D2C e-commerce and how to get it right

Consumer brands have been seeking to establish direct relations with end customers for a range of reasons. For example, to generate deeper insights about consumer needs, to maintain control over their brand experience, and to differentiate their proposition to consumers. Increasingly, they also establish these relations it to drive sales. McKinsey explains how consumer brand can get D2C e-commerce right.

The COVID-19 outbreak has accelerated certain business trends, including the massive consumer shift to digital channels. In the United States the increase in e-commerce penetration observed in the first half of 2020 was equivalent to that of the last decade. In Europe, overall digital adoption has jumped from 81% to 95% during the last few months. Thus, for any brands that have considered establishing a direct-to-consumer (D2C) channel in the past and decided against it, now is the time to reconsider.

Limited experience with D2C

Most consumer brands have a limited experience with direct consumer relationships and e-commerce. This is because the majority of consumer brands are used to selling through intermediaries. As a result, they often hesitate to launch an e-commerce channel despite the opportunities it offers. 60% of consumer-goods companies feel even moderately prepared to capture e-commerce growth opportunities. Consumer brands can overcome their concerns by having a deliberate strategy.

Revenues

Leading brands thoughtfully consider their revenue goals for D2C and ways to best to meet them.

• D2C channel role
  Start by defining the role DTC should play for the brand. Does the company aspire mainly to generate incremental sales? Or pursue other objectives, such as brand differentiation and insights generation? Or a combination?
• Assortment
  Many brands choose to adapt their D2C assortment to the specific requirements of their sector and consumers. Successful D2C players usually limit their online portfolio to the products that provide a good balance of revenue potential, operational feasibility, and consumer benefit.
• Prices
  As a general rule, online prices should be on par with retail prices. But premiums can be justified by offering additional benefits, such as free delivery and returns, exclusive merchandise, or product personalization.

Cost

Best-practice companies manage all elements of the online shopper journey to keep the costs of D2C in check.

• Prepurchase
  Marketing cost can be optimized by making the most of both paid and owned media investments, such as social media channels and outbound customer relationship management (CRM). Key efficiency indicators to watch include the customer acquisition cost (CAC) and the marketing return on investment (MROI) at the level of individual customers.
• Delivery
  Partnership fees are a key driver of supply-chain cost. Large corporations will want to establish frame contracts with logistics providers for all their brands. Lighter product packaging for the online assortment and flexible shipping options, such as click and collect or delivery to partner retailers, can help keep shipping costs down.
• Postpurchase
  Acquiring a new customer can be up to five times as costly as retaining an existing customer. This is why managing customer lifetime value (CLV) is crucial to D2C profitability. Consumer brands will want to maintain relationships with existing customers and keep engaging them with new touch points. A great D2C experience typically generates a “lock-in” effect that leads to superior economics.

Customer-centric capabilities

D2C requires a wide range of specific capabilities in addition to a compelling consumer offering. These include technology, operations, data and analytics, and an agile operating model. The common denominator is customer centricity.

Getting started

Before investing in technology or hiring an agency to build the website it is necessary to clarify the following. It is important to force clarity and assess relevant trade-offs, such as linkages to other channels and existing channel partners. In addition, D2C requires a clear view of assortment and pricing as part of a broader channel strategy. Furthermore, brands do not have to do all the heavy lifting alone. However, they will need to weigh the trade-offs of buying, building, and partnering extensively.

There are multiple ways for a consumer brand to begin the D2C journey. Brands that are just starting with e-commerce, using online marketplaces and established apps can be effective ways to learn about what works well online. In the other hand, other brands that are more digitally mature may want to scale their online presence to engage consumers and generate insights on what works well but hold off on launching e-commerce. Shopper behavior is changing quickly. Thus, brands will need to move with urgency to determine how best to connect with their customers online.