If you’ve been in B2B a while, you know how disruptive technology and process innovations can be. You’ve also seen that business models are changing across almost all the major vertical markets. Disruption happens like that. One year, you have solid market share, and the next you’re fighting for existence against some startup whose bootstrapped an online store and has a vision for domination selling directly to consumers.
Warby Parker, for example, is upsetting the near impenetrable eyewear industry. In 2016, it joined a long list of new companies selling directly to consumers and upending traditional markets. Warby Parker is valued at $1.2 billion and closed another $100 million series D round of funding this past April. In the fall of 2016 we saw Dollar Shave Club get acquired in a massive deal by Unilever. In 2017, we’re likely to see Jessica Alba’s The Honest Company, among others, get acquired as well. The CB Insights market landscape below shows just a small portion the startups skipping the traditional wholesale and distribution channels and targeting consumers directly.
Buying Models Are Changing
Direct-to-consumer initiatives represent a huge opportunity for innovation within any B2B vertical market. For those companies that embrace it, especially those in wholesale and distribution, it could be a financial boon. For those that don’t, it could be the beginning of the end.
I mention wholesale and distribution because they appear to be more at risk for disruption than other industries. Currently, in-store commerce represents about 70% of all retail transactions. Ecommerce, however, represents 80% of all growth within retail. Consumers are shopping online more and going to stores less. You’d be missing the boat if you didn’t consider the benefits of selling directly to those consumers who have little loyalty to big-box retailers.
I’ll illustrate with a personal story. My wife gave birth to our third child (first boy) in late 2015. Since this was our first boy our nursery decor was a bit girly and needed updating. My wife ordered a new rocker and ottoman from a major baby supply retailer. 8 months later one of the legs on that ottoman broke. The retailer doesn’t carry replacement parts and the individual locations don’t maintain a relationship with the supplier. After finding out name of the supplier I went to their website, they don’t have a consumer shopping site. They also don’t have a retail call center or even an online catalog for that matter. After a few days of work I end up with the number of some guy that works in a manufacturing plant. I sent a picture of the leg I needed to replace and $25 through Paypal. He shipped it to me on his way home from work the next day.
It’s 2016. This shouldn't be the process.
Channel Partners Are Great, Except When They Aren’t
People don’t talk much about channel conflict anymore. Manufacturers and channel partners have realized the need to diversify and minimize the risk of sales disruption. Consumers, on the other hand, get frustrated with channel partners.
Once consumers see the wholesale price of your product, they feel taken advantage of. Consumers don’t want to put you out of business, but they do want to feel as if they’re being charged a fair price. Going directly to consumers lets you offer your products at a discount compared with the market but at higher margin than you would get through your distributors. Sure, the volume isn’t there, but this type of business model innovation isn’t about shifting your entire revenue stream; it’s about diversification and protecting your future.
Channel partners can also introduce other problems that reflect poorly on your products.
Benefits of Working Directly with Consumers
I’m not suggesting that you abandon your channel strategy. I am, however, advocating that you consider the positive impact that direct-to-consumer initiatives will have on your business.
First, you own the customer relationship. As you develop firsthand knowledge of your customers, you can hone your marketing and access them (via mailing list, site marketing, etc.) as needed. Better knowledge and better marketing means better sales and more meaningful product updates.
Direct-to-consumer strategies also mean better margins. Fulfilling orders yourself requires investment, but markup belongs to you, not your partners. A subset of your customers will like buying from you because they will get a discount off retail pricing, but your margin is much higher on those transactions. Don’t worry about channel conflict. There are always channel partners that will use your products as a loss leader. The partners that have higher markups will adjust pricing or sell with some value added service to justify the higher price. You may cannibalize some portion of the channel business but if it provides higher margin and increases customer satisfaction it’s a sound business move.
Finally, a direct-to-consumer approach helps you build brand loyalty. The biggest driver of consumer sales is price. Next come product offerings and service—in other words, your brand. Direct-to-consumer is one of the most meaningful steps to establish strong relationships with the customers you want to target. Build your brand and watch profits soar.
Learn how Live Confortably developed their direct-to-consumer strategy with Oracle Commerce Cloud.