Should Wholesale Brands Start Selling Direct-to-Consumer?
With the rise of consumer platforms, brands no longer need to solely rely on their distributors to stay in business (and they shouldn’t).
Today, channels like Facebook, Google Shopping, Pinterest, and of course Amazon – offer traditional wholesale brands an opportunity to expand into the world of selling direct to consumer.
According to a recent survey, 59% of respondents preferred to do research directly on brand sites and 55% want to buy from brands directly (vs. multi-brand retailers).
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Unfortunately, many traditional wholesale brands are resistant to change.
“One of the biggest misconceptions for wholesale brands is that they don’t think they have to advertise on Google Shopping, Amazon or any other channels,” Jostin Munar, Manager, Retail Search at CPC Strategy said.
“Your wholesaler distributors control your price point. Even though you are making that additional margin, what happens when your third party retailers start to fold?”
This could put your brand in a very difficult position, especially if you only rely on brick and mortar retailers.
“As a brand, the main issue is if you stick to wholesale, you won’t be able to maintain control over your brand in the long term.”
“I know of a very popular apparel brand, who is now in the process of trying to move direct to consumer but their leadership does not see the value.”
“They have about a dozen major retailers they sell to and the assumption is that these wholesale distributors are always going to be around. But that isn’t a guarantee.”
Another scenario is maybe you are a brand who has moved beyond the “fear” stage of DTC selling.
For example, a high end shampoo manufacturer is distributing their product through select salons only. Now, they want to start selling their items on Amazon (or direct to their consumers leveraging Facebook advertising). It sounds like a great idea, until their distributors find out and get upset – threatening to pull their agreements.
So, how do brands navigate those awkward conversations (not to mention logistic issues) with their distributors or approach CEOs and other leadership on the possibilty of DTC selling?
In the following article, we take a closer look at the benefits (as well as the challenges) of integrating your wholesale brand with a direct to consumer business model.
Experts on Brands Selling Direct to Consumer
It’s a unique process for every brand, but there are ways to achieve a new equilibrium and balance of power between the brand and the distributor.
It’s a lot to process, and it definitely doesn’t happen overnight which is why we spoke with Eric Best, CEO at SoundCommerce to discuss how brands can transition from B2B to direct to consumer.
For retailers looking to accelerate GMV growth, and for brands looking to augment the wholesale channel with direct consumer engagement, SoundCommerce provides strategic guidance and validation on approach, goals, budget, infrastructure investment, and unit economic goals.
Essentially, what Sound Commerce offers is the ability to build a better direct relationship with your target end customers.
According to Best, there are thousands of (small to mid market brands in the U.S.) that have their own manufacturing facilities or conduct their manufacturing overseas.
“Most of these companies have mature business practices when it comes to the wholesale model. Unfortunately, they are typically not very digital native or data driven decision makers.”
“We talk about the importance of consumer behavior and signals from the direct channels and informing things like inventory, planning, and merchandising assortment.”
“It takes a cultural and capability shift to go from intuitively hoping you are on the right track with your product road map to using real time data to make those decisions. There’s a lot of elements involved in B2C that go far beyond just marketing.”
Wholesale Channel vs. Selling Direct to Consumer
Before we dive into the process of integrating your wholesale ecommerce model with direct to consumer selling, here’s a quick review of the differences between the two:
Wholesale is when a brand (or manufacturer) distributes their products to retailers in bulk. This model includes the potential to grow your cash flow, since you are allowing your distributors to market your products in their stores or online on your behalf.
Direct to Consumer is the marketing and selling of products directly to consumers from the brand manufacturer. In recent years, the expansion of ecommerce advertising on social media including Facebook, Instagram and Pinterest and the sophistication among advertising platforms like Google Shopping has opened up opportunities for brands to get their products in front of shoppers, without the need for the “middle man” distributor.
What are the Benefits of Selling Direct to Consumer?
1) Better Brand Control
Probably one of the biggest benefits of transitioning your business to a direct to consumer model is the ability to control your brand image, pricing, and distribution methods.
For example, when a brand sends in a bulk order of products to one of their wholesalers, they do not necessarily get to control the placement of that product in the store.
Think about it: Does the distributor place your item up front in the display window or are they in the back near the sales section? Is that something you can control?
What a lot of brands need to consider is – do I want to be known as a brand that can be found in the sales section or are we aiming to be front running?
Because if your items don’t sell, your distributor could put them on the sales rack or liquidate through channels such as Amazon, which could impact the way customers view and purchase your products.
2) Ownership of the Shopping Experience
Another benefit of going direct to consumer is you get to control the shopping narrative. When a customer visits a retailer (such as a Tillys), your product is going to be placed alongside competitors (whether that be in an actual brick and mortar or online).
But in a direct to consumer model, when a customer visits your website they won’t be looking at your products on the same screen as your competitors.
“Once they make it to your website they can compare two different styles of shirts, but in the end both shirts are your items,” Munar said.
“Selling direct to consumer also gives brands the ability to remarket to their shoppers with coupled styles. You can really customize the shopping experience.”
For example, if an online shopper wants to buy a ruffle cascade shirt from GAP, as a brand they can recommend pairing it with Crepe Pleated Joggers or Girlfriend Jeans.
This is something that a brand cannot control if they are selling items through their distributors.
3) Access to Detailed Customer Data
When brands sell their products to wholesale distributors, there is a disconnect with the amount of consumer data the brand will have access to once those sales take place.
The data that comes from a direct to consumer relationship is extremely valuable to brands and helps to identify:
- Who the customers are (gender, demographics, etc.)
- Which items they purchased
- How often customers are buying products (buying cycle, customer lifetime value, etc.)
“Those demand signals, in terms of where your customers are engaging online combined with the benefit of audience profiling tools like the Data Management Platforms (DMPs), help to paint an accurate picture of who your visitors are,” Best said.
“When they convert and become your customers you have access to audience information data, and ultimately end up with a very rich picture of who your customers are and what they like.”
4) Build Direct Relationship with Your Customer
Most brands agree that establishing a direct relationship with your end customer can be pretty powerful. Having access to customer profiles and buying patterns, can help brands better understand how to reengage with their shoppers – whether it be through email (like the example from TOBI below) or other remarketing tactics.
Selling direct to consumer also gives brands a chance to build loyalty from a successful relationship with the shopper and drive long term customer value through repeat purchases.
5) Drives The Implementation of Technology
In order to be successful with direct to consumer selling, there’s a certain IT digital readiness that’s required.
“In my experience, when brands go direct to consumer they become more technologically driven in terms of their approach to operations,” Best said.
“You are dealing with transaction life cycles that are measured in hours and days, rather than weeks or months. The direct channel can quickly expose areas where you have hidden inefficiencies and operational problems. These issues will become very obvious when you are trying to operate in a more agile responsive manner.”
Why Do Brands Hesitate to Shift to DTC?
Knowing all of these benefits, you would think most brands would be willing to start the process of integrating a direct to consumer model – but there is still a lot of pushback and hesitation. Here’s a couple reasons why:
1. Fulfillment Challenges
Aside from the – “this is how we have always done things” argument, there is a massive shift required to become B2C fulfillment ready, especially living in a world of consumers with very high shipping expectations (thanks Amazon) like 2-day, same day or even 1 hour shipping.
According to Best, “It’s one thing to be able to pick and pack the item to be able to ship it competitively through FedEx or UPS, but there’s a lot more to the logistic side of the business than shipping the product.”
The companies that are actually competitive in fulfillment have the ability to move inventory across the country, where products are staged closer to the customer door so they can ship faster.
Most of the new fulfillment centers are being set up on the outskirts of urban centers, so they can offer things like next day or same day delivery.
“Thinking about how you compete with that as a brand when you’re trying to build your own warehouse capability is pretty daunting.”
“So, we’re starting to see businesses emerge that attempt to solve that problem such as Convoy (rideshare but for products in need of long haul trucking) & Flexe (a network of warehouses tied together from an app).”
2. Investment Challenges
Second, you cannot expect all the same margins and profits that you are currently getting with your wholesales.
“If you go into the process with that kind of mindset, you are never going to be successful,” Munar said.
“What you have to do is visualize the ‘longterm play’ to connect with those customers and how you are going to make them come back and purchase directly from your brand.”
In additional to that, you also need to understand there will be a fair amount of investment required. From new fullfilment methods & PPC advertising to email marketing, you should be prepared to integrate new technology and strategies into your current business practice.
How do I Shift from Wholesale to Direct to Consumer?
There’s a complexity of issues that need to be addressed to shift your business model from B2B to B2C, and although we can’t address every single one of them in a stand alone blog article – we will highlight some of the most important strategies to keep in mind:
1) Identify Your Customers & Analyze Top 20% of Repeat Purchasers
One of the most important aspects of moving direct to consumer is figuring out who your customers actually are. Specifically, who your repeat customers are and determine what their customer lifetime value is.
According to Forbes, about 20 percent of your customers produce 80 percent of your sales.
But if you are only selling via wholesale, you probably don’t know too much about the 20% of those repeat purchasers – yet.
What brands need to figure out is:
- Who are the top 20% of repeat customers for my brand?
- Which items are my repeat customers purchasing?
- What’s the average order value for my repeat customers?
- When are my repeat customers making these purchases?
For example, over a period of 1 year, Joey Smith bought 2 black ribbed Surfer beanies in September, 1 pair of distressed slim fit jeans in November and returned again in December to buy a pair of limited edition Jefferson suede oxford shoes.
“Realistically, these are the shoppers you want to better understand and continue to build your customer base on,” Munar said.
“You shouldn’t be too concerned with the individuals making 1 or 2 off conversions. You want to focus on the people who are spending lots of money, throughout multiple years, making multiple purchases from your brand.”
From a paid advertising perspective, brands should also take a closer look at who is purchasing their items off non-branded search terms (example: black beanies).
Once you determine who is purchasing your products (based on branded and non-branded keyword searches) then you can start to build out specific email or remarketing campaigns to target those repeat purchasers such as:
- Returning customers get 15% off their next purchase
- Share this product with a friend and get 15% off your next purchase
“At this point, as a brand you are willing to eat that 15% loss for the discount on that customer because you know they fall into your top 20% list of repeat purchasers and are very likely to keep coming back,” Munar said.
2) Create Demand for Your Brand Through Exclusive Products
It wouldn’t be possible to write this post without addressing the elephant in the room: How do I manage my distributors, if I want to start selling directly?
One potential solution to this is to sell your “general release items” to your distributors and create exclusive products – to be sold only on your website.
The first step is to determine which styles you going to send in bulk to your distributors and which styles you are going to offer exclusively through your website.
You have to make that distinction to avoid any confusion later on.
“Most brands do not want to completely step away from wholesale clients. Especially if you were built on that structure and still want to maintain a relationship with them.”
Another suggestion is to create a tiered distribution system.
For example, you can offer your premium retailers a group of select exclusive items if they are willing to bulk purchase your general release items and adhere to strict MAP pricing agreements.
This tier strategy creates a demand for your own brand (both on the consumer side and with your retailers).
Companies that operate under this model successfully include Adidas and REEF. Both offer general release items to their retailers, but only offer exclusive items on their ecommerce sites.
As seen in the example below, REEF featured a “website only” holiday special last year for exclusive new colors and styles of sandals.
3) Enforce MAP Agreements
For those who don’t know, Minimum Advertised Price (also known as MAP) is the minimum amount that resellers agree not to advertise below.
For example, if a backpack company sets a MAP price of $50 for its best selling item than all distributors including brick and mortar stores and Amazon resellers are obligated to advertise this product at $50 or more.
If they advertise the product at a discount of $35, the distributor would be in violation of the backpack company’s MAP agreement.
As manufacturers grow they may develop relationships with other product distributors. Unfortunately, sometimes manufacturers discover they are being undercut by unauthorized one-off resellers which are not adhering to the Minimum Advertised Price (MAP).
It’s important to evaluate your current seller agreements with your distributors to ensure they are maintaining MAP.
4) Differentiate Your B2C Model Through V-Commerce
“I think one of the biggest reasons retailers are still alive is because customers want to go in, touch and try on the product, so they have a better understanding of what they are purchasing – from shoes, to phone cases to laptops. Being able to create that unique shopping experience for your customers is something brands are going to have to figure out,” Munar said.
A potential solution to this is the emerging “V-commerce brand”.
In 2015, V-commerce companies generated 6.6 billion in sales, and are projected to hit 16 billion by 2020.
Jean Chatzy, Financial Editor of NBC’s TODAY show said the new wave of online shopping companies called digitally native vertical brands – “V-commerce” for short – traditionally don’t have brick-and-mortar stores.
“Companies want to have a real relationship with their customer and the shopping experience should be experiential,” Chatzy said.
For example if you search for direct to consumer shoes – you might end up at a place called “Everlane” where they are very transparent about their process of making products and how much it actually costs them.
Warby Parker, is another example of a brand who wants to bring the experience of the products to the consumer, by allowing customers to try them on free of charge. If you like it , you keep it, if you don’t – just send it back.
Trunk Club subscription models, (think the Dollar Shave Club’s of the world) are another example of brands trying to create a unique shopping experience.
Tamara Mellon, former chief creative officer and co-founder of Jimmy Choo said it best in her interview with Racked:
“This is how I think the next generation of luxury brands are going to be built. I don’t believe the next billion-dollar brand will be built in the way I built Jimmy Choo. The way we used to build brands was wholesale and retail. The last brand, probably, to be built like that was Michael Kors.”
“Today, our customer she lives in digital, and unfortunately as an industry, we operate in analog, in a 50-year-old, 60-year-old business model and the customer doesn’t want to shop that way anymore.”
The Future of Wholesale
Ultimately in order to be competitive and survive, brands need to take advantage of all the channels that are available to them.
“It’s really more a question of what does the steady mix look like between DTC & Wholesale? The answer to that, depends on whether or not retailers are able to survive based on their own merits,” Best said.
“There are certainly channel conflict considerations. I do think it’s a different world today versus 5 or even 10 years ago, with the rise and of consumer platforms like Facebook, Google, Pinterest, and of course Amazon.”
“My prediction is that the lines between the manufacturer brand and retailer will continue to blur and businesses seeking sustainable growth are inevitably going to come full circle to those direct to consumer channels.”
For more on selling your products direct to consumer, email [email protected]
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