middleman

Skipping the Middleman: Why Businesses Should Consider the Direct to Consumer Model

Ecommerce has completely disrupted not only how people shop, anywhere anyhow, but also the supply chain and distribution of goods. Brands and businesses are empowered in a way never before possible, most noticeably by cutting the middle men and selling directly to consumers. By adopting a direct to consumer strategy, businesses gain a stronger presence in both online and offline markets.

The Apple example

Dive into Apple’s branding strategies in the past and you’ll recognize the importance of a direct to consumer approach for success. Long before its growth streak, Apple’s sales were driven by big box electronic retailers. After launching an online store in 1997, the company turned around and aggressively expanding its own retail stores internationally. Since then, Apple has grown to become the number one tech company in the world.

But Apple isn’t the only success story. Nike, Puma, L’Oréal, Kiehl’s, and Dell have expanded their distribution channels and sold directly sell to customers by increasing their ecommerce distribution channels, specifically brand.com websites and mobile apps, and by establishing brick-and-mortar stores worldwide.

So why should other brands shift from a traditional distribution process through retailers to a direct to consumer model? How has this shift triggered such a phenomenal growth for these brands? Let’s dive in.

1. Direct to consumer is the best way for brands to build a strong relationship with customers

Directly selling to consumers gives brands a chance to gain complete control over their brand presentation. Whether through a brand.com website and/or a brick-and-mortar store, they’re able to portray a story that conveys the purpose and meaning behind their products and add a distinct personality to their brand so their products can shine.

Southeast Asian consumers are predicted to drive the ecommerce boom in the future as they are among the world’s fastest and strongest adopters of mobile and social media in online and in-store purchasing activities. According to Bain, 80% of digital consumers use social media or messaging apps to research products and connect with sellers. With online stores, the style of the images, the way the site looks, and even how the items are packaged when shipped, all add to a brand’s customer’s experience.

Take for example Kiehl’s, the global luxury skincare brand is currently expanding a full scale ecommerce strategy in Thailand by adopting an unconventional O2O campaign in order to create an omnichannel experience and in turn drive customer conversions as well as brand awareness. Figure 1 and 2 show the comparison between how products are presented to customers with its own branded website and brand presence on an e-marketplace.

Figure 1: Kiehl’s beauty products displayed on its own website

Kiehl’s beauty products displayed on its own website

 

Kiehl’s beauty products displayed on the website of its retailer partner

Kiehl’s beauty products displayed on the website of its retailer partner

“The advantage of having a brand.com is control. You can create your in store experience and highlight the products you choose. It’s not the same as selling through other retailers because you can’t create your own story.” – Tiffany Schmitt-Chretien, Senior Brand Commerce Manager at aCommerce.

Southeast Asian consumers tend to use physical stores as a platform to gain more knowledge of a wide range of products, touch and feel are very important. As opposed to selling through retail intermediaries, brands with a physical presence have the advantage of enhancing the whole shopping experience by providing in-person interactions. This can be something as simple as in-store music and lighting to set the mood, to themed decor pieces that reinforce brand identity. Sales assistants can also dress the part to create an immersive experience. Stores like Dior and Chanel often spray their signature scents in the air to play into all the senses – a unique element that intermediaries would overlook. Warby Parker, also moved from ‘click to brick’ back in 2013 to provide a special experience that could contribute towards building relationships with its customers.

Example: A Kiehl’s Store with their trademark industrial lab style visual merchandising

Example: A Kiehl’s Store with their trademark industrial lab style visual merchandising

Physical brick-and-mortar stores also allow brands to offer special events and in-store promotions exclusive for members only, which provides the opportunity to strengthen a customer’s return. This becomes a significant advantage for brands wanting to target the Southeast Asian market as consumers in this region hold unique views on special events. According to PWC’s report, consumers in Singapore, Malaysia, and particularly in Thailand place a significantly higher level of value on member-only events than global consumers – they value exclusivity.

From marketing to customer experience, brands are also able to better connect with their customers through direct channels, and in turn gain their trust. In 2013, L’Oréal, boosted its ecommerce efforts with new business models to support their digital marketing strategy, one of which involved launching the “L’Oréal Paris Make-Up” application. This platform allowed users to test products virtually and create a “brick-and-mortar” type of experience. L’Oréal was able to drive traffic through their application, which effectively strengthened its brand loyalty and contributed towards its significant growth of 29% of online sales in 2013.

2. A key opportunity to collect relevant customer data to drive sales

There’s a clear difference in quality of the data collected directly from a brand’s own channels and the data accessed by third parties. The customer analytics generated from direct channels are more specific to a company’s customers, whereas buying customer data from retailers may be too generic or irrelevant for customer segmentation purposes.

In owning a brand.com site, data is easily collected through techniques such as spotting trends with user’s clicks, identifying the most lucrative search terms and analyzing customer behavior on social media sites. In doing so, brands are able to assess a consumer’s decision-making process and analyze their purchasing behaviors to personalize future campaigns for its existing customers. This is done in the following ways:

  • Customise promotions and special offers to different audiences
  • Improve and/or create new products from product feedback
  • Find the most useful visuals and messaging approaches to boost the effectiveness of marketing campaigns
  • Provide better customer service by tailoring interaction with customers

And we can draw back on brands in the past which have been able to succeed through analyzing the data from consumer purchases. In 2013, Puma’s efforts to gather and analyze data on consumer interests had significantly improved their brand marketing and engagement strategies. Apple’s use of big data over the years has allowed them to analyze their user’s behavior, build new products and determine what new features should be added to their existing products.

“Ecommerce fills a gap when it comes to understanding consumer’s interests,” said Tom Davis, Global Head of Ecommerce for Puma

In owning a branded retail store, brands can also obtain indirect information from its customers – a phenomenon known as ‘in-store analytics’. The ability for brands to analyze in-store performance is vital to understanding consumer behavior and manage in-store marketing campaigns, as both factors facilitate shoppers deeper into stores for maximum exposure. In recent years, Topshop was able to install a WiFi-based analytics system and fitting call bells to analyze conversion rates, which provided better insight on how to refine store layouts and position in-store advertising messages more effectively.

Customer analytics therefore enable brands to discover the hidden preferences of their consumers and better understand their needs and demands. According to a 2014 Infosys survey, 78% of consumers claim to more likely purchase from a retailer again if they accurately provided offers targeted to their interest, wants or needs. It is crucial brands maintain strong control over customer data to better understand their customers, and in turn drive sales up.

3. A direct to consumer strategy allows brands to control their pricing structures

Pricing is a factor that significantly influences the overall competitiveness of a brand’s products and affects the generated sales revenue. By selling direct, brands are able to formulate their own pricing strategies to improve sales margins, rather than being influenced by the varying pricing structures set by retail partners. Nike for example, has taken advantage of pricing adjustments by commanding higher prices for its products: a factor which has significantly contributed to its phenomenal gross margins.

Brands also no longer face intermediary costs that once consumed a percentage of its sales so there is no need for brands to negotiate pricing with retailers and brands nor outspend the competition for better in-store position and promotions. SaleStock Indonesia, a fast-fashion startup based in Jakarta, recently took a proprietary merchandise strategy with efforts to eliminate all intermediaries. By vertically integrating their design, manufacturing and supply chain processes, they are able to provide on-trend clothing at a fraction of the general retail cost in midst of the increasing competition of other e-retailers such as Lazada and Tmall.

Costs & risks to consider

In light of all the benefits of the direct to consumer model, there are associated costs. In shifting to a direct to consumer strategy, brands need to take on all the responsibilities that were once in the hands of traditional retail intermediaries. From channel to cross-border management, and from tech-development to fulfillment and delivery, maintaining operations and logistics become a significant upfront cost. On top of that, more emphasis needs to be placed on marketing your brand and its distribution channels.

For well-established brands such an investment is not an issue but it may be a problem for brands with a smaller consumer base. In midst of the intense competition among brands in the ecommerce and the retail market, it becomes a challenge for start up brands to establish their share in the market place. One of the major difficulties faced by the clients of aCommerce is driving traffic to their newly launched online website, particularly those who lack a strong presence on social media platforms.

Another area of concern brands need to consider is the risk of channel conflict with its retailer partners. Retailers may view brands going direct as a threat, as brands draw more sales data for themselves. Back in 2007, Dell’s shift towards selling directly to end users and abandoning its reseller partner channels caused a negative reaction in their traditional sales channels. Also, Apple’s change in focus of its whole channel towards a direct selling model forced 55% of its partners to go toe-to-toe in competition, with 14%, 33% and 46% of these partners rating the channel conflict as high, medium and low, respectively.

The power of bargaining is definitely something to look out for.

In Southeast Asia, the chances of conflict are even greater. According to Praponsak Kumpolpun, Senior Brand Ecommerce Manager of aCommerce, ‘there aren’t many strict laws and regulations where you have to follow pricing guidelines – so the power of bargaining is definitely something to look out for’. For example, let’s take a look at the big intermediary players of Thailand such as Tesco and Lazada. In holding dominant market share, such retailers force brands to maintain pricing integrity. Brands which go against these retailers and adopt an aggressive pricing strategy will jeopardize their long term relationships with them.

However, there are also opportunities to generate sales and product awareness through cross-promotion. Multiple channels can be used to stimulate interest and encourage purchases. There are several ways in which brands may do this, some of which are listed below:

  • Offer a store finder on their website so consumers can discover its retailers
  • Give retail partners advertising space to market their unique bundle promotions
  • Promote in-person store events
  • Reward high-performance retailers with prominent listings on your site
Chanel’s store finder which includes both its own retail stores and its retailer partners

Chanel’s store finder which includes both its own retail stores and its retailer partners

Many brands nowadays incorporate “Online Channel teams” in their operations to structure a trade plan within their company. By doing so, they have the ability to adjust the slot of promotions across channels without a conflict of interest between channels. Such promotions may include bundle sets unique to each specific retailer. This strategy prevents price comparison across each channel. Alternatively, many brands sell and promote brand exclusive products. Figures 4, 5 & 6 below show the varying promotions of SK-II products unique to the SK-II brand and its retail partners.

SK-II exclusive offers on the official website

SK-II exclusive offers on the official website

 

Unique SK-II product bundle from Lazada

Unique SK-II product bundle from Lazada

Previous studies do not find strong evidence of cannibalization from direct brand to consumer channels. In fact, according to a study commissioned by Digital river Inc and completed by Forrester Research Inc., more than half of the manufacturers are reported to have seen a positive effect on relationships with other sales channels from its direct to consumer strategy.

What’s next for brands in Southeast Asia

Ultimately, the best approach for brands is to reach their consumers through both traditional and direct channels by adopting an omnichannel retail strategy. By doing so, they are able to benefit from selling directly to consumers and can use channel conflict to their advantage. The benefits of direct to consumer outweigh the costs and risks.