Understanding D2C brands and businesses
D2C is a retail model where brands sell directly to customers through an online store. Brands use in-house or rental fleets to directly ship their products at the customer’s doorstep. Unlike D2C brands, traditional brands reach customers through distributors and wholesalers.
The Secret Sauce
D2C companies seemed to have cracked the code to cater to niche consumer segments. These brands are chasing the top 30-40mn online
customers (out of ~100mn) in India who have high disposable income. These Brands mostly operate in premium categories which predicted to happen well for delivery (high average order value) and provide high gross margins. High margins are required to absorb customer acquisition cost (CAC) as well as higher logistics cost. Platforms spend heavily on digital marketing, primarily on Google and Facebook, to drive traffic. The idea is to keep the CAC lower than customer lifetime value (LTV).
Brands also create content (blogs, videos, polls) to drive customer engagement. While D2C brands are pushing the customer to shop on their platforms, majority of the sales still comes from marketplaces such as Amazon, Flipkart, Myntra, etc. After establishing a strong online presence, most of these brands are opening their offline stores to provide a holistic experience.
Advantages of going D2C:
- Better engagement: Brands are able to control the entire customer experience – includes curation of product portfolio, content to educate customers, packaging, and other services such as subscription, etc. – leading to a seamless experience, better customer engagement and retention.
- Generate Insights: Brands collect vast amount of data throughout the journey of the customer from the first click to the final checkout. This data is used to generate insight to launch better products and provide a better customer experience.
- Better Reach: Going digital enables brand to reach millions of customers across all corners of the country. According to a recent Bain
Report, 97% of postal codes in India ordered at least 1 item online in the last year. Nykaa, a beauty and personal care retailer, generates 64% GMV from Tier2/3 cities. Customers in these areas have aspirational needs and want to associate with new age brands.
- Lower cost of Failure: FMCG companies are using D2C to launch new products before rolling them out in the offline market. This entails much lower upfront investment and much faster consumer feedback. Marketing expense on digital platforms such as Facebook, Instagram is much lower than traditional channels viz. TV, print. New age brands pivot through different business models as the cost of failure has come down.
- Better Margins: Companies are able to improve their Gross Margins as they are able to sell their products at full price. Also, reaching the customer directly saves distribution charges.
- Booming Online Shopping: Online channel has been growing at an accelerated pace in last few years especially after Covid disrupted
offline operations. Ecommerce platforms have expanded the digital channel, both in terms of reach and categories. D2C platforms have
benefitted from the increased adoption of online shopping post COVID.