3x founder based in New York City. Currently scaling Darkroom and NERA.
The very nature of the internet has drastically changed the way startups try to reach their customers, with many e-commerce brands deciding to bypass traditional resellers entirely so they can have greater control over their customer experience.
Customer resource management tools give website owners everything they need to fully track customer interactions, inventory levels and the status of their shipments so that everything operates efficiently and somewhat (if you’re good) autonomously.
Best of all, selling directly to the customer results in higher profit margins by eliminating reseller expenses, and operating exclusively online helps avoid the overhead costs associated with opening brick-and-mortar locations — though certain brick-and-mortar costs are replaced by associated advertising expenses, explored below.
But as DTC e-commerce has experienced a boom, shifting technology and rising competition are creating new challenges for would-be entrepreneurs. A few key strategies are essential for navigating this tricky space.
A big player in the rise of DTC e-commerce has been the improved methods of customer acquisition offered by Google, Facebook and other digital channels. When 54 percent of social media users use these platforms to research and discover products, it’s clear that there is vast potential for DTC brands.
Unfortunately, while the audience is there, various trends have resulted in rising customer acquisition costs across the board. Not only has Facebook’s organic page reach fallen dramatically (to not even really being relevant) in recent years, but the percentage of digital audiences that see a DTC brand’s social content also declines as the audience grows.
Top DTC brands are spending massive amounts of money in an effort to gain new customers. A report from MediaRadar revealed that from Q1 2018 to Q2 2019, Peloton Interactive spent $180 million, while SmileDirectClub spent well over $200 million on both digital and traditional media channels.
As acquisition costs increase, DTC brands are becoming increasingly hard-pressed to gain new customers at a profitable level. Even worse, they may hemorrhage cash to acquire new users, with the hope that their customer lifetime value (CLV) will be roughly three times greater than that acquisition cost. The main problem with that? CLV is often hard to predict — and is usually lower than what’s estimated.
With customer acquisition costs rising across the DTC space, many founders are finding that they cannot rely on the same channels they’ve always used if they wish to continue acquiring new customers.
In fact, at the 2019 Modern Retail Summit, industry leaders noted that companies aiming to scale on a major level must also begin considering strategies for Amazon or getting their product on the shelves at Walmart. In other words, major sustained growth will likely require a step away from a pure DTC model.
DTC combined with traditional retail is traditionally being seen as the best long-term approach for venture capital-funded brands.
Another important consideration for DTC businesses is going beyond the common trifecta of Facebook, Google and Instagram to find new channels for reaching your target audience. Conducting additional research on your target audience and the channels they use can easily reveal more cost-effective platforms for growth.
As a largely digital platform, it should come as no surprise that managing your data is key to success in the DTC sphere. There are seemingly countless data points to track the customer’s journey, particularly as you further diversify the channels you use to reach them.
Ideally, you should be able to track a customer’s initial encounter with your brand, past purchase behaviors and even how they browse your website. Digging deep into the numbers will allow you to see which channels deliver prospects most likely to make a purchase.
Diving into your cart abandonment rates could help you optimize your checkout process to reduce sales losses. Better understanding search intent can help you improve keyword usage on your site.
This information is readily available through Google, your web hosting platform and even the social media tools you use to drive new traffic. The problem, of course, is that many DTC brands and other startups fail to use the data they have — even though it can offer a competitive edge by helping you identify your highest-converting products and sales channels.
As noted by Nikolay Savin for DATAVERSITY, AI tools and big data can improve all aspects of DTC retail: “AI-powered price analytics solutions consider all the pricing and non-pricing parameters such as seasonality, weather, customer behavior, and business goals.”
Continued Savin, “Moreover, such solutions establish latent interconnections between the variables, help to group products into clusters depending on their sales potential and suggest pricing moves by weeks earlier than in a traditional scenario. […] With AI-based technology, over 90 percent of products can be sold when necessary, while revenue and sales can grow by 10 percent and 15 percent respectively.”
Using data and channel research, channel optimization will prove key for successful DTC scalability. You need to consider how your own website can work in conjunction with other retail channels to get more product to your customers.
As Daniel Backhaus of Core dna explains, avoiding channel conflict is key for your overall growth. “Identify which products are performing really well with your retail partners, and which ones aren’t. Since online retailers are the most significant source of revenue for most brands, you don’t want to draw sales and traffic away from those products that are performing well as it would be counterproductive. Instead, with careful inventory planning, you can focus your strategy on those products that don’t perform well at your retail partners.”
Your DTC platform can prove most successful when it prioritizes products that don’t perform as well with other retail channels. A similar approach can work with the marketing platforms you use. Certain products may see more successful marketing results when targeted to a particular channel.
As with any major business activity, continually testing and tracking results will prove essential for determining which channels and marketing platforms prove the most effective for shifting inventory.
Changing tech and even global events like the coronavirus can impact everything from product manufacturing to which channels are best for acquiring new customers. DTC e-commerce founders must take a proactive approach and consider the opportunities and threats to their growth.
By fully evaluating all your options, you will be better equipped to take advantage of this continually shifting marketplace so you can rise above the competition.
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