Business flows through wholesale and retail. DTC can be an incredible opportunity for growth (if executed properly).
“I’m trying to find a [product}, and every single retail store and online supplier says it’s out of stock. I can’t find it anywhere. When will I be able to get one?” One person commented on our client’s Facebook page. And this certainly isn’t a stand-alone comment, oh no. This company hears about it all the time. Even though they have a well-established distribution network, thousands of dealers across the U.S., and produce a high-volume of products from a relatively narrow product-line, it never seems to get the right products in the right stores, at the right time. We will keep their identity hidden, however the stories are real. The challenges they face are the same for countless companies across the world. Selling directly to consumers addresses this challenge head-on. DTC may never become the highest grossing sales channel, so it needs to be done carefully, so as not to damage wholesale and retail partners in the process.
Why Brands Should Sell DTC
Most brands and companies that manufacture or sell a product do so through distribution channels, such as wholesale and retail. This model has been the primary method of scaling a company and getting products to the largest quantity of consumers. However, with advances to the internet, technology, and logistics infrastructure across the world, companies now have the most practical ability to sell directly to consumers. If companies are going to add another sales channel utilizing DTC, there are a few considerations that need to be made to ensure they don’t damage their existing channels and undervalue the relationships that sustain the company.
The Smart Time For DTC
Any company that is considering new sales channels, including direct to consumer, should make sure they’re doing it for the right reasons… and that it is the right time to make the shift. The most important factor to consider is whether or not the current distribution models are providing a good service to the consumer. This means they have reasonable access to your product and at a fair price. Are the existing retail channels upholding the value of your product?
Consider DTC when;
- Distribution Isn’t Reaching Consumer Locations
- Stores Aren’t Stocking Your Product (Even Authorized Retailers)
- Stocking Excess Inventory
- Need To Move Aging Or Obsolete Inventory
Poor Wholesale Distribution
A company we work with is a well-respected manufacturer in their industry. Their particular industry relies heavily on wholesale distribution to get their products into mostly small retail stores, which are privately owned. When wholesale distributors aren’t effectively educating retailers and selling their products to the store owners, this may be a primary catalyst for deciding to sell DTC. No, it is not going to change this company’s profitability radically… and it’s not going to help them scale to levels that were previously unattainable. However, it will help them add a new sales vertical at a much higher margin than their primary wholesale model. Additionally, it will also improve consumer brand perception for our client by giving their customers a way to interact directly with them.
By choosing to go DTC, consumers who missed out on speciality products in local stores will now be able to purchase them directly from the manufacturer. DTC didn’t harm the local store owners either because these products weren’t being stocked and their customers weren’t going to buy anything else in its place. This was simply a condition where a new market expanded the opportunities for the company, without harming their primary distribution relationships.
Aging Or Obsolete Inventory
Another company we’ve been working with for a few years has had incredible success with a similar business model of wholesale and retail sales channels. However, this company had a few lagging product lines. These lagging product lines had expected to be successful and the company had manufactured large quantities of inventory. The engineering, tooling, manufacturing, and material costs of creating these products really started to pile up. Coupled with lagging sales and poor distribution, cash from the company tied up in capitol that’s collected dust.
To combat this situation, the first strategy should always be focused on a concerted effort to increase sales through training and improved marketing. However, when those efforts have been given the full focus and treatment they deserve, yet still fail to meet the sales goals, a new strategy may be appropriate. DTC sales should be considered in this situation, and can help move lagging products that aren’t being stocked or sold by existing channels. DTC can also free up valuable resources and allow the company to move on from this product line and focus on more successful products in the company.
DTC Without Damaging Wholesale And Retail Partners
You may be convinced that a DTC sales channel could be used as a compliment to your existing sales verticals, which may plug holes and shore up lagging sales, but there is also a primary factor you need to think about before establishing any new route. If you are considering moving to this method, it’s critical to make sure you do not harm the relationships you’ve established with your existing sales partners. Without careful consideration, this can happen inadvertently and quickly, leaving you to double back and salvage crucial relationships.
No Discounts (On Good Products)
It’s tempting to encourage sales by running promotions and offers, however, as the original manufacturer it’s important to uphold the suggested retail (MSRP). Your end customer and retailers will be looking to your leadership to build the value and price of your products. If the manufacturer is offering deep discounts that are competitive with wholesale pricing, or even simply trim value from the retail store, then those sales channels will lose trust in your company. The companies that we work with commonly sell their products in independently owned stores as I mentioned earlier. Their products are sitting next to those of direct competitors. Removing any incentive from the retail store owner to suggest a competitor’s product over yours can be catastrophic, especially at scale. So you must support them by holding the line on retail and allowing them to negotiate directly with the customer and provide a better value than if they purchased from you, the manufacturer. This builds trust and puts some of the pricing power in the hands of the retailer, which encourages them to buy more from your company. Now, they can offer a premium product to their customer at a lower price. Everyone wins and you’re on your way to creating a distributed army of sales people advocating for your products.
When To Discount
Slow Movers & Obsolete Inventory
There are products you can discount, and there are products you probably should discount. Products that are well-stocked in your own inventory and through distribution or retailers that suffer poor sales figures can be sold well through DTC (even at a deep discount). One of our clients recently introduced a program to sell three specific products which retail over $2,000 at 50% off MSRP. This deep discount is driven by the knowledge that they will be discontinuing the product in the following year after several years of poor performance. The deep discount on this product will not harm retailers, because they’re struggling to sell it too. If the manufacturer is concerned of blowback from their retailers, you may consider offering an exchange program to replace the obsolete (OBS) inventory with newer, quicker turning products.
As the original manufacturer, you’ll likely have a greater ability to sell specific product lines in large quantities that individual stores struggle to sell. You offload the inventory, retailers free-up capital to purchase faster turning products from you. End customer gets a great price on something they want. Everyone wins. Other successful discounted scenarios include:
- Discontinued Products
- Products Not Available From Retailers
- Poor Interest From Wholesale Or Retail
- Specialty Groups
- Government, Law Enforcement, Military Organizations
The companies we work with that have added direct-to-consumer sales using their own online stores are winning big by creating additional revenue streams and improving relationships with their customers through eCommerce websites and direct purchase relationships. Providing these customers with products where they haven’t had convenient access.
We have found that product manufacturers truly have a unique ability to create a remarkable web presence. By showcasing all of the products they offer online, they elevate public awareness around the quality of their products and the brand itself, when limited exposure is common at retail stores. It’s time to invest in your own direct to consumer online store. This may be a significant undertaking, however, identifying the right agency partner that is experienced in creating direct-to-consumer websites for manufacturers provides the expertise, advice, and leadership your company needs to deploy a successful store, worthy of your products, company, and brand.