For generations, we’ve done virtually all of our weekly shopping at large stores where we can buy everything we need at one convenient, centralized location. However, long before these handy “middleman” companies existed, there was a simpler, more personalized way of buying and selling—the Direct-to-consumer (DTC) method. Though it obviously was not known as such at the time of its creation, his model has dominated as the world’s purchasing model since the earliest days of trade.
Since its inception, DTC has survived many ups-and-downs, reinventing itself as needed in order to adapt to the current climate. Though it suffered a few setbacks in recent decades, this indomitable concept is quickly making a Phoenix-life comeback in the modern era. Let’s take a look at DTC’s fascinating past and present in order to project what to expect in the enterprising years to come.
The Rise of the Direct-to-Consumer Model
DTC dates back to the first known trading practices, roughly 40,000 years ago during the Upper Paleolithic Period. This ancient era is considered one of the major revolutions in the history of the human race. Money hadn’t been invented yet, but hunters traded goods directly with “consumers” who had items they needed in exchange. Most such deals took place locally since vehicles for long-distance travel hadn’t come about yet. During these times, trust and personal relationships were invaluable commodities of their own.
Fast-forward several thousand years to the 7th century BCE, when the Lydians introduced the world’s first coin, known as the Stater. By this point in history, people were becoming more mobile, and currency use slowly began to replace bartering systems. Before the minting of coins, many used nuggets of precious metal, but it was a nuisance to weigh such items. With the issuance of standardized, government-backed coins, that problem was eliminated.
Ultimately the Lydians became so infatuated with commerce that they were known throughout the region as “People of the Market.” Traversing the lands from the Aegean Sea to the Black Sea (in what today is modern Turkey), their merchants were one of the earliest examples of middlemen. In other words, they became one of the first threats to the Direct-to-consumer model…but they’d hardly be the last. In this era of buying and selling between strangers, trust to a backseat, with hard currency filling that void.
During the following millennia, the world changed drastically. Transportation methods became more abundant, faster, and more accessible. Countries formed and adopted currencies. Local trade still took place, especially in rural areas. But there was no turning back the tide. Between the 18th and 19th centuries, small shops popped up to sell a variety of goods so customers could conveniently get all their basics in one place. Meanwhile, industrialization led to urbanization and the growth of cities packed with retail and grocery stores. DTC wasn’t dead, but it was becoming increasingly irrelevant. Or so it seemed.
However, many entrepreneurs saw an incredible opportunity. Why not set up shops to sell one’s own wares directly to customers without the middleman cutting into the profits? Early US-based examples of this concept include the H. & D.H. Brooks & Co., opened in 1818. Today that company still operates under the brand Brooks Brothers, which at one point maintained 424 stores around the globe. Another example is Lord & Taylor, which opened in 1826 and sold apparel for nearly 200 years before being hard-hit by the 2020 COVID-19 pandemic. Other long-established brands have faced similar economic crises in recent years, such as Macy’s, Barnes & Noble, and Sears.
America wasn’t the only nation filled with intrepid DTC-minded business people. In France, harness maker Thierry Hermès set up shop to market his hand-crafted goods to nobility. Today, Hermès International S.A. continues to thrive as one of the world’s most iconic fashion houses, with leather handbags selling for thousands of dollars (while vintage bags have reached up to $380,000 in online auctions). Customers “trust” the brand because of its international reputation, even if they don’t have a personal relationship. Clearly, this Direct-to-consumer model worked out well for Hermès. In fact, to this day it continues to obsess over maintaining control over its own suppliers, which is one of the tenets of sound DTC business.
The Direct-to-Consumer Model (A Transitional Period Case Study)
As one of the oldest proto-DTC businesses, Hermès is not only alive; it’s still setting trends. Thus it makes a fascinating quick case study. What factors contributed to its longevity and unparalleled success? What lessons can be learned from this fashionable purveyor of luxury goods?
As mentioned above, Hermès loves to control every aspect of the manufacturing process, starting with the supply chain. Through vertical integration, the company procures other companies within the production stages, even venturing into crocodile farming to acquire the skins needed for their expensive goods. That particular practice landed the brand in hot water over ethical issues related to the treatment of the animals, but they oversaw the necessary changes to correct the problem while retaining control over their farms. In 2015, Hermès’ tannery division also bought Tanneries du Puy, bringing yet another company under its umbrella.
With materials sources internally, the production of the bags comes next. Every Hermès bag is meticulously hand-made by highly-trained experts, using unique and painstaking methods like saddle-stitching. Before being allowed to assemble one of the trademark Birkin handbags, artisans require at least five years of training. Every bag is made by one individual, with Birkins requiring up to 48 hours to complete.
Hermès customers know all these little details. They’re masters of Hermès trivia, and Hermès knows it because it’s all part of the brand story they’ve been cultivating for nearly two centuries. Their reputation for excellence and craftsmanship is a significant factor in building brand loyalty. It is this type of loyalty that the most successful Direct-to-consumer brands are able to generate and capitalize on.
Another trick from the Hermès playbook involves the creation of desire. Customers buy new merchandise directly from Hermès boutiques, but in many cases, they can’t purchase what they want from those stores. For the coveted Birkins, waiting times can exceed a year…assuming the customer is able to navigate the mysterious process for completing a purchase. Remember, Hermès began by selling to nobility and at the turn of the 20th century, it was making saddles for the Czar of Russia. Today, nobility has been substituted by celebrities, and Hermès is very careful to cultivate its image by controlling not only how its bags are made but also who buys them. In other words, they generate an air of exclusivity, driving up demand.
While Hermès has clearly taken the DTC ball and ran with it, it is not entirely representative of how most DTC companies function in the 21st century. Many present-day businesses simply don’t have the history nor the hyper-zealous legions of wealthy clients. However, this doesn’t mean they can’t learn from Hermès; it simply means they need to adapt the lessons to today’s online marketplace.
Direct-to-Consumer Sales in the Age of the Internet (A Present Day Case Study)
During the 1980s, the world entered into yet another groundbreaking era, with the advent of the home computer. By 1983, researchers were able to use a “network of networks” called ARPANET, which would become the Internet we know today. However, for over a decade, most personal computers were limited in their ability to access information other than through floppy disks. All that changed on August 6, 1991, with the creation of the World Wide Web.
Within a few short years, businesses were using the Web to create online stores, selling products directly to customers who were sitting at home. Once the company received the order, they would package the item and ship it directly to the customer’s home address, just like mail-order businesses had operated for years prior. It took some time to catch on, but soon e-commerce began to rival traditional brick-and-mortar stores for business. Within a couple of decades, the entire industry had changed.
Today, consumers take for granted the ability to buy anything they want, wherever they are, thanks to mobile technology. They can compare prices instantly, read customer reviews, and check for the availability of in-store merchandise if they don’t want to wait for an item to be shipped. Many businesses have been unable to successfully adapt to the myriad changes wrought by all this new technology. Obvious cases-in-point include book stores, which faced virtual obsolescence following the meteoric rise of Amazon.
Others, however, recognized the incredible potential for small businesses to seize the day. Indeed, Amazon itself was one such start-up. Jeff Bezos famously left a good-paying job in order to sell used books out of a garage. From that humble beginning, Bezos oversaw his company’s growth into a $1.14 trillion market-valued behemoth. Amazon was never purely Direct-to-consumer, but Bezos eventually figured out the same vertical integration tactic used by Hermès and others when it launched the Amazon Kindle.
As noted by analysts, the company began selling the Kindle eReader virtually at a loss. Why would any business commit to making and selling hardware without a profit? The answer was simple. Bezos had circumvented the home computer and placed a direct purchase platform into the hands of millions of customers. Now they could buy books easier than ever before, straight from their Kindle tablets linked to their Amazon accounts and credit card information. But Bezos wasn’t finished. Soon, Amazon went all out, marketing the Kindle Fire as a direct competitor to the much pricier Apple iPad and other popular tablets. Bezos has even admitted his strategy, noting, “We sell the hardware at our cost, so it is break-even on the hardware.”
The idea wasn’t to profit from the hardware but to bypass as many middlemen as possible. This was done, again, by putting an affordable, digital storefront into the hands of the customers at home. Now they could buy not only books, but also streaming video and audio, games, and mail-order merchandise from literally anywhere, without a phone or computer, and with only one click.
DTC Pros and Cons in Today’s Marketplace
As we’ve seen from the above short case studies on Hermès and Amazon, DTC concepts offer strong advantages when done right. The more aspects of the process a company can manage itself, the more streamlined and effective they can become, maximizing profits while diminishing factors beyond their control. To offer a truly wide variety of products and services, like Amazon, the business may only be able to use DTC principles on certain parts of their operation. However, models such as Hermès, which sell a limited range of products at very high prices, can afford to manage more and are better off controlling as many elements as possible.
Both brands, as with booming DTC operations, rely heavily on brand loyalty. That takes time to build and, just as importantly, to maintain. Customers are finicky and often follow trends, so even though a business might build a stellar reputation for itself over the course of several years, it can all come crashing down virtually overnight. Consider The Learning Company (TLC) founded in 1980 with revenues that grew at an exponential rate for nearly a decade making educational software, prompting Mattel to buy the brand for $3.6 billion in 1999. Mattel lost $86 million that year from the deal, costing the CEO her job while the company dumped TLC for a tenth of what it had paid.
The Mattel/TLC fiasco wasn’t the only deal gone wrong that year. 2000 marked the bursting of the “dot-com bubble,” which brought many Direct-to-consumer brands to their knees. Like The Learning Company (which was not itself a DTC business), many dot-coms were spending more than they were bringing in, trying to grow big and grow fast. This “growth over profits” mindset doomed countless start-ups as they attempted to raise awareness of their brands and transform into publicly traded companies. The results were disastrous as businesses folded like dominoes, one by one filing bankruptcy as the Nasdaq witnessed a ~77% drop.
However, twenty years after the fallout, Direct-to-consumer businesses have made a strong comeback, after learning many valuable lessons. After all, the basic model has always been sound, i.e. to have as few third-party outsiders involved as possible and to simply deal directly with buyers. The Internet is still a powerful enabler for doing business that way, yet along with that convenience comes a new set of troubles. Some of the more pressing issues that DTC businesses must tackle today relate to cybersecurity. Capturing and storing customer data, including credit card information, makes businesses a juicy target for criminal hackers. Nearly every year, major companies including Yahoo!, LinkedIn, Marriott, eBay, and more have reported massive data breaches with account information compromises numbering in the millions (and in some cases billions).
For DTC companies selling physical products, logistical complexities can also turn into nightmares. Even those brands that manufacture and market everything themselves typically lose control once the items go out for shipping (with Amazon being a notable exception, now that it has its own vehicle and drone fleets). However, USPS, UPS, and FedEx all offer tracking services that make it easier than ever to ensure items reach their intended destinations. This is a critical feature when it comes to DTC. After all, it doesn’t matter how good a product is if the customer never receives it in the mail.
Another inherent disadvantage with DTC is that the customer can’t touch or feel or try on the product before buying. This leads to the risk of higher rates of product returns. It also points out an important issue related to the way customers shop. Often, people go shopping as a leisure activity. They may not need a new shirt, but they might feel bored and want to go look around anyway. Invite a friend and it becomes a social activity.
While out, many succumb to the infamous impulse buy, nabbing items they didn’t plan for but can’t live without. One of the challenges for DTC is to simulate such shopping experiences online. Indeed, the notion of making e-commerce pleasurable enough to entice customers to engage in it brings us to our next section!
DTC Done Right
Some of today’s top DTC brands are focusing their energies on apparel, cosmetics, and personal hygiene markets. Notable “Internet famous” brands include Glossier, Quip, ThirdLove, Outdoor Voices, Harry’s, Everlane, and Summersalt, to name a few. While these aren’t household names yet, CNN notes that these businesses have less overhead, fewer middlemen, more flexibility, and far more responsive customer feedback (which makes sense, because they rely more heavily on reviews that significantly impact the perception of potential new customers).
At a time when legendary stores like Macy’s are shuttering stores and relying on last-ditch efforts to secure enough financing to survive, 30-somethings cutting hand-made organic soap at home are raking in millions. Behold Jack Haldrup of San Diego, founder of the subscription soap for men brand, Dr. Squatch. One of his brand’s YouTube ad campaigns, “Save Your Skin” (produced by marketing agency Raindrop) won the top spot on YouTube’s TrueView ad leaderboard after getting 90 million views.
Currently headquartered in Little Italy, California, Haldrup ensures Dr. Squatch maintains its low overhead and focuses on online sales directly from its website. Although there is nothing new about the types of soap Haldrup produces, a major distinction is the niche he’s marketing to—men willing to buy natural soap products, but who don’t want to be seen as such. “This is for the guy who would never normally consider buying natural products because he thinks they’re for hippies,” Haldrup told the San Diego Union-Tribune.
The brand’s frontpage invites readers to “Feel Like a Man, Smell Like a Champion.” Since soap orders quickly went through the roof, the company soon added toothpaste, shampoo, beard oils, colognes, shaving cream, and other male-centric products that bolster the vibe it’s aiming for. The high-quality items combined with a refined customer base, superb client-savvy branding, and a viral social media campaign have turned Dr. Squatch into a poster child for how to do DTC right. They aren’t simply delivering a bar of soap that smells like “Pine Tar” or “Citrus Cedar.” They’re delivering a fun experience and a way for their customers to purchase products they want without feeling uncomfortable about it.
The Future of DTC
Logistics leader Hollingsworth recently noted that “global e-commerce sales are expected to hit $4.9 trillion by 2021.” Much of those sales will be from digitally native companies, i.e. ones that exist predominantly online as DTC models. Meanwhile, according to Retail Dive, research indicates that 81% of US consumers intend to buy at least some products via DTC within the coming five years. Among the reasons listed for why they’d be shopping DTC: better customer service, easy returns, and automatic replenishment (for subscription-based models such as Harry’s). However, when looking at the stats closer, we see that the percentages of people citing these reasons are relatively negligible.
So what are the “real” reasons people buy, or plan to buy, DTC? As discussed, a lot of it has to do with brand loyalty and creating that authentic brand experience in an exciting, innovative, and consistent way. Customers want to “feel” something that they can’t get from shopping in person, and DTC offers a flexible and unique ability to control that. Consider Dollar Shave Club. It’s a “club,” meaning customers are “members” of something. Perhaps not as exclusive as Hermès, but in a way, that’s the point. Hermès wants to create exclusivity and sell bags at exorbitant prices that few can afford. Dollar Shave Club invites customers into their fold, where it is not only okay to be frugal, but actually the smarter decision.
To succeed with Direct-to-consumer marketing in the coming years, companies must pay as much attention to their customer avatars and brand experiences as they do to their products. They’ll need to find ways to craft concepts of particular lifestyles that they envision their customers want to participate in. They have to keep going beyond surface-level mission and vision statements and truly build these elements out in ways customers feel a part of and want to interact with on a regular basis. Of course, along with all these tasks comes the age-old issue of advertising and marketing it all, of finding those customers and enticing them to click a link and start their journey from casual viewer or reader to paying shopper.
As Bonobos CEO Andy Dunn put it, “Digitally native vertical brands are maniacally focused on the customer experience and they interact, transact, and story-tell to consumers primarily on the web.” Notice he mentioned “primarily,” because sometimes creating customer experiences involves in-store touchpoints. In such settings, consumers can directly speak and interact with brand representatives who authentically represent the local groups they want to cater to. Since these representatives serve as the customer’s first impression, it’s important to understand the customer first, through the collection and analysis of customer online data.
Such insights, if used correctly, can also drive the decision-making process for brands ready to launch permanent physical stores in select locations. Choosing not only the right state and city but even the right neighborhood can go a long way towards building meaningful connections within the community. Over time, the brand becomes synonymous with the area, and aspects of the community can even be ingrained into the advertising and marketing. Consider Starbucks, once a small local cafe in Pike’s Place, Seattle. Today, the international coffee powerhouse continues to “act local” through unique store designs tailored for the areas they operate in. Walmart, at least partially, bought into the same philosophy when it ventured into its smaller Neighborhood Markets.
Many DTCs are experimenting with locations in major cities, such as New York, San Francisco, and Los Angeles, but it’s critical to understand that the function of these stores is different from traditional retail outlets. While most Direct-to-consumer brands do make sales in their brick-and-mortar locations, their marketing strategy focus is still on e-commerce. Having physical touchpoints, whether permanent or pop-up, adds a level of legitimacy and allows consumers to meet brand ambassadors and take away live experiences to share on social media, which is where many brands acquire customers in the first place.
It’s an interesting dichotomy, but it works. As America’s big box stores struggle for relevance in the ongoing retail apocalypse, the future will see DTC brands venturing into the gap to replace them…but hopefully not grow so large as to mirror their downfall. Just as big companies should take notes from their upstart rivals, so too should Direct-to-consumer brands look to the recent past to avoid the pitfalls of their predecessors. DTC entrepreneurs must study not only the past and present of their DTC peers, but also those of their traditional counterparts. Because as the expression goes, “Those who do not learn history are doomed to repeat it.”
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