The Direct To Consumer Model has been doing well in the US in recent years. In Southeast Asia, we have seen the emergence of fashion and lifestyle brands aiming to leverage on the Direct To Consumer model too.
In this article, we cover the basics of Direct To Consumer Model including its benefits. In further updates, we will looking into 3 companies operating a Direct To Consumer model:
- HipVan, an online store specializing in designer furniture and lifestyle products.
- Pomelo, a fashion online store based out of Bangkok.
- Annabella Patisserie, a bakery specialising in delicious and affordable macarons in Singapore.
What is Direct To Consumer?
In a nutshell, Direct To Consumer companies/brands are selling directly to their target customers, bypassing retail markups. There is a higher degree of control over design, marketing and service quality.
A Direct To Consumer approach should fundamentally and essentially control the full value chain (not always the case) from design, manufacturing, distribution to marketing, and thus deliver a unique experience.
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Moreover, these companies operating on the Direct To Consumer model should have more bandwidth to experiment like a technology company. The analogy could refer to being agile and able to build, measure and learn faster than a traditional company. Whether it is experimenting new distribution strategies or partnering with physical retails or setting up pop-up shops all over the country (or in major shopping malls), a Direct To Consumer model is synonymous with speed, in most cases.
How does Direct To Consumer matter?
For the company, the Direct To Consumer model offers control over 4 key factors which help build a sustainable business model.
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End to End Experience
When a Direct To Consumer company sells, it is selling a package which consists of the purchased good along with a seamless customer experience. Being able to control the experience is what could set apart a Direct To Consumer model to traditional retail model by having more say in the value chain.
Data as a Key Resource
Since the Direct To Consumer model enables the company to control the experience, it also controls most, if not all, digital channels where it engages with the customer. Knowing the customer habits and consequently the spending pattern, preferences, and trends, the company is able to leverage on data to provide better offerings.
Beyond owning the data, the 'conversation' with the customer is a key relationship that the company can achieve through a Direct To Consumer model. The brand also have a better degree of freedom to work its narrative, messaging and positioning for its customers. Combined with strong data analytics, the personalization and effectiveness of digital strategies could be better achieved through a Direct To Consumer model.
Customer relationships also apply to the rest of the value chain, not the customer purchases the product. By working closely with all stakeholders, the Direct To Consumer model builds a long-term rapport which is in practice mutually beneficial to all parties.
By removing fixed costs, by reducing friction along the value chain and exercising wise pricing strategies, the Direct To Consumer model enables companies to find flexibility in experimenting with both their revenue and cost models. Thus, the potential margins are high enough to make business sense.
Customer Acquisition Paradox
Traditional companies use brick and mortar to attract, educate and convert customers. Direct to Consumer model has inevitably been using Facebook and Google as a mean to acquire, educate and convert customers.
In fact, companies in the Direct to Consumer space have spent millions in their Cost of Customer Acquisition (CAC) efforts that they made the internet giants such as Facebook and Google into modern days middleman in the consumer retail space. High CAC became almost equivalent to rent.
Furthermore, the cost structure should also include fixed cost such as customer service & product development and variable cost such as shipping and returns, which does not come down to a low single percentage of the product's selling price.
Spend to earn, earn to spend dilemma
Having mentioned the CAC as a major cost factor, there is one more key metric that is quintessential to the survival and profitable growth of a company: Lifetime Value, or Customer Lifetime Value (CLV).
The success of a Direct to Consumer model business is to workout this tedious (simplified) equation: CLV > CAC preached by every startup textbook.
In the Direct to Consumer model approach, the company could either sell an expensive item at a profitable price or sell a relatively cheap item and incite the customer to make repeat purchase (or upsell other products & services).
In both cases, Direct to Consumer model will require solid retention marketing strategies to bring the customer back for repeat purchases whether it is a week later, a month later, or even 4 years later. Thus, spending more on marketing might be a necessity in order to earn more.
In fact, the Direct to Consumer model is synonymous to the health snacks subscription model we covered last year, whereby both models share similar challenges.
Can Direct To Consumer model survive in Southeast Asia?
We believe it is yet to become a growing trend. There are, however, some great companies which adopted a Direct To Consumer model and have been around for the past couple of years. It shows that they have been able to sustain their business through their approach.