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In India, we’re obsessed with established brands and the trust they bring. Just a look at the ads you see on TV or in the paper can prove this. They feature motifs of ‘reliability’, ‘promise’, and age-old ‘traditions’ — particularly in the consumer goods and FMCG segments.
But today, we’re happy to take the leap on new, untested, and often obscure labels we find online selling clothes, groceries and whatnot. So, what’s changed?
Yes, these new-fangled companies are fulfilling niche demands. However, it’s not just the product, but also how it’s distributed that counts. With a smartphone in every pocket, access to new products has increased, along with our expectations of the product quality and user experience.
But how can a manufacturer reconcile quality customer experience with business growth? The direct-to-consumer (D2C) business model has cracked the code by elevating distribution, marketing and customer service efforts.
And the legacy brands it challenges must take notes, lest they lose out on a $100 billion opportunity. That’s why Nike is throwing its weight behind its D2C operations and FMCG behemoths ITC and HUL are investing in the space.
Why the D2C model wins
At the core of it, the success of D2C companies stems from their independence from the intermediaries of conventional supply chains. These companies engage with the end customer directly, benefiting from the intimate customer relationships in many ways. For instance:
They can increase their profit margins by reducing distribution costs.
The one-on-one customer relationship ensures that the company has access to and full control over user data.
D2C companies have better control over their brand experience because of the lack of middlemen and reduced dilution of messaging, quality control and buying experiences.
These companies can predict consumer tastes and preferences by studying trends and patterns emerging from user data.
Legacy brands fall behind
The importance of joining the D2C race isn’t lost on legacy brands. Many established brands have opened up direct-to-consumer sales channels by either creating their own presence online, or by acquiring existing digital businesses. But for companies with established distribution channels, it’s not an easy undertaking.
Poor unit economics
For legacy brands that are set in their ways of doing business, incorporating a D2C channel into their operations can upend their functioning. Routing products through this channel results in higher costs of storage, packaging and last-mile delivery as against selling in brick-and-mortar stores.
Challenging well-entrenched intermediaries
It can be difficult for established household brands to cut ties from the intermediaries who have thus far supported their operations. Any legacy brand looking to go the D2C way must trade complex supply chains for shorter distribution cycles via e-commerce or social commerce, which comes as a difficult challenge to the status quo.
Without their trusty middlemen, it can be a gamble for brands to carry out order fulfillment through their own channels. There’s always the risk of poor fulfillment leading to bad customer experience that could tarnish an established brand reputation.
Competing with high e-commerce standards
By selling directly to their customers, brands aren’t just competing with D2C companies but also with the logistical standards set by e-commerce giants such as Amazon. They must choose between outsourcing fulfillment operations or building them in-house, all the while bearing in mind the magnitude of their competition.
The FinTech factor
Adding a fintech layer could give legacy brands the edge they require to compete with their thoroughly digitized pure-play D2C counterparts. Here’s how –
Focus on customer retention
Legacy brands may lament the loss of intermediaries, especially retailers that brought them customers. However, by operating through digital channels, they can leverage FinTech capabilities that can help build a robust customer base.
For example, plugging financial products into the user journey can remove hesitation or even allow customers to place larger orders. This in turn increases the number of returning customers, the platform’s gross merchandise value, average order value and ultimately, customer lifetime value.
Tackling unit economics
Customizable point-of-sale financing like buy-now, pay-later improves product stickiness, thereby lowering the cost of customer acquisition. Legacy brands can offset high logistical costs typical of the D2C model against low CAC to improve their overall unit economics. Moreover, embedding financial services unlocks alternate revenue streams. Platforms earn a percentage of each loan disbursed through their app, or can charge fees from partner-lenders.
In addition to the weight that their vintage carries, established brands looking to enter the D2C fray can level up by introducing FinTech capabilities. Whether it’s payments or credit, by packing these into their user journeys, brands transitioning to D2C can improve their chances against formidable competitors by delighting customers.
D2C companies derive their strength from absolute ownership of their user data. By making it available for underwriting, legacy brands testing D2C waters can put this data to good use and offer their customers more than just credit on purchases. The products on offer could range from insurance, extended warranties, flexible ownership plans to more evolved products such as loyalty programs and ecosystem-based partnerships with other brands.
In markets where players are constantly one-upping each other, it is the little details that set the successful apart. Pivoting towards D2C comes with an array of pressing challenges for big brands. While solving these head-on remains a priority, ancillary yet crucial services like financing can silently work behind the scenes in support of the larger goal.