Skip navigation

BLOGDigital Transformation Strategy: Direct to Consumer

by Randall CraigFiled in: Make It Happen Tipsheet, Blog, Digital StrategyTagged as: , ,

Many organizations have developed robust channel strategies over the years. A manufacturer sells to distributors. The distributor (who knows all of the retailers in their region) sells to the retailers. And the retailers (who know their customers) sell to them. This system vastly simplifies life for the manufacturer: Lower selling costs, as one need only deal with a smaller number of channel partners. Simpler collections, for the same reason. And less complexity, since shipping need only be to a small number of distributors’ warehouses.

Digital Transformation Strategy: Direct to Consumer

The fundamental flaw in this approach is that the manufacturer has no idea about the end customer. Nor does the manufacturer even have a relationship with the retailer. While it is true that the largest manufacturers make “direct” deals with the largest retailers, they still have no idea who the end customer is. To be completely insulated from your ultimate buyer is very difficult.

Manufacturers have traditionally looked to a number of approaches to solve this problem:

  • Market research
  • Warranty cards (which, sadly, most never filled in)
  • Post-purchase clubs and online enthusiast communities
  • Post-purchase customer support

It was into this environment that “Direct to Consumer”, or DTC was born. While it seems almost trite to say “with the advent of the internet” DTC was actually possible, there actually is some truth to the statement. But it wasn’t the internet per se that allowed DTC to flourish. It was only after a number of competitors realized that shopping patterns were changing, the existing channels were stagnant, and that many retailers were not actually adding any real value, beyond “curating” a stable of products for their customers.

The DTC digital transformation strategy is simple: disintermediate, capture margin that was otherwise lost, and collect data (i.e. build understanding) of those who are actually buying your product. And since you have that direct relationship, you can experiment directly (rather than use traditional market research), use a “land and expand” to sell related products, build a community of buyers, and then use this community to power third-party endorsement and viral marketing efforts.

With such an upside, the allure of the strategy is obvious. So why have so many traditional companies stuck with their traditional channel strategies instead of jumping on the bandwagon? Part of the answer may be lack of management (or board) courage. Part of the answer may be inertial: Why fix something if it isn’t broken? But the most compelling reason for not embracing this transformation strategy is the cost and risks during the transition. If a company chose to pivot to a DTC, their channel partners would (rightly) see the company as a sudden competitor… and dump them. This would lead to a sales disaster, something that most management teams (who are compensated on profitability targets) would not be keen to have happen.

As a result, there has been space for a large number of DTC start-ups to flourish, selling everything from razors (Dollar Shave Club) to sneakers (Allbirds) to eyeglasses (Warby Parker) to mattresses (Casper), to exercise equipment (Peloton), and more.

While DTC is no longer new, there still is a question about how a business can transform, adapt, and (hopefully) prevail over these disruptive competitors. The options depend very much on where you sit, and they are not mutually exclusive:

Transformation Strategy for Manufacturers: For those with the courage (and budget) to make a change, there are options.

  1. Create an independent flanker brand that begins selling DTC.
  2. Transition an entire line to DTC only.
  3. Acquire an existing DTC operation. This is what Unilever did when it purchased the Dollar Shave Club a number of years ago for $1 billion.
  4. Become a contract manufacturer for selected DTC brands.

Transformation Strategy for Distributors: This is a bit dicier, as distributors are being challenged both upstream and downstream.

  1. Negotiate exclusive deals with niche products that retailers cannot source elsewhere, and where it is unlikely that the product manufacturer will move to a DTC model.
  2. Diversify into providing services to retailers: this can be marketing, a tech operating platform, e-commerce services, consulting, training, etc. Since the value brought by the distributor is in the relationships with their customers (ie the retailers), the idea is to lean into this area, and diversify away from a product-only approach.
  3. Develop exclusive products, possibly with per-retailer branding and customization. This gives retailers something exclusive that is not available DTC. It also insulates the distributor somewhat from a manufacturer’s decision to end the relationship: at least the distributor has something to sell.
  4. Build a DTC operation of your own in a narrow niche. The distributor has always had a unique view on what is selling at the retail end, and what is coming down the pike from manufacturers. While the investment required for this approach is large, it remains an option if the alternative is a slow spiral to irrelevance.

Transformation Strategy for Retailers: The outlook here is bleak – retailers have been the recipient of a difficult one-two punch. Tech platforms (eg. Amazon) have decimated walk-in traffic, and challenger DTC brands have siphoned off away many of the highest-margin product categories. Nevertheless, there still are options:

  1. Move to an online-only model, swapping the cost of physical space for an online presence and digital marketing.
  2. Lean into your strong customer relationships, and transform your retail into a “community”, with a number of ancillary benefits.
  3. Move to an exclusive private-label model, with products that are only available in the retail shop. Stores such as Trader Joe’s and Simons (a Canadian department store) have done this successfully.
  4. For larger chains, make a deal with key DTC companies for shelf space for their products.

The question of how any of these strategies are DIGITAL transformation strategies is a good one, and speaks to the fundamental principle of digital transformation: the decision to transform must come first. Only once a strategy is set – in this case a DTC strategy or a DTC defence strategy – can tech be applied.

This week’s action plan:

DTC is not a new concept, but the speed of change in our society has been huge: everything from technology, to digital marketing best practices, to buying habits, to the economic and behavioral impacts from COVID, and so on. This week, consider the impact of DTC on your industry: who are the players and what are they doing (or not doing). Then begin the conversation with your colleagues – or with us – on what this might mean for you.

Does this topic resonate? Reach out to Randall: he can present it to your group.  (More presentation topics)
Download Randall’s professional credentials: Speaker credentials one-sheet or Management Advisory credentials.

Content Authenticity Statement: 100% original content: no AI was used in creating this content.

@RandallCraig (Follow me for daily insights) Professional credentials site.



Randall Craig

Contact us for more on Randall’s topics, availability, and audience fit.

Back to top