Comment: Pros and Cons of manufacturers selling directly to consumers
In efforts to build customer loyalty, more and more manufacturers are expanding their footprint, selling directly to consumers (DTC), and taking on roles that were once reserved for distributors and retailers. They’re selling subscription services for packaged goods, like razors, and inviting customers to design their own fashion statements, like shoes, with their phone. They’re also customizing highly configurable products, like furniture and doors. Even business-to-business manufacturers (B2B) are jumping on board, stressing customer-centricity and offering products as a service contract. But, how do manufacturers make these new go-to-market models sustainable? Profitable?
Software technology plays a major role in making this shift to direct-to-the-consumer commerce practical and financially realistic. Without the proper IT infrastructure and functionality, manufacturers may be taking on a challenge that is high-cost and high-risk. Manual systems, outdated technology or a “good enough” mind-set can jeopardize customer relationships, with any miss-steps acting as fuel for social media scalding. Let’s look closer at the issues and ways software can help manufacturers transition to a new commerce model.
How Did we Get Here?
Operational innovation. For decades mass production had ruled, the driving force behind modern efficiency and profitability. Then Made-to-Order and Engineer-to-Order business models began taking hold for highly complex machinery and industrial equipment. Software technology helped manage the collaborative process, the unique specifications, and change orders, making the “batch of one” seem simple. From there, change was rapid and transformative, spreading through consumer goods. Operational innovations, like assemble-on-demand, hub-and-spoke modules, configuration tools for specifications and quotes, and easy-to-program robotics for fast change-overs, turned old-school manufacturing upside down.
Ecommerce. Ecommerce is making significant gains over traditional brick and mortar stores. In 2018 it represented 14.3% of total retail sales. Consumers spent $517.36 billion online with U.S. merchants, up 15% over the previous year, according to U.S. Commerce Department figures. Ecommerce giants like Amazon and Alibaba are driving much of these sales. Traditional retailers are pushing into online retail to take advantage of the trend, too, with even grocery stores offering online ordering, pick, and deliver programs.
Consumer Convenience. Consumers today seek convenience. And companies are responding. Proctor & Gamble, one of the most established consumer packaged goods (CPG) companies, is experimenting with DTC. Last year it launched a subscription service for its Tide brand that allows consumers to get regular deliveries of Tide Pods laundry detergent. Internet of Things (IoT) technology is also being used so some products, like refrigerators, can automatically contact the manufacturer when replacement filters are needed.
Consumer intimacy. Customers, especially millennials and those in generation Z, have high expectations around sustainability and support companies that strive to reduce their carbon footprint. Manufacturers are meeting this need by providing special customer portals that help build the manufacturer-consumer connection and share behind-the-scene glimpses into supply chain origins, products in progress, and the sustainability story. In the food and beverage industry, websites will track the origin of food, back to the farm. This level of customer intimacy helps build brand loyalty. Today’s generation of consumers is fiercely loyal to causes and brands that share their beliefs.
Smart products. Almost half of internet-wired households have some sort of smart home device, with thermostats, smart home systems and smart appliances topping the list. The global smart home market is predicted to be worth $97.61 billion by 2025 according to a PwC survey. A growing use-case is smart appliances emailing the homeowner when replacement filters are needed—or even directly placing the order from the manufacturer.
Mobile technology. Increasingly, consumers are using their phones to make purchases, even products that have traditionally been ones to “try on” for fit. Recently, Nike opted to focus on serving athletes on a one-to-one basis, using mobile technology. The Nike+ app is an example of how DTC is more than just selling products directly to the consumer. Expanding the relationship is the goal, building off shared interests and lifestyle choices. For Nike, that means giving athletes a dashboard of useful data that can be used to bolster performance. Nike says it plans to grow this part of its business by 250% in the next five years. In the company’s forecast, its DTC sales will reach $16 billion by 2020—a massive increase from the $6.6 billion this channel generated in 2015.
Social media. The shifts in commerce are closely tied to the ubiquitous nature of social media. Consumers can praise or lambast a spokesperson and enterprise on social media, influencing perceptions and sales. Many manufacturers have learned that social media can’t be ignored or dismissed, so embracing its high potential is the more pragmatic approach.
Business-to-business (B2B), too. Even industrial suppliers find themselves catering to their business customers as if they were consumers, wooing them with servitization, value offers and loyalty programs. Customer centricity in this segment means collaboration on product design or innovative process solutions, sharing of data, and supply chain visibility, supported by networked connectivity. In the high-stakes B2B space, the customer is particularly demanding, waving big contracts as the incentive and but insisting on indisputable quality and compliance.
Digitally native. Some digitally native companies are bypassing all other forms of commerce. Warby Parker, the digital source for glasses is an example of a company transforming an industry. The #Warbyhometryon marketing campaign encouraged customers to promote something they were already doing -- taking photos and videos of themselves trying on eyeglasses. Another digital native success story is Casper, a bed manufacturer, that built a $100 million business in two years by selling its innovative “bed in a box” in direct-to-consumer online channels.
Is it working?
Research shows that almost half (48%) of manufacturers either have or plan to have Direct-to-Consumer (DTC) channels, with almost all of them (87%) seeing these channels as relevant to their products and consumers. Stephen Diorio, author and Forbes contributor, says, "The number of manufacturers selling directly to consumers is expected to grow 71% this year to more than 40% of all manufacturers. And over a third of consumers report they bought directly from a brand manufacturer’s web site last year."
Success stories are numerous and inspiring. Levi’s, the maker of iconic denim products, hit a two-decade sales record in 2018 when direct-to-consumer sales helped increase revenue by 22% globally. Nespresso, a pioneer in gourmet single-cup coffee market, is another success story. The company reports that their direct to consumer platform records 250,000 purchases each month, with a 24.7% conversion rate – almost double the rate from similar purchases on Amazon.
The DTC landscape does have some pitfalls. Consumers frustrated with slow or complex purchasing screens will abandon their purchase. It’s estimated $4.6 trillion in ecommerce sales are lost to cart abandonment each year, and the average cart abandonment rate is 69.86%
How can Manufacturers Optimize these Trends?
For many manufacturers these are new areas, far from the traditional mass production methods that are entrenched in their history. Branching into new arenas can be a challenge. Fully understanding the risks and obstacles before testing a concept is advisable.
Relationships. The heightened customer expectations also bring new opportunities – if the enterprise is willing to fully commit and go all-in with necessary resources of talent, time, and software technology. Manufacturers that excel at building relationships and connected networks will be able to stand apart from the laggards who are slow to adopt innovative functionality. Customer Relationship Management (CRM) solutions can be valuable in managing the full customer lifecycle.
Configuration. A solution to help manage product configuration is one of the most important ways software technology helps manufacturers step up to the challenges of building a customer-centric approach. Configure Price Quote (CPQ) solutions step the user through design choices, ensuring that the options are within pre-set engineering constraints. Then, a quote and CAD drawing are automatically generated so the customer can visualize the end-product. This is a huge time-saver for the sales team and engineering team, freeing them from manually redoing specs and quotes for each custom order.
Ecommerce. Modern solutions also help manufacturers launch ecommerce programs. While there may be many “shopping cart” off-the-shelf programs, a manufacturer needs an ecommerce solution that can integrate with the ERP solution, synchronizing with order entry, inventory, and back end financials. It’s not as easy as placing some product thumbnails on a site and an order form. To truly embrace online engagement with customers, manufacturers need to tell a story, invite dialogue, provide added value and insight about the products and the company, and, above all, present an authentic desire to listen to the customer’s needs.
Innovation. Filling a spot closer to the consumer brings some advantages, including more immediate input for innovation and product development. Online shopping carts, interactive portals, and active social media listening give manufacturers first-hand exposure to buyer feedback. This can shorten the product development stages and inspire fresh-thinking for new designs.
Product Lifecycle Management (PLM). Manufacturers can optimize the development of new products with PLM solutions that help track objectives, milestones, and communication at each stage of the product’s lifecycle, from cradle to grave.
3-D printing. For “batches of one” and highly customized products, advanced manufacturers can turn to 3D printing for components, decorative items, or accessories. The fashion industry is even incorporating 3D-printing for personalized adornments, monogrammed features, and signature elements.
Supporting processes. The DTC movement brings with it some responsibility. Manufacturers have traditionally turned to distributors and retailers to be the “front person” engaging with customers in local and regional settings, maintaining inventory, acting as trusted advisors, and offering the one-on-one buying experiences. Bypassing these layers means manufacturers must step in and play that part. Often, they are not equipped to be customer-facing, lacking in basics such as a call-center and a shipping department designed to handle large volumes of small quantities—and returns from disappointed customers. Making the shift to selling directly to consumers often requires a full enterprise shift, including new operational processes and departments. It’s definitely not a “deploy and done” transformation.
For manufacturers who are already stretched thin, adding DTC capabilities may strain resources further. Also, attempting to transition to a DTC model half-ready can backfire, hurting the brand and alienating existing distributor partners. But, the manufacturer who is willing to invest in technology and commit to a new business model, marketing directly to the consumer can have many benefits, particularly increased customer intimacy and brand loyalty. Ultimately, DTC may be what the customer wants—and demands. Who can argue with the customer?