Direct-to-consumer: the future of marketing is nowStrategy Consulting 10 July 2019
Brands like Casper, Warby Parker, and Glossier, have practically become household names in the United States, and for good reason: they’ve experienced exponential growth since appearing on the market. They are each a perfect example of the direct-to-consumer model (D2C), one of the biggest revolutions of the past decade in the consumer market. More than a marketing shift, D2C is a brand new standard, which means that brands operating under more traditional models must make a change to adapt to consumers’ new expectations.
Direct-to-consumer: when data spurs horizontal product creation
Casper launched in 2014 in the U.S. The company’s 5 founders shared the same conviction: mattress shopping is a complicated and often unpleasant experience for consumers. Prices are too high, the logistics of the purchase is mind-boggling, choices are confusing and overwhelming. How can anyone possibly know the difference between a “firm” and “very firm” mattress? The founders created Casper to avoid these issues. Their radical model contradicted the norm: a unique and affordable product, delivered straight to your home.
Casper was able to break the mold because it identified product characteristics that could appeal to the masses. It based the design and testing of its unique product exclusively on consumer data, and determined what kind of mattress would appeal to the largest number of potential clients. This mattress became the cornerstone of its product development, bolstered by continuous feedback from 15,000 loyal users. In this way, D2C companies first distinguish themselves from competitors by implementing horizontal product development. They deploy personalized digital campaigns and activate relevant communities on social media – or perhaps create their own. It is also quite common for these brands to create pre-launch crowdfunding campaigns – as was the case for French natural deodorant brand Respire, which received 21,000 pre-orders via crowdfunding before it had even hit the market. It’s not a new method, but it is becoming more and more popular. Unlike a “universal” product like Casper, horizontal product development is driven by hyper-personalization. Based on this same direct relationship with the user, horizontal product development means that brands are co-creating their product with the users, taking their needs into account. Look no further than the success of luggage company Away, where users can customize their travel items to fit their style.
Cutting out intermediaries?
Casper, like most D2C brands, appeared in the last 10 years. Companies like Casper are digital natives, and have adopted the social and horizontal aspects of the internet culture as the anchor of their business model. The most telling trait of D2C brands, though it may vary slightly, is that the intermediary has been removed from traditional channels of production, sales, and communication. Beauty brand Glossier, founded by Emily Weiss in 2014, makes almost all its sales through its website. Though the brand has opened flagship stores and the occasional pop-up, these brick and mortar locations serve more as hotspots for the brand’s culture. What’s more, almost all of Glossier’s marketing is sent out via its own digital communication channels, social networks, or newsletters – and the rare times they do leverage traditional media, they always do so in a disruptive way. Both communication agencies and distributors are thus seeing their role becoming less important, if not nonexistent. The top quality of this workflow is obviously higher margins thanks to fewer intermediaries. Moreover, the disintermediation that we see with D2C brands gives them an unparalleled advantage over established competitors: almost total control over consumer data (or first-party data).
This control represents a two-part paradigm shift: targeting certain “identities” rather than blasting consumers en masse, which in turn optimizes engagement with the audience, often even making them “brand ambassadors” – and sometimes, as we’ve seen, brand co-designers.
From “pay, spray and pray” to data-driven marketing
Instead of the traditional “pay, spray, and pray” marketing technique, which seeks to reach the largest number of targets without distinction, brands are now favoring a data-driven media strategy. Thanks to AI and D2C brands’ control over data, they manage to implement a tailored marketing approach which includes automated media mix decisions, target optimization, and a much better understanding of attribution.
The purpose of this new approach is to challenge the role that marketing plays for companies. Previously seen as a source of spending, the returns on which were difficult to measure, marketing in the D2C world is showing itself instead as a source of profit, with measurable metrics. Because the D2C model controls consumer data, it reveals each consumers’ lifetime value (LTV). LTV can then be used to calculate the customer acquisition cost (CAC), so that brands can make budgetary and marketing decisions based on these figures. “CAC is the new rent” is the mantra of these new models where data control transforms marketing spend into a growth variable.
Are traditional brands headed for the same fate as Kodak?
The most zealous observers see the D2C revolution as an upheaval that most traditional brands will not escape, due to cumbersome inherited infrastructure that cannot evolve and lacks the flexibility necessary to become data-centric and agile in decision-making. Could it be that these brands are headed for the same fate as Kodak?
There is no doubt that the market will be affected in the long-term. Customers today expect customer service that is friendly, instantaneous, and personalized. In the era of Amazon, they will not stand for delivery that is not free or takes more than a week – or even 48 hours in urban areas (even in 2017, 69% of users would not wait more than six days for delivery).
D2C brands thus represent a future that is already here, and should be an inspiration rather than a threat. The trend of traditional brands purchasing D2C companies – since Unilever’s $1 million acquisition of Dollar Shave Club in 2016 – is the first response to the phenomenon. The second is the creation of D2C brands within these groups – such as L’Oreal’s millennial-leaning Color&Co, launched last May. It seems evident today that the next trend will be integrating best practices from D2C models into traditional business structures. This will go hand-in-hand with a movement to internalize marketing within these companies. Internalization offers these structures a much-needed streamlining of costs and greater transparency. For a perfect example, look no further than U-Studio, created and operated by in-housing agency Oliver, which resulted in a savings of €500 million for Unilever. In-housing integrates agile and expert ad-hoc teams into a company to implement a marketing strategy in line with these new standards and consumer expectations.
Rather than a revolution that traditional brands are not invited to partake in, D2C is the advent of a new marketing model. But growing acquisition costs on Google and Facebook, the premier digital ad platforms, highlight the importance of these new intermediaries, and foreshadow the first growth crisis of the D2C model. While digital pure players turn to traditional channels like retail and TV with the intention of reinventing them, it remains to be seen if traditional brands will be able to integrate this new agile and data-driven model, in order to leverage the full potential of digital innovations.