3 Reasons the Retail Industry Is Shifting to Direct-to-Consumer Sales
To appreciate why the retail industry is shifting to direct-to-consumer (DTC) sales, consider the case of Nike. In fiscal 2017, Nike’s DTC sales channel generated $9.1 billion in revenue, Fox Business reports. This accounted for 28 percent of Nike’s total sales, but more significantly, it made up 70 percent of the company’s sales growth. Nike’s DTC sales grew eight times faster than its wholesale channel over the course of the fiscal year.
The dramatic growth of Nike’s DTC sales exemplifies a trend that is sweeping the retail industry. DTC sales also dominated growth in the technology industry in the first nine months of 2017, increasing 34 percent to generate 13 percent of all e-commmerce sales, NPD says. Designer brand Milly is in the process of transforming its sales model in order to have 60 percent of its sales come from direct retail channels, according to Digiday. Here’s a look at three reasons why the retail industry is migrating to direct-to-consumer sales.
Generating Higher Profit Margins
One of the major advantages a direct-to-consumer sales model offers retailers is higher profit margins, explains Sufi Khan Sulaiman, overseer of surveillance systems provider Lorex Technology, a pioneer in the DTC e-commerce space. The company started off in the 1990s selling primarily through channels such as Costco, Best Buy, Home Depot and other brick-and-mortar chains. But in the process of liquidating inventory accumulated from returns, Sulaiman set up an eBay store to consolidate online sales, launching an early version of e-commerce. This generated 50 percent margins on the channel’s first million sales, which was partially reinvested in further e-commerce expansion. Sulaiman found that by cutting out the middleman, they could retain more of their sales revenue while generating additional revenue from follow-up direct-to-consumer sales. In 2018, the company is on track to generate nine figures in revenue and reach the ranks of the top 50 consumer brands.
Building Customer Relationships
Another major advantage of the direct-to-sales consumer model is that it gives retailers the ability to build long-term relationships directly with customers instead of depending on wholesalers access to customers. This improves the shopping experience and customer satisfaction because it appeals to consumers’ preference to buy directly from manufacturers so that they have a guarantee of authenticity as well as direct support from brands’ customer service. One brand that has leveraged the value of offering customers direct service is men’s clothing brand Bonobos. Inspired by the success of Zappos, which was fueled by superior customer service, Bonobos began building a super-responsive support team by implementing a policy of responding to 90 percent or more of phone calls within a half hour, generating 90 percent or higher response ratings on all email support, and responding to all emails within 24 hours. Following these principles helped Bonobos achieve a 53.5 percent direct traffic rate, an industry high.
Having direct access to customers also makes it easier to promote referrals. Because brands can communicate directly with customers, they can directly encourage customers to make referrals. A brand that has had significant success with this is shaving equipment manufacturer Harry’s, which along with the Dollar Shave Club helped cut Gillette’s share of the men’s razor business from 70 percent to 54 percent between 2010 and 2016. One key to Harry’s success was a prelaunch strategy which built anticipation through a waitlist while offering prizes to list members who referred others to the waitlist. For instance, referring five friends could win free shave cream, while referring 10 friends could win a free handle with a blade and referring 50 could win a year’s supply of free blades. Using this strategy, Harry’s was able to build a customer base of 100,000 members in just one week.
Higher profit margins, stronger customer relationships and increased referrals are three of the reasons the direct-to-consumer sales model is helping retail brands succeed. As more brands imitate the success of the direct-to-consumer model, the role of DTC in the retail industry will continue to expand. DTC will not replace traditional sales channels, but will supplement them, empowering brands to leverage and grow their sales.
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