What is a direct-to-consumer business model and how can it benefit your business?

Written‌ ‌by‌ ‌Salman Hossain Rohan on December 15, 2021

With competition getting fierce within industries every passing day, one question runs amok - what can businesses do to get a step ahead of their competitors? Well, a lot of companies have started switching to the direct-to-consumer business model, hoping it might be the answer. Offering benefits that the conventional B2B business model struggles to achieve, direct-to-consumer sales, or DTC sales, in the U.S. grew from $6.85 billion in 2017 to $17.75 billion in 2020.

Striving towards competitive advantage when e-commerce sales have reached its peak, integrating direct-to-consumer in their sales strategy is something a lot of businesses are leaning towards. Here's what you need to know about it.

What is Indirect Distribution?

Indirect distribution refers to the process where manufacturers channel their products through a third party to reach the customer. Widely known as wholesale distribution, manufacturers adopt this distribution model to focus on the core of their business while retailers sell their products for them. However, distribution agents or retailers will have a share of your profits, and retailers may sell your competitors' products alongside your own. Even though widely adapted, indirect distribution is not always the most effective under all circumstances. Here are some of the cons that come with indirect distribution:

  • Indirect distribution deprives the consumer of the right in-store experience. The retailer may not have enough knowledge of the product and might not be able to convey the company's message properly.
  • Retailer-induced inventory issues might result in the retail store not displaying the accurate amount of products in the physical store.
  • Having a third party involved increases the gap between the company and the consumer. It also means an increase in the time products takes to reach the customer.
  • Retailers stack products of multiple companies side by side since it's more profitable for them. Due to this, chances are your product will be showcased right beside its biggest contender.

What is direct-to-consumer (DTC)?

Direct-to-consumer or DTC is the distribution companies' way to cut off the middleman when selling a product. It refers to distribution companies selling their products directly to consumers through a channel organized and managed by the company itself.

DTC business opens the way for customers to buy products directly from manufacturers. It enables a business to monitor their customers' opinion of the items they produce firsthand. Direct-to-consumer strengthens the connection between the customer and the company itself. By eliminating the middleman, the company shakes hands with the customer in the most unadulterated way possible. Almost the entire foundation of the direct-to-consumer business model stands upon transactions made through a headless eCommerce website or a platform. A fully digitalized distribution management system is a part of it as well. This is generally looked at as an upgrade from the conventional B2B business model, as companies now don't have to share their profits with a third party. Still wondering why are large distribution companies adopting direct-to-consumer? A look into the benefits of DTC might answer this question.

The benefits of direct-to-consumer distribution:

Selling directly from manufacturing and cutting out third-party distribution companies or retailers means a company is ready to redesign its supply chain. While it may sound like a risk, it is still considered an upgrade by many. There are obvious reasons behind so many companies adapting to this business model. Here are the benefits that DTC offers and the reasons why direct-to-consumer companies are on the rise-

Cutting down on costs

  • Excluding the third parties from the supply chain means an obvious rise in profit. No third party involved equals to no money given out to intermediaries.
  • Having an online space relieves the company of potential startup costs. It also cuts down on transportation costs the company has to bear to reach the retailer.

Knowing what the customer wants

  • 59% of the people who shop online have already done their research at the manufacturer's website before purchasing a product from them. The direct-to-consumer model ensures you get to know how the customer behaves once entered the website.
  • Direct monitoring of customer behavior enables the company to overview which products are popular among their customers and which are not.

Faster and wider approach

  • Manufacturers can reach their customers faster through direct-to-consumer business models as there are no middlemen to pass through.
  • As tech moves forward, the need to rely on retailers to reach the customer comes down as well. The use of DTC enabled online portals makes sure a brand can reach their customers needing nothing but a smartphone.
  • Companies can respond to criticism faster as well, because the reviews of the products are shared directly with the company.

Brand image and reputation maintenance

  • The company selling directly to the customer, can have complete control over what they are trying to convey to their customers. The company solely manages its social media presence, product packaging and labeling etc.
  • Maintaining a stellar brand image helps a company build up positive communication with the consumers and create brand loyalty as the benefits of direct marketing. Customers who will buy products directly from manufacturers will see the image the company wants them to see. Consistency in brand image and marketing is what uplifts a company's overall value.

The promise of quality

  • Having the sales in your own hands means you get to maintain the product quality first hand - making sure your products reach the customers only in peak condition.
  • Direct-to-consumer business models eliminate the chances of the primary distributor or the retailer damaging or selling a defective product to the customer.

Direct-to-consumer is a major hit and is still on the rise as online shopping gets more popular every passing day. Amongst the choking market competition, a shift towards the direct-to-consumer business model might just be what your company needs.