Direct to Consumer (D2C) is a business strategy where a manufacturer or the consumer packaged goods (CPG) directly sells to the consumer. It bypasses the traditional business model of selling through Distributors/Retailers or resellers.

The ability to engage directly with customers using the internet is a major enabler for D2C brands. It removes the traditional retailers like Walmart etc out of picture.

Case Study of Dollar Shave Club:

Dollar Shave Club was started in 2011 by Mark Levine and Michael Dubin. Their business model was about providing subscription service for blades. Instead of buying one could buy a subscription at $ 10 or $ 20 a month. Consumers could buy a razor for around 1$ instead of $20. 

 By 2016, Dollar Shave Club had around 15% of US Razor Cartridge market Share.

Before we go into how Dollar Shave Club disrupted the shaving market, let’s look at the strengths of P&G (Owns Gillette): 

P&G is one of the great consumer companies of all times. It’s advantages were:

  1. Research and Development (R&D):
    1. Spending huge amounts there
    2. Worked with the maxim – ‘ Promotions may win quarters, innovation wins decades.’
    3. In 2014, it spent $ 2 Billion in R&D in 2014. (Dollar Shave Club was acquired by Unilever in 2016). It was double that of Unilever. 
  2. Advertisement: 
    1. In 2014, P&G spent $ 10 billion in global advertisement, 37% more than second biggest Unilever. 
  3. Distribution & Retail:
    1. P&G’s huge collection of brands and products gave it massive economies of scale in production as well as massive leverage with retailers. It could dominate shelf space which is a lifeline for CPG products. 

Factors that enabled the rise of Dollar Shave Club:

Dollar Shave Club bypassed Gillette (P&Gs) massive strengths in the Razor and Blades market. 

R&D:

Blades were already good enough. It isn’t a high-tech product no matter how much Gillette would want men to believe so.

Dollar Shave Club need not invest in R&D. Incremental benefit of R&D was negligible. 

Production:

Dollar Shave Club could get the production of blades done at Dorco in South Korea. They could get good quality Razors and blades at reasonable prices.

Marketing & Sales:

One of the biggest constraint or limiting factors for D2C brands is the ability to reach consumers and sell them.

A combination of 3 factors helped Dollar Shave Club and many D2C Brands today

  1. Emergence of Cloud computing service like Amazon Web Services (AWS):
    AWS made it easy to launch startups. Firms did not spend huge amounts of money on getting servers etc.
  1. Opening up of Advertisement & Marketing: Rise of Social Media platforms like Youtube, Facebook:
    1. Social media democratized the field of advertisement. 
    2. There was a time when advertising required huge sums of money thereby restricting the ability to large companies.
    3. YouTube made it easy to make videos and share them to millions.
    4. Facebook and other social media enabled targeted local advertisements. Reducing the entry barrier of scale in advertisement. You don’t have to be a Pan Country brand to be able to do advertisements. 
  1. Opening up of Distribution: E-Commerce:
    1. Development of the E-Commerce ecosystem enabled the ability to deliver goods directly to consumers.
    2. The Internet has infinite shelf space.
    3. New players could directly bypass traditional sales channels like retailers.
    4. Also read our note on “The Long Tail” – How Internet enabled low cost distribution opens up new markets.

In part two of this note on D2C Business, we look at the evolving landscape and challenges for D2C businesses.

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Published by Abhishek N Jain