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:
- Research and Development (R&D):
- Spending huge amounts there
- Worked with the maxim – ‘ Promotions may win quarters, innovation wins decades.’
- 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.
- In 2014, P&G spent $ 10 billion in global advertisement, 37% more than second biggest Unilever.
- Distribution & Retail:
- 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.
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.
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
- 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.
- Opening up of Advertisement & Marketing: Rise of Social Media platforms like Youtube, Facebook:
- Social media democratized the field of advertisement.
- There was a time when advertising required huge sums of money thereby restricting the ability to large companies.
- YouTube made it easy to make videos and share them to millions.
- 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.
- Opening up of Distribution: E-Commerce:
- Development of the E-Commerce ecosystem enabled the ability to deliver goods directly to consumers.
- The Internet has infinite shelf space.
- New players could directly bypass traditional sales channels like retailers.
- 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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