The Direct to Consumer (D2C or DTC) model seems to have declined recently. The slowdown comes following several years of feverish growth, causing concerns over its viability. The result is that companies of all sizes and in all growth stages are currently reevaluating their D2C prospects.
While the downward trend is of concern, D2C has not gone away. D2C as a channel requires the right expectation and a clear idea of where it is used alongside other e-commerce, retail and wholesale channels. It can offer customers a customized experience while presenting great margins for the business. In this post, we will discuss ongoing trends, threats, and opportunities. We’ll also provide suggestions on staying in front of market changes.
Is D2C Trending Down?
In the days before COVID-19, a new trend was on the rise. D2C offered a customer experience in tune with the shopper’s perceived lifestyle with favorable unit economics to the business. Products could be shipped directly to consumers and after factoring in costs of goods sold, customer acquisition cost (CAC), and other expenses, many businesses were able to make a profit on the first purchase.
The initial success of D2C businesses (due in part to low CAC via paid social channels) drove a tremendous amount of interest in the channel from investors and new entrants alike. Brands like Warby Parker, Dollar Shave Club, and Casper endeavored to disrupt multi-billion dollar industries through the delivery of a new business model.
However, many brands ignored–or simply weren’t cognizant of–the reality of future change, eschewing alternative channels for the panacea D2C promised to be. While D2C always displayed promise, a lot of the early-stage D2C successes had underlying business model challenges. Their LTV (customer lifetime value) to CAC ratios were never sustainable and their ad costs continued to rise as a percentage of total revenue and repeat purchases weren’t significant enough to offset initial investments in acquiring customers.
Unusually favorable market conditions such as an unprecedented period of low interest rates, quantitative easing, and ongoing government stimulus post financial crisis masked some of these challenges as companies continued to raise money at higher and higher valuations – despite weak underlying fundamentals.
Outlier Data + False Trendlines of the Pandemic Market
Fast forward to 2020, and the pandemic created an even more fertile ground for the D2C business model. After all, with people stuck at home, it fueled the need for convenient delivery (during quarantine) and novelty in people’s daily life.
Primarily using social media to drive sales, D2C saw unprecedented growth. However, once people were released from quarantine and daily life began to resume, so did a change in spending habits.
Protecting Consumer Privacy
Many direct to consumer brands have relied heavily on detailed data tracking for years, detecting and storing information about the interests, habits, demographics, and activities of potential customers as they browse the web. But all of that is changing now that consumers are demanding increased privacy protection, and major providers like Apple iOS are facing consumer pressure to comply.
Apple iOS is used by more than half of consumers in the US, so direct to consumer and e-commerce businesses really took notice when iOS changed their privacy settings. Now, iOS users are able to clearly see what data is being tracked as they browse the web, and opt out of all unnecessary data tracking with the click of a button–forcing D2C companies to pivot to more creative and direct methods of consumer data collection.
While it’s had the biggest impact on e-commerce and D2C businesses, Apple isn’t the only brand prioritizing consumer privacy. Meta, Google, and other major brands and service providers are taking steps to increase transparency in data collection and prioritize consumer privacy, allowing users to easily opt out of tracking. These changes have caused a huge decline in cookies and tracking, severely reducing brands’ abilities to detect and target their ideal customers.
This is one major factor that has contributed to the rise in popularity of the creator economy, with many direct to consumer brands starting to rely on influencers and niche content creators to target specific audiences and educate consumers about their brand and products.
Rising Cost + Diminishing Returns of Digital Ads
With the sudden decline of data tracking, the cost of digital ads have shot through the roof. Many companies that were previously able to rely almost entirely on relatively low-cost, high-return paid social media ads to market their products saw their advertising costs skyrocket, while ROAS (return on ad spend) plummeted. While Facebook and Instagram ad prices were already on the rise, the data privacy changes triggered a step reduction in ROAS for direct to consumer businesses that left many brands and investors scrambling despite the obvious warning signs. For many struggling brands, D2C became the scapegoat for broader business issues.
In reality, the consequences of these marketplace changes were the result of relying too narrowly on D2C as the sole revenue driver and over-looking business & economic fundamentals. In hindsight, the issue was never the viability of D2C business, but with brands treating D2C like a silver bullet and putting all their eggs in one basket.
D2C Is Here to Stay
The only thing certain about the future is change, and that holds true for D2C marketing and business. The changes to the marketplace were predicted and expected by market experts, and while challenging, none of these changes spells doom for D2C. E-commerce currently makes up 21% of all retail sales, a not insignificant increase from about 19.6% the previous year, and is expected to grow to 22.3% next year. Direct-to-consumer is expected to increase along with e-commerce overall.
As brands pivot and adopt new and different strategies, alternative business models have boomed. For example, businesses using the subscription model currently make up 4% of all US e-commerce businesses. According to data collected by Pipe Candy, “The US DTC subscriptions economy has grown 5-8x faster than traditional businesses in the last decade, outpacing growth rates seen in retail and S&P 500.” They go on to share that the majority of subscription model consumers are Millennials and Gen Z, who appreciate the convenience, selection and personalization of automated purchasing. (1)
What to Expect Through 2025 and Beyond
While we won’t see the record-breaking growth levels of the pandemic, the D2C market is continuing to grow and evolve. Over the next few years, we expect to see changes like:
- Increased competition among D2C brands
- Growth of omnichannel marketing as physical retailers jump on the D2C bandwagon
- Increased growth of the creator economy and influencer marketing, including influencers creating their own D2C brands
- Continued adoption of the subscription model and flexible payment plans
- D2C continuing to expand into other business categories
Maintaining Success in D2C
As direct to consumer brands adapt to the major changes in the marketplace, there are several steps and considerations they can make note of to keep their edge in the e-commerce space. While marketing tactics are important, building customer loyalty and improving customer retention rates have become increasingly vital as customer acquisition costs (CAC) continue to rise.
Easy, Uncomplicated Returns
Most people are hesitant to purchase a product they haven’t tried before, no matter what category of product is in question. Keeping your return policy simple and painless greatly boosts shopper confidence, increasing the likelihood of converting the visitor to a customer. It also reduces the risk of complicated customer service issues, and increases consumer satisfaction even in the event of a return.
Customer Website Experience
Creating a memorable experience for your customer on your website will stick in your customer’s memory for a long time, whether that experience is good or bad. The more the site resonates with the customer, the more likely they are to associate the brand with their own needs. Focusing efforts on UX/UI strategy, website functionality, and website accessibility all have been shown to have positive impacts on D2C performance.
One of the struggles faced by D2C marketers that relied solely on this model is the ability to adapt to changes in circumstances. Just like with any business or personal budget, spending money on marketing without proper planning and diversification creates waste and risk. It certainly doesn’t set you up for future success, and it limits your brand’s ability to be flexible and adapt to market changes and fluctuation. The key is to focus on the efficiency of your investments and overall profitability.
Influencers + Social Commerce
The use of social media to market has not gone away. Hashtags such as #tiktokmademebuyit can generate billions of views. Working with influencers allows you to hand-pick ambassadors that speak directly to your ideal customer, and increases the potential that your product will be viewed again and again by a niche audience with a high likelihood of interest in your brand.
Additionally, social media ads – and especially short-form video ads – let you engage directly with your customers in their space, and increase the opportunity of impulse purchasing as customers can buy products with just a few clicks without leaving their feeds or social platforms.
Taking D2C To the Next Level
While direct to consumer e-commerce is no longer at pandemic-level heights, it is still a healthy, growing industry, and well worth pursuing. To set your D2C brand up for success, focus on creating a great customer experience, setting the right expectations based on non-pandemic market trends, and maintaining a conservative fiscal approach.
At Markacy, we create and maintain our strategic, targeted marketing services with your brand’s bottom line as the most important factor. To see samples of our work, view our case studies and creative portfolio.
If you’re ready to work with a marketing agency that’s just as focused on your bottom line as you are, contact us today to learn more about how our finance-based marketing services can elevate your brand to the next level.