Dealing with Channel Conflict for Brands Going Direct to Consumer

Posted by Philip Driver on Sep 2, 2019, 11:53:39 AM
Philip Driver

 

 

The number of digital first direct to consumer brands has never been higher and the growth in this approach shows no signs of slowing down.

The number of digital first direct to consumer brands has never been higher and the growth in this approach shows no signs of slowing down

There are extremely enticing benefits for building a direct sales channel including:

  • Have a direct relationship with consumers

  • Create and own your own data

  • Avoid a consolidating retail market

  • Create a new revenue stream with higher margins

  • Expand market reach

  • Test and range more products

  • Improve control

However, there are still plenty of established brands that have either not made the investment, have only dipped a toe in or have tried and failed to build a DTC channel. There are many barriers to entry when it comes to building the capabilities to go direct which we will explore in other articles, but one of the greatest challenges for established brands is dealing with the additional complexity and conflict that the new channel brings. The longer an established brand holds off investing in DTC though the more likely a disruptor will enter the market and gain rapid dominance.

As the number of channels that a brand works in increases so does the resources and the management capacity required. This introduces complexity and internal conflict that may have not been present before.

For most traditional brands they have operated at the top of the marketing funnel, creating product marketing and running above the line consumer engagement and essentially outsourced the rest of the sales and marketing funnel to their distributors and retailers. So, although it is tempting to see the margin and costs savings available by cutting out these middlemen and selling direct, it should not be underestimated the vital contribution these partners play in helping consumers go from awareness to sale. Retail is highly competitive and only the strong survive, they have accumulated infrastructure, processes and experience that is not easily replicated. Brands are often shocked by the level of investment required to go to market at enterprise level across technology, people and partners. Building a direct to consumer channel for most established brands needs to be seen as a long term investment.

Brands are often shocked by the level of investment required to go to market at enterprise level across technology, people and partners

DTC Channel Conflict – Key Areas

The Brand

As the brand your position will be dictated by the history of your category and the influence you are able to bring to bear in the market. Many brands with a high degree of market power have already built highly successful direct to consumer channels. Brands like Apple, Nike, Adidas have huge power and deep pockets to make DTC work. For other brands the need for caution and managing your partners to keep your established business safe is a constant juggling act. As the brand your aiming to build the following.

  • Create a direct route to market.

  • Showcase your products and best practice ecommerce experience.

  • Have direct relationship with customers.

  • Have access to customer data from sales and marketing activity.

  • Create and manage your social proof e.g. Reviews.

  • Most importantly have full control of consumer experience.

The issue with the above points is that for the most part it creates conflict with the next group, the retailers.

The Retailers

Your retail channel is highly effective at getting product in front of consumers and encouraging them to buy it. The issue for the brand is that retail by its very nature is an open marketplace with little loyalty or interest in helping perpetuate your brand (without investment) and customers are always the customer of the store, not the brand. It’s still important to understand your retailers and the core requirements they have such as:

  • Access to product information and assets to showcase product.

  • Product training and POS material.

  • Clear Information to customers on where to find retailers.

  • Clear journey from brand site to retailer.

  • Clear pricing policy and agreements.

  • Co-op Marketing.

  • A level playing field.

Retail is changing rapidly but for most brands it is still the most important channel they have to reach customers. Most retailers are now used to seeing brands going DTC but conflict will be an ongoing part of the relationship. Clear communication with your partners is required if you are to avoid market confusion. Market confusion is probably the single biggest threat to your business as it effects the next group, your consumers.

Market confusion is probably the single biggest threat to your business as it effects the next group, your consumers

The Consumers

Consumers are savvy, often fickle and show varying brand loyalty depending on the category. We are now in an age where consumers have almost unlimited choices and it is no longer enough to simply be visible. In terms of channel conflict the worst outcome of this is that it has the potential to introduce confusion into your market. If consumers are not sure how or where to buy from and messaging is confusing you will lose sales and other easier to comprehend brand journeys will be favoured over yours. Your consumers need:

  • Easy to understand product information and media.

  • Compelling calls to action.

  • Strong Value proposition.

  • Clear and un-confusing journeys.

  • Journeys must be easy to:

    • Find Product

    • Assess Product

    • Buy or Navigate to Retail

If you are not fulfilling these basic customer needs, then your sales will suffer irrespective of the channel you operate in. Channel conflict may be unavoidable, but it can be minimized by clear communication, joint solutions and the adoption of superordinate goals, i.e. appeal to mutual goals relating to survival, market or customer satisfaction.

 

Brand D2C Market Positioning & Tactics

When we work with brands going direct to consumer for the first time, we often use this market positioning graph (an adaptation of Blue Ocean Strategy by Kim and Mauborgne, 2005) to help visualise the strategic problems and possible options for brands.

In the above example we have two axes, along the bottom is price which is never far from consumers minds and on the other axis we have experience, which in this instance means shopping experience. We have positioned three players on the graph. In the bottom left we have the grey importers, foreign copycat products and undersold stock retailers. They sell the product with no regard to the shopping experience at the cheapest price possible. Managing your product distribution is an ongoing issue for many brands and we won’t delve into this further but It’s important to understand that there will always be someone selling your product (or an inferior copy) cheaper. This is an issue for both you and retail.

In the centre you have the mainstream retailers, they have high reach and high volume. They have a standard price and a good shopping experience. They have optimised their consumer journeys to deliver fast and efficient sales within the space they operate in.

Finally, we have the D2C brand. If you are an established brand and not a digital first business or taking an exceptionally aggressive stance to your direct to consumers channel (which is a good tactic for very powerful brands) it is highly likely that your store price is going to be more expensive than retail. This from a brand context is not a bad thing, as the brand you have to show value in your product. The issue arises that from a store experience point of view, especially for online only DTC your shopping experience is likely to be at best on a par with retail. So, from a consumer standpoint your store is both more expensive and has nothing else to offer. Most consumers now take for granted the additional services that big retail offers, easy returns, quick delivery, store points etc.

Your options are now influenced by three factors.

  • Your leadership commitment to DTC as a channel – How aggressive can you be?
  • Your control of the category – Does the brand already control many aspects.
  • Your budget & Team – Can the business support investment in the channel and stand up a team to effectively manage the new business unit.

Important Note: When a brand enters the DTC channel it needs to have a pricing strategy worked out ahead of time. What should your price point be and how will this affect the market? it is also highly advisable that you take legal advice on this subject. Nothing we are mentioning in this post can be considered legal advice and you could face concerns of market collusion or anti-competitive behaviour from the choices you make.

As the brand its typical that you want to maintain as higher a price point for your products as possible across the market. However, this can create a paradox for your DTC channel which will usually have a sales and revenue target applied to it. So how do you attract customers to your DTC store, especially when your using premium pricing and a standards sales platform?

Premium Brand Experience

The vast majority of brands that we work with all aim to build a premium brand direct to consumer experience. In a traditional bricks and mortar setting this can be achieved through experiential marketing and services. For online store this is harder, although technology such as augmented reality is helping many brands bring their product to life. Outside of new technology brands usually focus on the wider sales experience and ongoing consumer relationship that traditional retail can’t or won’t do. This could be with new ranges, services and value adds, out of box experiences and after care. Now that the brand has a direct relationship with their consumer, they can also start to think in terms of lifetime value and ongoing communication.

Non-Direct Competition

Irrespective of the experience you build around your brand and consumers you are still operating a store and want to drive sales. Without dropping your standard selling price, which is a route to the bottom, you will still want to start to apply trading methodologies. These can be traditional like running sales and promotions, Black Friday Sales etc. to indirect discounts via affiliates and niche audiences e.g., Student discounts.

Building a strong association between your DTC channel and your product and distribution teams is also a key to success. Making sure that as the brand you are always in stock is essential as well as ensuring that the store receives good options on older or end of life product. Over time you may also wish to build in a pricing model that reflects the lifecycle of your products, helps clear old stock and prepares for the launch of new products. As the brand owner you can also control the new product launch experience, you may decide to keep new products as brand exclusives totally or have variants only available in the DTC store. We have seen huge gains for DTC channels around the use or pre-orders that both help to increase awareness of new products and gives you important sales forecasting data.

 

Going direct to consumer for most brands is now a matter of when and how rather than why. For help in developing your direct to consumer plan, contact us for a free initial consultation.

Topics: marketing strategy, CRM, DTC, b2cmarketing

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