According to Adroll, one of the top D2C trends to watch out for in the next decade is “going global”! In fact, according to Shopify, 42% of all e-commerce transactions happen in China, and by 2022, international purchases will make up a fifth of worldwide D2C sales.
American D2C brands might be hesitant about the idea of selling abroad, and the same may be true for non-American D2C brands trying to break into the American market. However, earth is a very big planet, and going global, no matter where the business is based out of, offers massive potential for increased sales. E-commerce platforms already offer D2C sellers a range of global services, such as multi-currency options, customized tax calculators for different countries, and integrated fulfillment services that cover international shipping and distribution.
Third party platforms such as the Canada based Shopify, are great resources for foreign D2C companies to sell their goods all across the world- including America. In fact, 1,000,000 businesses in approximately 175 countries use Shopify’s platform- and these are pre-pandemic figures as of June 2019! Shopify’s proprietary platform offers D2C retailers a suite of services “including payments, marketing, shipping and customer engagement tools to simplify the process of running an online store.” For foreign companies, they offer even more services ranging from currency help, to fulfillment, taxes, tariffs, and more.
A good example of a foreign company selling D2C in America is Nanoleaf. Nanoleaf, which has headquarters in Toronto, Paris, and Shenzhen, is a retailer specializing in LED lighting. Before even launching as a formal company, Nanoleaf started as a side project between 3 University of Toronto engineering students. After launching their first product on Kickstarter in January 2013, with an initial goal of $20,000, they received $250,000.
After further growth with successful crowdfunding campaigns and international expansion, Nanoleaf discovered that one of the biggest headwinds for foreign manufacturers trying to sell to America were actually from the customer’s end. They would find customers getting slapped with taxes, tariffs, and additional courier fees that they did not know about in advance. However, to make a long story short, after using a platform such as Shopify, Nanoleaf was able to break into the American market. Although Nanoleaf at its core is still a D2C company, with 15-20% of its sales coming from online, American retailers such as Apple and Best Buy now carry Nanoleaf’s products in hundreds of its stores.
Why have D2C brands failed and how can they adapt?
In the words of Gary Vaynerchuk, “Ninety-eight percent of D2C brands are out of business, they just don’t know it yet.” While the concept of D2C revolutionized the way independent retailers did business in the early 2010s, today, the landscape is significantly different and harder to navigate. Many of the most successful D2C brands are far less attractive than they were five years ago. Take Casper for example. After much success as a private D2C company, Casper went public in February 2020 with a disastrous IPO. After being considered a “unicorn” by private investors, public markets were not convinced. After the D2C mattress retailer IPO’d, it was valued at approximately $600,000 less than its last private fundraising round. Furthermore, just days after Casper’s IPO, another D2C retailer Brandless ceased operations and laid off 90% of its employees. Other recent D2C hiccups include Glossier, which suspended its color cosmetics line Play after lackluster sales, and Outdoor Voices, whose CEO Tyler Haney was forced to resign after a reported $2 million monthly burn rate on $40 million of annual sales.
Why, after so many successful D2C launches in the early 2010s, has the landscape changed? In short, it’s significantly more challenging to separate from the pack and be a successful D2C company nowadays. There is an increasingly crowded landscape becoming increasingly more competitive and challenging to stand out in. The tactics that helped companies like Warby Parker skyrocket don’t work the same way in 2020. For example, look at the D2C cookware market. D2C companies such as Equal Parts, Made In, Misen, Great Jones, Caraway, Our Place, and more are all competing in the same premium cookware space, to sell directly to the same target market. As mentioned earlier in the report, large mega-brands have also caught on to the trend, and have either launched their D2C lines or partnered with D2C brands. With more brands competing for D2C market share, also come increased costs in social media ads and increased customer acquisition costs.
What Can D2C Brands Do To Succeed In 2020?
Although it is far harder to become a successful D2C brand in 2020 than it was in 2010, there are still countless ways to be a successful D2C brand- especially if you are a foreign D2C manufacturer looking to do business in the USA.
One thing that D2C brands can do to start is offer a subscription service. According to Shopify, almost 75% of businesses selling D2C are forecasted to offer subscription services by 2023.
Additionally, according to the Harvard Business Review, there are several things that a D2C business can do to adapt and adjust to this congested climate.
- Omnichannel Is A Necessity
Omnichannel is a multichannel strategy that D2C brands approach in order to provide consumers with a seamless shopping experience, no matter what device they are shopping from, or if they are shopping in person. Because of the saturation that today’s D2C landscape is experiencing, this is an absolute necessity.
In fashion for example, these are how many top brands are utilizing an omnichannel approach.
- Differentiate Through Community
D2C brands have the unique advantage of developing one-one-one relationships with their consumers while capturing valuable data that would be impossible to capture from a traditional retail model. According to the Harvard Business Review report, this is increasingly becoming a two-way relationship where consumers collaborate with brands in order to co-create new products and services. As D2C brands scale upwards, this becomes increasingly more challenging. However, what will separate the successful D2C companies from the unsuccessful will be the companies who can keep some semblance of community as they grow.
- Expand Margins Via Vertical Integration.
What helped many D2C companies rise in the early 2010s were borrowed supply chains. However, this will not work over the long run as established brands continue catching on to D2C tactics. D2C brands need to start looking into plans to vertically integrate with tactics such as creating their own manufacturing operations instead of contracting them out. As more D2C companies rise, and as more large legacy brands continue to make the landscape more difficult, D2C brands need to continue figuring out ways to cut both production costs and customer acquisition costs as they increasingly eat into profits and become more expensive.
- Prepare For The Voice Revolution.
Voice interfaces will disrupt and reshape commerce over the next 10 years just as the internet did 30 years ago. Companies not thinking ahead to this voice revolution will inevitably fall behind.
Outside of the Harvard Business Reviews’ recommendations, developing a comprehensive digital marketing strategy has never been more important. It cannot be stressed enough how crucial e-commerce is to a successful D2C model. However, as mentioned before, it is important to realize that as D2C has grown, so has saturation. According to Neil Blumenthal, CEO of Warby Parker, “it’s never been cheaper to start a business, although I think it’s never been harder to scale a business.” Additionally, Ben Lerer, CEO of Group Nine, said that “there’s still a lingering idea that DTC is innovative. That simply isn’t the case anymore…It’s about how you do it now that’s innovative.”
With a CAGR of 17.6% from now until 2025, digital marketing’s landscape is growing in importance as the world is becoming more dependent on tech. 2020’s circumstances forced businesses to think on the fly and adjust to not only stay relevant and functional, but to survive. With the way the world was already changing pre-pandemic, businesses with a strong digital marketing strategy were already ahead of the curve and well positioned. Specifically during COVID-19’s initial peak, the most successful D2C brands understood that with digital marketing, they could better adapt to the evolving ways that people shop. In fact, according to a Deloitte report, digital sales eclipsed holiday sales during the start of COVID, and grew by 18% in Q1 2020 compared to Q1 2019. Traffic also grew by 13% in Q1 2020 compared to Q1 2019.
The internet democratized the tools required to start and scale a business. But now, D2C businesses more than ever need to comprehensively use these tools together in order to successfully reach their consumers. Digital marketing reaches people where they spend their time and money, regardless of distance and location. Digital marketing is easier to customize and individualize, and target specific audiences. Furthermore, digital marketing is more cost effective than traditional marketing, and also has a higher ROI.
With several digital marketing tactics such as content marketing, social media marketing, native ads, SMS/email marketing, and retargeting, D2C business can grow through investing in an all encompassing digital strategy.
- Content Marketing
Content marketing is a marketing strategy that focuses on creating, publishing, and distributing relevant, consistent, and targeted content. This is a long-term marketing approach that aims to build a strong relationship with a consumer by producing high-quality, consistent, and personalized content- with the hope of eventually driving sales. Content marketing is especially popular with D2C brands to create brand awareness, and attract and retain loyal customer bases. These techniques can include anything from images, infographics, videos, and GIFS, to tweets, blog posts, and newsletters.
In a 2018 survey for “most effective digital marketing techniques,” content marketing came in at number 1 as the most effective technique- and it was not close either. 1 out 5 respondents said that content marketing was the most effective, while AI and big data came in tied at number 2 with only 14% of respondents.
Out of all content marketing techniques, the usage of visuals has been shown to be the most widespread, organic, and engaging for D2C brands. Recent studies have shown that 85% of consumers are more likely to purchase a product after watching a video about it, 46% of users act after viewing a video ad, and when you combine video with full-page ads, you can boost engagement by 22%. Furthermore, 80% of consumers will remember a video ad they viewed in the past 30 days, 64% of online consumers have reported that watching a Facebook video has influenced them to make a purchase. By utilizing videos, e-commerce sellers can increase product purchases by 144%. There is a reason that Shopify partnered with TikTok to attract more shoppers by allowing its merchants to sell products in the form of shoppable TikTok video ads, where TikTok users can then click on an ad to buy.
Additionally, video content better explains product information than simple text. Videos, through being more eye-catching and engaging, also promotes sales better. Users clearly retain more information when they watch a video as opposed to simply reading text.
- Social Media Marketing
Social media marketing was one of the first avenues that got D2C brands started. In the early 2010s, an environment of abundant venture capital, low competition, and under-priced social media ads created an atmosphere for D2C brands akin to the wild west. However nowadays, the market has changed. So many D2C brands have sprouted up and cluttered the market resulting in a more challenging social media environment to stand out, with pricier social media ads. The cost of customer acquisition has gone up considerably, making the need to stand out from the pack on social media all the more challenging.
Combining content marketing concepts with social media marketing is a good start. In fact, outside of watching videos, engaging on social media is the most popular online activity. Incorporating social media marketing with content marketing can reach a larger audience, and get more out of your marketing budget. For example, creating an attractive and engaging video exclusively for Facebook utilizes the principles of content marketing, with the vast audience exposure that Facebook offers.
Despite the oversaturation that D2C brands have experienced, an effective social media marketing strategy is so crucial. Why? Social media marketing, compared to off-line marketing, reaches more people directly where they spend their time and money, regardless of location. This is especially important for foreign manufacturers trying to break into the US market. As of October 2020, the world has 4.66 billion global internet users- nearly 60% of the world’s population. Of these 4.66 billion internet users, 4.14 billion are active on social media. Dig deeper into the numbers, and you will also see that the most important method of reaching social media users is through mobile social media marketing. Of the 4.14 billion active social media users, 4.08 billion are active on mobile devices, including 98.3% of Facebook users.
For the average Internet user, social media takes up 33% of the time they spend online. Companies of all shapes and sizes are realizing this, and the benefits of social media marketing and advertising. But what are these major benefits exactly? According to a January 2020 survey, 86% said increased exposure, 78% said increased traffic, 67% said generated leads, 60% developed loyal fans, and 59% improved sales.
Additionally, 37% of online shoppers report using social media for inspiration when they’re ready to make a purchase, and 72% of consumers want brands to share discounts and other promotions on social media.
- Native Ads
Native advertising is a crucial component for D2C brands to include in a well rounded digital marketing strategy. Native ads are paid ads that match the look, feel, and function of the media format in which they appear. These ads are effective, because they simply do not look like ads. Native ads are especially effective for consumers that have tuned out internet ads, don’t trust them, or block them. In fact, 80% of adults in North America have some form of ad blocking software. However, publishing ad content that seamlessly integrates within a consumer’s typical feed will reach these consumers more than an ad will- figuratively and literally. In fact, viewers spend nearly the same amount of time reading editorial content and native ads-2 seconds and 1 second, respectively. Furthermore, according to a study by digital marketing company Outbrain, 70% of individuals want to learn about products through content rather than through traditional ads, people view native ads 53% more than banner ads, and native ads increase purchase intent by 18%. Native ads also have a click through rate (CTR) 40 times higher than that of classic display ads.
Native ads have also been shown to have a strong ROI. For every $1 spent on Google Ads businesses make an average of $2 in revenue, for example. PPC ads can also boost brand awareness by up to 46%.
- Email Marketing
Email marketing is the oldest, yet most tried and true method of digital marketing. Email marketing refers to the usage of email to promote products or services. What makes email marketing so effective for D2C brands, is that it can also be used to develop and strengthen relations with current customers, while reaching out to potential customers. Email marketing also allows businesses to customize their messages and keep their customers informed.
9 out of 10 marketers use email marketing, and 81% of small businesses still rely on email as their primary customer acquisition channel compared to 80% for retention. But most importantly, this form of digital marketing is preferred by customers. In fact, 51% of US consumers said that the way they most preferred to be contacted by brands was through email, including 73% of millennials. 59% of consumers also say that marketing emails influence their purchase decisions.
Email marketing is also by far the most cost-effective and conversion-rich form of digital marketing. Email marketing has a median ROI of 122% in fact-four times higher than any other digital marketing channel. Additionally, according to Constant Contact, for every $1 a company spends on email marketing, they can expect to earn an average revenue of $38. An eMarketer survey also revealed that email marketing drives 25% of the total revenue from surveyed companies. But what has been shown to drive the most revenue are segmented email campaigns, which according to statistics, can drive as much of a 760% increase in revenue.
- SMS Marketing
Another reason why email marketing is very effective is because more and more people are using their phones as email devices nowadays. In fact, as of 2018, Apple iPhone and iPad together had over 1/3 of the global email client market share.
But just think how many people have phones that don’t use email. There were 7.9 billion mobile subscriptions worldwide as of 2019, with an estimated minimum of around 5 billion people owning some kind of mobile device that can send and receive SMS messages. Regardless of what type of phone someone has, SMS reaches virtually everyone. In fact, on average, 23 billion text messages are sent daily-or 270,000 per second. Therefore, an even more effective way to reach people on their mobile devices is through SMS marketing.
SMS marketing is also known as text message marketing. This digital marketing tactic is a simple method where businesses send out specials, coupons, promotions, alerts, and highly targeted permission-based “opt-in” texts.
The numbers of SMS marketing’s effectiveness are staggering. SMS messages have a 98% open rate, for one, with 90% of these messages are read within 3 minutes. SMS also has a 209% higher response rate than phone, email, or Facebook marketing means, with customers redeeming SMS-delivered coupons 10 times more than other types of coupon.
But what makes this such an effective form of digital marketing? People are always on their phones and actually like the messages! The average American checks their phone 47 times a day, for example . But compared to other forms of marketing, customers actually opt in and act on SMS texts. 48.7 million people this year are projected to choose to opt-in to business SMS messages, with 59% saying that a promotional SMS led them to visit a store in person or online.
Retargeting, which is also known as behavioral retargeting, or remarketing, is a form of online advertising that targets consumers based on their previous internet actions. Only about 2% of web traffic converts on the first visit. But through retargeting, consumers can still be exposed to a brand even after leaving a website.
The numbers show how effective and cost effective retargeting is. While CTRs and conversions naturally drop through time with typical display ads, the CTR rate actually increases by 10 times for retargeting ads, with a conversion rate nearly twice as high. Because of this CTR and conversion rate compared to other forms of digital ads, retargeting ad clicks cost anywhere from twice to 100 times less- a very attractive ROI.
Retargeting is also the best display advertising strategy when increasing brand awareness. A recent study which compared six different online display advertising, found that retargeting had the highest increase in brand-related search queries at 1,046%.
“Success today requires an understanding of both evergreen business basics and also the lasting ways in which the D2C model has permanently reshaped the industry.” This quote truly summarizes what D2C businesses need to realize- especially if they are an international company looking to break into the American market. As the world continues to advance and adapt to these unprecedented times, the D2C landscape is becoming more and more competitive. Businesses are becoming more and more sophisticated as technology advances. If D2C businesses understand business fundamentals, understand what has worked and what hasn’t in the D2C space, and understand future trends, there is plenty of room to become the next Outer. While the environment is considerably more challenging today than it was 10 years ago, the opportunities are still plentiful. It will just take a lot of research, work, and creativity to make it happen.
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 McLeod, James. “Shopify holds a healthy chunk of pot sales’ upside, says COO.” The Financial Post. October 30, 2018, p. 2.