The FOMO about D2C

The FOMO about D2C; Authors - Geeta Lobo, Country Service Line Leader, Ipsos SIA (India) & Deepak H, Partner, Strategy 3, Ipsos India

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The author(s)

  • Geeta Lobo Executive Director, Social Intelligence Analytics
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Direct to Consumer (D2C) is the new buzzword in marketing. We now hear marketing gurus proffer this route as a means to rapidly scale up a business without having to invest time, effort and resources in building conventional channels. Recent successes of new generation companies like Mamaearth, Licious, Bewakoff, Wakefit, Wow Skin Science, The Whole Truth, Let’s Dress up, has created an impression that once a strong product-line or even just a standout solution is developed, it is easy to reach consumers and then scale up from a start-up to a mid-sized business. This has also forced successful consumer goods and durable goods companies to consider if D2C is the missing magic spanner in their toolkit. Before we examine these notions it is important to understand what D2C is and the ways in which it differs from alternative means to access demand.

D2C is many things:  There is a wide range of means being deployed under the broad catch-all of D2C. This includes use of social commerce platforms, fulfilment services, delivery services, payment aggregators, demand aggregators such as QVC and e-commerce enablers, or even selling directly on marketplaces.  Given the existence of specialist services that can be availed to create a direct access to consumers, it is not surprising that different combinations of these get uniformly described as Direct to Consumer channel, even though each of these combinations differ in the cost and control it affords to brands. In reality it would be a spectrum of service bundling ranging from mainly selling on a marketplace to aggregating and fulfilling orders all in-house as was done by Dollar Shave Club before its acquisition by Unilever.

 

The rationale of a D2C channel : Building a reliable channel on conventional lines is a complex, costly and time consuming endeavour. Going D2C lowers entry costs and allows you to focus resources on product and brand development. Conventional offline distribution channel works by allowing intermediate entities to share the gains of aggregating demand efficiently. But this also creates a distance between the brand and its customer base. While selling through an online marketplace helps bypass the time and cost involved in developing a conventional distribution network, the chasm between the brand and its consumer base remains because the consumer data usually stays with the retailer. 

While it is useful to think of D2C as a quest to get closer to consumers, the reality is that this channel is often availed by new brands because of practical constraints of developing conventional distribution channels. Even for start-ups, the success of a D2C strategy is contingent on many contextual factors. Most critical of these is an understanding of the purchasing behaviour for the category. Unless online search and purchase is already a part of the current behaviour, driving traffic to this channel can become a formidable task. Besides, the real value of this channel requires investment in analytics capabilities to leverage the data collected. In the absence of these factors even digital native brands are better off selling on marketplaces.   

 

Growing importance of the D2C channel: Though saliently associated with start-up companies it is not limited to these digital natives. Leading FMCG brands & Consumer Driven Businesses have forayed into this space or considering to, riding on the growth witnessed in the e-commerce business. Some examples are:

Company

Initiative

Products / Description

Tata Consumer Products

Tata Tea 1868

(www.tatatea1868.com)

A Luxury Tea Brand

Sonnet (www.tatacoffeesonnets.com)

A Premium Coffee Brand

Mars Wrigley Treats

www.marswrigleytreats.com

Chocolates & Confectionaries

ITC

www.itcstore.in 

Entire range of products

Duroflex

Sleepyhead (www.mysleepyhead.com)

Online only mattress brand

Unilever

https://www.theushop.in/

Premium brands

 

Demand side factors favouring D2C movement

While the D2C boat has been floated by an exponential growth in online retail, there are some favourable factors on the demand side that is putting the wind in its sails. The advent of digital era has strengthened the trend of Personalization. This is clearly visible in consumption of entertainment content where it is now possible to customize content stream to individual requirements and even individual experience moments. In online retailing, such customization covers meeting individual requirements in product selection, delivery scheduling, offers and payment preferences. Customization of this kind has driven a mindset change where consumers are now actively seeking product solutions and brands that meet their particular requirements. Another favourable trend is that of Responsible Consumption. On the affluent side of the consumer spectrum in mature and even in emerging markets, brand choices are being driven by aspects beyond the inherent value of the product or the mere aura of premiumness. Consumers are seeking assurances of responsible sourcing and sustainability in the choices they make. These shifts create greater opportunities for new brand offerings which address specialized or niche requirements.

 

Contexts where D2C works best:

While, we have not seen many case studies of scale in the D2C space yet, the reasons to consider the space is beyond revenue generation in many cases. Direct to consumer marketing self-evidently, is a closer connect between the brand and its user base. The closer brands get to their consumers, the better they understand them, enabling them to address their needs more effectively. Intuitively such proximity is advantageous especially for categories where requirements are varied and very specific- such as entertainment, health and lifestyle accessories. This would also be true of dynamic category contexts where needs tend to evolve rapidly such as fashion.

 

 

In our view the rationale for D2C as a channel strategy comes from two perspectives. The following framework outlines the scenarios where having direct access to consumers can add significant value.

   

Why?

 

 

Customer Engagement

Customer Retention

Category Creation

When?

Premium Products

 

 

 

Subscription Based

 

 

 

Innovative Launches

 

 

 

Unique Product

 

 

 

 

  1. Product Value Perspective (When?): To cover the set up and running costs, it is best if the products are either premium priced, subscription-based or there is a bundling opportunity to increase the basket size. Else, the cost attributes will not allow to accommodate for the running costs until and unless one sees this as an investment. The other compelling scenario will be driven by innovative & unique products, where there is a great opportunity to interact with customers directly.   
  2. Customer Value Perspective (Why?): D2C can also be a great way to create customer engagement, retention models depending on the product scenario. In many new categories that have been created (Eg: Meat Delivery, Personalized Beauty & Wellness, Health Supplements & Snacks etc.), D2C works best. 

We have also noticed products or business launched which do not really fit into the above Product & Customer Value Scenario. These seem to be largely driven by FOMO.

 

So, what is driving the FOMO ?

D2C may not be the first digital journey for many brands since they would have already been directly engaging with consumers through social media (Instagram, Facebook, Blogs etc.) D2C seems to be the natural progression from this stage with the added ability to sell. With so much of activity happening in the digital consumer space, many companies are looking to create a new channel (D2C). This sense of FOMO is mainly driven by beliefs about D2C which may not hold good for every situation.

  1. Growing base of online shoppers: India is estimated to have ~600 mn active mobile internet users, 340+ mn facebook users, 250 mn shoppers on Flipkart during the "Big Billion Day” sale. And the pandemic is expected to have driven even more transactions online.  
    Reality check : D2C brands like Licious has a unique customer base of 1 mn, Lenskart has a customer reach of 0.4 mn monthly, through both online & offline mode. Further, while the pandemic has created new shopping behaviours, not all of these will endure.
  2. Direct access to consumers & consumer behaviour data: The power of such data in driving retention and growing customer value cannot be understated.
    Reality Check In many business categories, D2C sales is largely contributed by marketplaces and not company owned websites. Which means, consumer data is not accessible to draw insights or understand behavior or create direct engagement programs effectively.  
  3. Better margins: Theoretically reaching out to consumers directly saves on the margins shared with channel partners.
    Reality Check: This seems to be a perception than reality in many scenarios. While the cost of entry is not much but there is higher cost of customer acquisition, logistics & fulfillment cost, marketplace margins etc.

Peer Pressure seems to be a major factor influencing every brand to look at making an entry into D2C, irrespective of relevance to their category or brand reality. While it is important to leverage the online e-commerce play through marketplaces or aggregator channels, not all brands are likely to be effective, operating through their own, native channels. A clear consideration of category realities, the role of this channel in the overall marketing strategy and investment plan for building backend capabilities are needed before taking this leap.   

 

 

The author(s)

  • Geeta Lobo Executive Director, Social Intelligence Analytics

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