As online and hybrid business models become more commonplace, companies are finding new ways to engage with customers that don’t involve physical locations and intermediary retailers. When brands directly connect with their audiences, they can build stronger relationships through one-to-one communication and first-party data collection, which leads to better user retention and customer loyalty. Direct-to-consumer is one of the best-known business models that helps brands do exactly that. What is direct-to-consumer, and how does it work?

In a direct-to-consumer (D2C) business model, brands sell their products directly to their end users, rather than through intermediaries like wholesalers or retailers. For example, a clothing brand will ship items directly to their consumers’ homes, rather than selling them through big-box stores or independent boutiques. Shoppers make direct purchases on a website, through an app, or even by phone. This creates a simple, straightforward relationship between company and consumer without outside influences or interference.

While some brands are strictly direct-to-consumer, others have adapted a hybrid model in which their products are also available through intermediaries. Companies that are exclusively D2C, sometimes referred to as digitally native brands, also manufacture, market, and distribute their products without the help of partners or middlemen. Direct-to-consumer currently accounts for 40% of sales growth in the consumer packaged goods (CPG) sector, with American D2C sales projected to reach $175 billion by 2023.

In a business-to-consumer model, “business” refers to any company that sells products to end users. This includes retailers, marketplaces, or brand manufacturers who sell directly to consumers. B2C intermediaries offer products from a number of competing brands, giving consumers the power of choice. Retailers also determine other factors like customer experience and brand positioning, leaving companies with little control over how shoppers find and engage with their products.

In a direct-to-consumer business model, businesses have full control from start to finish, including production, distribution, marketing, and customer service. They create end-to-end brand experiences, rather than competing with other companies for advertising or shelf space. Brands are responsible for their own business decisions and marketing efforts, and have a direct line of communication with their customers that helps drive sales and engagement.

In a business-to-business model, companies sell products to other companies, rather than to end users. This can include resellers and wholesalers like brokers and agents. Businesses typically buy products in significantly large quantities, requiring high production costs and capabilities. Recently, more and more B2B companies are also creating D2C channels to sell directly to consumers as well.

In a direct-to-consumer business model, end users typically buy products in small quantities. However, brands may still incur high production and delivery costs depending on the number of customers. They’re also likely to spend more on marketing and customer support than they would in B2B while eliminating the cost of forming and maintaining relationships with business partners and middlemen.

Greater control and stronger brand identity

In a direct-to-consumer business model, brands maintain full control over each stage of the process, including development, distribution, marketing, and customer support. Distribution and marketing are especially important, as brands no longer have to compete with other companies for shelf space or ad positioning like they would in a traditional retail environment. D2C also reduces the number of potential risks and limitations associated with business partnerships, such as communication issues or financial investments. Companies face significantly less pressure from outside influences when making decisions or developing strategies. This helps them focus on creating a clear brand identity in alignment with their own values and goals.

Higher profit margins and lower distribution costs

When working with intermediaries like retailers and marketplaces, brands have to pay fees or provide commissions to distribute their products to customers. In D2C commerce, companies gain direct access to their end users and collect payments in full, leading to higher profit margins and lower distribution costs. Many D2C brands pass on their savings by offering discounted prices as a result, increasing sales and retaining customers while continuing to improve their return on investment over time.

Direct user feedback and consumer first-party data

In a B2C or B2B model, brands may have limited access to user data, negatively affecting their ability to understand and meet their audience’s needs and expectations. D2C provides a direct line between company and consumer as marketers can look at their website and app activity, purchase history, and so on. They can also connect via customer support, ask for product reviews, and send out feedback surveys without needing to go through an intermediary. This reduces the amount of time and resources required to capture, analyze, and leverage users’ zero-party and first-party data.

Improved personalization and increased customer loyalty

Brands need user feedback to improve their customer segmentation and marketing personalization efforts. As D2C commerce gives them a greater breadth and depth of consumer data compared to traditional retail models, marketers can respond to audience’s demands more effectively. For example, brands can collect product reviews from their own website and app instead of compiling them from multiple sources, or perform A/B tests to improve their paid advertisements and email campaigns. This makes it faster and easier for marketers to act on user feedback and provide the personalized experiences customers are looking for.

In turn, data-driven personalization fosters customer loyalty, as it demonstrates a brand’s genuine interest in their audience’s values, preferences, and behaviors. With D2C, not only do marketers get more data, but they also gain more opportunities to communicate with their customers. For example, brands can send out a survey to ask for feedback on their latest product launch. Then, they can release their new and improved product while emphasizing the value of user responses.

Brand reputation and increased competition

For many brands, having complete control from start to finish can be both an advantage and a disadvantage, as their reputation is constantly at risk. This can range from rushed product development and poor quality control to delayed deliveries and failed marketing campaigns. Logistics and fulfillment involves a lot of moving parts in which a lot can go wrong. Companies face constant pressure to meet customer expectations, and D2C brands don’t have business partners or middlemen to consult or fall back on.

D2C brands also have to navigate a competitive retail landscape consisting of both traditional distributors and other D2C companies. In addition to big-box retailers like Walmart and Target, there are an estimated 22,000 direct-to-consumer brands currently in operation. Companies need to maintain a positive reputation, nurture strong relationships with their customers, and focus on brand and product differentiation to successfully overcome these barriers.

Customer acquisition and user retention

D2C commerce offers relatively low barriers to entry, resulting in a highly saturated market. Brands may find it difficult to stand out from their competitors, limiting their ability to acquire new customers. Additionally, customer expectations are constantly increasing while the cost of switching brands is constantly decreasing, making it harder for marketers to retain users and nurture customer loyalty.

To navigate these challenges, brands should take advantage of user first-party data and data management platforms. They need to analyze shoppers’ path to purchase to continuously improve their strategies for acquisition and retention. For example, they might find that people are visiting their website but not making purchases, or unsubscribing from their mailing list because their email content isn’t relevant. Data helps companies reduce acquisition costs, drive sales, and nurture customer loyalty and brand advocacy.

Diversify distribution channels

Given the potential risks of the direct-to-consumer business model, brands should consider being D2C-first, not D2C-only. This helps them diversify their resources, build smaller-scale business partnerships, and reach a wider audience of consumers. For example, rather than working with as many major retailers and wholesalers as possible, brands should consider distributing their products through a few select stores. They can offer a subscription service in addition to direct purchasing, or occasionally run a physical pop-up shop. Even brands like Nike, Kraft Heinz, and Nestlé have made the shift to D2C commerce without eliminating their existing retail partnerships, giving both themselves and their customers more options.

Build dedicated brand communities

Direct-to-consumer companies need to create active and engaged brand communities to nurture sales, retention, and customer loyalty. Marketers should identify their brand’s niche and values so they can create groups of consumers with shared interests and behaviors. For example, they can practice social listening to learn what shoppers are talking about and join their conversations. They can create a branded hashtag, collaborate with influencers, or start a user-generated content promotion to foster community engagement. Lastly, they can design loyalty programs with game mechanics like point systems and rewards. Objectives and incentives help drive user participation and can lead to long-term customer relationships.

Create personalized messaging and experiences

Customer loyalty is built on segmentation and personalization, as shoppers want brands to acknowledge and meet their individual expectations. Since direct-to-consumer companies don’t have to communicate with their customers through retailers or middlemen, they can better understand their audience’s path to purchase and create personalized experiences at every touchpoint. For example, they can create landing pages and social content that speaks to certain audiences. They can look at consumers’ past purchases to offer recommendations and send follow-up emails. Targeted marketing and messaging helps companies define their brand identity, establish trust, and nurture customer loyalty.

Prioritize user data and feedback loops

D2C commerce gives brands a direct line to their customers, meaning they can collect a greater breadth and depth of information. Data helps create more detailed buyer personas, build stronger customer relationships, and consistently improve their products and services. Marketers should continuously create opportunities for capturing zero-party and first-party data, such as asking for reviews or sending out surveys. They should also incorporate user feedback and share it directly with their audience. For example, if a brand updates their product with a highly-requested feature, they can send out an email campaign to include their customers in the process. This builds consumer trust, credibility, and loyalty.

The D2C business model is becoming increasingly popular with established brands, as it helps marketers incorporate personalization and foster loyalty outside of traditional distribution channels. They can also offer bundles and discounted prices, further incentivizing continuous sales and engagement. For example, PepsiCo recently launched two D2C websites, Snacks.com and Pantry Shop. Shoppers can either purchase pre-made bundles or build customized boxes of snacks and pantry items from brands like Quaker, Doritos, and Lay’s.

Many direct-to-consumer brands opt for the subscription box route, in which they either partner with an existing subscription service or create their own. In a subscription model, customers typically answer a series of questions to build a profile of product preferences. For example, Loot Crate is a pop culture-themed subscription service that offers t-shirts, figures, comic books, and so on. In addition to surprise boxes and themed boxes, they also sell co-partnered boxes with companies like Marvel, Sanrio, and the Cartoon Network. Brands can partner with subscription services like Loot Crate to increase awareness and engagement, capture user data, and nurture retention and customer loyalty.

Lastly, D2C brands can incorporate loyalty programs into their business practices to further increase sales and user retention. With loyalty programs, they can offer discounts and bundles, exclusive products and free merchandise, and gamification tactics to drive engagement and data collection through objectives and rewards. For example, ThirdLove is a popular D2C brand that sells lingerie, activewear, and loungewear. They also offer a tiered loyalty program, Hooked Rewards, where customers increase their lifetime spend to move through the program tiers and receive free shipping, birthday gifts, early access to new products, and more.

Foster customer loyalty through gamification and loyalty programs

The direct-to-consumer model helps brands gain greater control over their business operations, profit margins, and user data. D2C can also lead to increased levels of user retention and customer loyalty, especially when companies incorporate personalized marketing tactics like targeted messaging, gamification, and loyalty programs.

With 3 tier logic’s PLATFORM³, brands can foster awareness and engagement through marketing campaigns like sweepstakes, gift with purchase promotions, loyalty programs, and more. Modules like Dynamic Messaging, Points & Gamification, and Data Capture & Analytics gives marketers the tools and information they need to build effective campaigns for customer loyalty. To learn more, book a demo with our team today.