In previous articles, we’ve looked at why businesses must work within specific models depending on what they offer the market. Identifying exactly how your company makes money gives you the edge where, as an entrepreneur, you know which opportunities to pursue and which not to waste your resources on. In this article, we’ll look more closely at the Direct-To-Consumer (DTC) business model and its pros and cons.
As the name suggests, transactions within the DTC model happen between the company and the end user, that is, unlike the traditional retail business model, there are no intermediaries such as the wholesaler. This type of business model trades primarily online where you sell your goods through eCommerce.
Let’s look at the DTC business model in more detail.
What is a Direct-to-Consumer Business Model?
Online trading is not limited to the DTC model where you may decide to sell your product from a third-party platform. However, selling from your own website allows you to have control over how your brand is expressed and achieve brand consistency. Therefore, it’s worth investing in a professional who will ensure that not only do you have an attractive and engaging sales platform but that it is user-friendly, too.
Another unique feature of this model is that you can customize how you offer or introduce your products to secure more sales. For example, if you have an online skin care store, you could have a quiz to determine what type of skin the user has and recommend products accordingly.
Within the DTC framework, the business is also in charge of service delivery where a significant amount of follow-through is needed post-sales. The responsibility will be on the business to prepare, dispatch, and deliver goods smoothly and in a timely manner.
Furthermore, because this business model is so customer-centric, optimizing user experience also depends on whether they can give feedback, and your ability to respond to it and adapt if there is enough demand to do so. Allowing feedback also presents diversification opportunities where you can pick up unmet needs and in turn, extend your product offering. This gives customers the power to co-create products where you, on the other hand, can test the market on the existing customer base.
How Does This Business Model Make Money?
The DTC business model retains income from not having to pay outside suppliers, such as third-party online retailers, or not giving discounts for bulk purchases by wholesalers. This allows the DTC business owner to sell products at a low cost, creating a budget for marketing.
Another way DTC businesses make money is through subscriptions where, for a monthly or yearly fee, regular customers become members and receive added benefits, such as discounted items. Subscription boxes are an example of this where members get a small selection of goods to try which then drives future sales.
The digital retail space offers business owners access to seller data, such as their demographics and buying habits. These insights allow companies to customize their service offerings and in turn charge more for their products and services.
Online retail also increases a company’s potential for sales by using search engine optimization (SEO) tools. SEO tools work by using specific keywords in your website content that then increases a business’s discoverability.
Business owners can also generate income from notification systems where users of your platform can sign up to receive information about sales by email with embedded links.
Creating a Sustainable DTC Business
The success of this business model relies on creating an authentic experience for the end user in how they identify with your brand.
Creating an authentic experience for the consumer happens when a company organically produces a product (or service) based on what matters to consumers. If businesses are successful, then they will attract customers that can relate to the company’s values.
Alternatively, you can create experiences for your target audience where entrepreneurs spot a need in the market and create goods that cater to that need. For example, maybe you started a sustainable clothing store because you wanted to do something about the negative impact the fashion industry has on the environment.
Another example is that you may have established a healthy foods online store and one of the main requests that you get is to offer meal kits. These kits allow you to expand your service offering based on customer needs.
Examples of the Direct-to-Consumer Business Model
The three categories to consider are:
Product and services
An example of the DTC model is the Dollar Shave Club, which offers monthly subscriptions where based on the information you give them; they will then tailor-make packages with quality products. Another subscription-type DTC business is JustFab, a fashion eCommerce site. that offers a personalized shopping experience where they curate looks that match your style preference.
BarkBox offers members monthly boxes for their pets with different themed toys and treats. They entice customers to join by offering double the number of items you’d get on any other month when you first sign up with them. Another way BarkBox retains members is by asking them to provide feedback on which tools their dog(s) loved. This way, Barkbox can customize future orders accordingly.
DoorDash is a popular food-delivery service that will drop off your favorite food from various restaurants at your door. DoorDash also offers a monthly subscription that allows users to bypass their fees associated with each order. Similarly, FreshDirect offers customers the convenience of having their groceries delivered to them.
Another example of a DTC business is online training. Users can subscribe to virtual courses without having to go through a university or school. LinkedIn is a good example of this, as they offer paying members a large variety of courses in a wide range of fields and expertise.
Due to the exclusion of third parties, the DTC business model requires that orders are fulfilled internally. They must manage activities that companies based on the retail model would usually outsource, such as cybersecurity, warehousing, coordinating shipping, handling returns, and customer service. Because of this, you may need to have more departments, which will involve higher labor costs.
Another challenge with this model is that there is high competition where there are a great number of companies offering the same product or services that you are. Differentiating yourself from the rest will require innovative thinking, significant marketing efforts, and professional customer engagement.
In summary, the DTC business model is based on transactions between the company and the customer where income from sales is kept high because of the exclusion of the “middleman.” We’ve also seen how, at its core, this mostly web-based trading depends on modifying your offering to personal expectations to enhance user experience and, as a result, ensure repeat customers.
This strategy, together with efficient service and ascertaining how a product is received, is what will put you in the position to set yourself apart from competitors. For more on the different types of business models, read our article 21 Different Types of Business Models With Examples.