“D2C offers great potential for manufacturers.”

Direct sales from the manufacturer to the end customer, or short D2C, are currently being discussed more frequently. Our Managing Partner Cliff Pfefferkorn spoke to the ECC Club, the community of the market research company IFH KÖLN (Institute for Retail Research). We are publishing a copy of the interview here.

Cliff Pfefferkorn
Managing Partner
eStrategy Consulting

What does the term D2C mean to you, especially for established manufacturer brands?

D2C is very often seen as a new sales model through which B2C and B2B manufacturers can sell their products directly to end customers, i.e. without wholesalers, retailers or specialist retailers. This is also true insofar as selling directly to customers is a central anchor point of D2C.

But: D2C offers many more advantages than distribution models usually do. And it also demands more. It therefore makes much more sense to view D2C as a business model – and a very powerful one at that, with a great deal of potential and complexity.

The most important thing to understand about D2C: It’s about building holistic, commercially healthy relationships with customers, in all phases of the customer life cycle, i.e. from initial product interest, through the accumulation of product knowledge and trust, to the first purchase – and then further, through all phases of owning and using the product, with all the challenges to be mastered along the way and, of course, with the long-term increase in customer lifetime value. This only works if the manufacturer also aims for this relationship between manufacturer and customer to always be valuable to customers and getting to know them better.

No retailer can do this as well as the manufacturer, because the manufacturer knows its products much better and knows much more about the use of the product via product registrations, IoT data, etc. than the retailer ever could. As a result, the manufacturer can – and must – succeed in ensuring that customers find the relationship with them more valuable than the relationship with their retailers.

The interesting thing is that many manufacturers are already intensively focused on building, shaping and protecting relationships with customers through their omnichannel marketing activities, for example through good product descriptions and advice on their own website, chat-supported customer service, IoT-driven apps for better use of products or product registrations. By influencing and forming the transactional moment in the customer journey themselves, i.e. by setting up their own web stores, they are now closing the gap and opening the door to many exciting strategic playing fields at the same time.

What advantages does D2C offer for manufacturers?

The list of benefits is very long and ranges from top-line design (sales) to bottom-line aspects (margin) and product development. That is why we are talking about a business model, not just a sales model. As a manufacturer, you should think about D2C:

• Direct monetization of your own online reach: especially for high-interest products, visiting the manufacturer’s website is already a standard part of the customer journey anyway. After all, no one should be able to provide as good and comprehensive information about their products as the manufacturer itself. So why not monetize this reach directly? This also creates additional flexibility, especially in times of crisis.
• Complete control over the brand experience: In principle, of course, you trust your retailers, but you have little or no influence especially on the moments-of-service and after-sales. A D2C manufacturer can also influence online marketplaces themselves. This means they do not have to leave the selling on these marketplaces to retailers, who may not have any experience with them and do not offer customers a good shopping experience – which they transfer to the manufacturer brand.
• Building long-term, valuable and customizable customer relationships: Omnichannel marketing by manufacturers has always aimed to build direct relationships with as many customers as possible via their own digital channels. Inhouse e-commerce now makes it possible to learn even more about customers, to develop relationships in an even stronger and more individualized way and to actively develop the customer lifetime value of each customer.
• The reduction of relative marketing costs, i.e. the share of marketing to sales: no marketing is as cost-efficient as the digital, data-driven and personalized reactivation of existing customers via your own channels (website, app, newsletter, etc.), because customer relevance is high, and no budgets are required for media or performance marketing.
• Create sales channels for innovative product ranges that retailers cannot or can only sell to a limited extent: This can include, for example, circular economy strategies with certified refurbished old appliances. And, of course, this also involves digital services from manufacturers, which are often offered as subscription-based business models that cannot be sold via retailers’ checkout processes.

These are just some of the advantages: The spectrum is huge.

Which things define a successful D2C business?

The most important and overarching success factor for D2C is that the strategy is consistently thought through and implemented. This has many facets.

It starts, of course, with clean, error-free and scalable operational and technical processes. Especially E-commerce technology is constantly developing innovatively, but it is also democratizing and providing ever better standard solutions. Nevertheless, a clean operational and technical setup is a must. Otherwise, one won’t be able to properly utilize all the data- or even AI-driven advantages.

Good logistics geared towards B2C is also a barrier to entry that needs to be overcome. It is completely different to send pallets in B2B business or individual parcels in D2C. Logistics must be well connected to customer service, for example if something is missing in the parcel. And there are also returns.

But both the operational-technical skills and the logistics only ensure that the manufacturer can sell well. Now there are two additional levels that ensure that he actually sells:

1.  One must professionalize ones online marketing, i.e. building traffic, and trim it for performance and conversion – with much larger budgets
2.  One must think in a consistently customer-oriented way. Customer centricity is becoming essential. It is also very important to give your own sales channel a sufficiently attractive value proposition. Even a top brand will not sell through its own online store if customers can buy the product at a better price and with faster delivery from a retailer or marketplace.

What are the major hurdles to consider for D2C success? And how can one overcome these challenges?

There are two major hurdles to overcome:

1) the “budget and complexity” hurdle and 2) the “transformation” hurdle.

Budgets and complexity are increasing – it is a new business model that operates on different levels than for example omnichannel marketing alone. Sales and service are added, which are managed in an integrated way, with a much more complex operational setup and tech stack. One can only manage this if one has a good business case and manage the business model like a business.

You also need more sophisticated business monitoring, which includes in particular a whole new set of KPIs, because in addition to product KPIs, there are now also customer KPIs such as customer base, customer lifetime value, churn, customer acquisition costs and customer retention costs. This also includes sophisticated performance monitoring, with good measurement of all driver-impact logics. But omnichannel marketing & sales is fundamentally ideal for this.

The second major hurdle is the transformation hurdle. This is probably the most underestimated challenge, even before the topic of customer centricity and at the same time linked to it. Of course, there will be discussions with existing retail partners, especially if, for example, the prices in your own D2C store become competitive. At the same time, one thing is clear: without competitive prices, you won’t sell anything in your own D2C store.

Internal working methods and planning and prioritization activities also need to be transformed. If successful D2C requires marketing, sales and service to create integrated experiences, then they must also be managed in a more integrated way. However, manufacturers also benefit from these transformations overall and across the board.

Manufacturers just need to be aware that the transformation must be approached just as consistently as the development of their own capabilities and the development of competitive value propositions for the D2C channels. Everything must be coordinated. But then D2C can also unleash its full power as a powerful business model for both B2C and B2B manufacturers.