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Direct To Consumer And Its Coming Era
Succeeding with digital-physical business models means bringing together customers, business unit teams, technology teams, customer-behavior experts, and outside partners to take a customer journey, mapping out how customers use and derive value from your product or service throughout its entire life cycle; and then exploring how you might increase that value with digital and other means.
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The marketing function developed in the ‘Indirect Brand Economy’. Historically, the advantage lay with the entrenched incumbents. Challengers had a bleak chance of breakthrough. The top few players created a high barrier to entry using a capital intensive supply chain network. Small scale distribution was exorbitantly expensive and it was almost impossible to get shelf-space with the retailers unless you drove ‘big volume’ demand. Inability to manufacture, distribute or create customer awareness at scale meant new entrants had almost guaranteed failure.
The third parties involved in value extraction included the advertiser channels who controlled all access to the consumers and retailers who were the only ones to do the last mile demand fulfilment. Right from FMCG to consumer durables, this formula was the holy grail for success and remained so for more than a hundred years.
Fast forward to the current century – legacy systems have longevity and naturally, the major brand and supply systems have endured though eroded. The essentials are all the same - it is important to have an idea, be viably differentiated and create positive meaning. And yet things have changed tremendously. The rush of technology, particularly cloud, has been a game changer in the way brands conduct their businesses. It has fueled a ‘Direct to Consumer’ economy.
This trend of selling directly to consumers without physical outlets started in the 1990s itself with the e-commerce players like Amazon and Zappos. They certainly posed a serious threat for traditional retailers but for manufacturers/brands they simply opened up an additional demand fulfilment channel. It is what transpired in the next decade that transformed this equation – we saw a meteoric rise in D2C companies that started disrupting legacy businesses by creating their own brands and selling directly to consumers. Traditional brands were no longer immune from upstarts with a plan.
So, the obvious question is what has changed? Firstly, an end to end supply chain can now be leased ‘off the shelf’ – this has not only bulldozed a capital intensive entry barrier but has also eroded the value of scale with the companies becoming extremely agile and nimble. Cost of entry has plummeted leading to fragmentation in not just brands but also how things are sold.
Additionally, the rise of digital marketing and e-commerce has ensured that the access to the end consumer is far more democratic – the reliance on the ‘3rd Party hand-offs’ has come down dramatically. In a nutshell, this ‘Direct Brand Economy’ creates value through open source, leased or rented supply chain and does value extraction through a direct relationship between the brand and the customer.
The shift from physical retailing to digital demand fulfilment is leading to creation of a different form of companies – an enriched enterprise where the core asset and hence the entry barrier and competitive advantage is data itself. This emergent reality has made D2C – Direct to Customer - a big force and growing reality as evidenced by the deals between Coca-Cola and Costa, Nestlé and Starbucks and Unilever and Dollar Shave Club. All of those deals are influenced in some way by the advertiser’s need to control first-party data or at least use it in a coordinated way.
A new breed of specialist agencies will come into the picture and be valuable. For example Sokrati Merkle is a leading edge agency in digital, search and CRM data services. It expanded its data services beyond direct mail and email marketing to include loyalty initiatives, data strategy and modelling, as well as technology integration. Every major brand is looking for a service layer agency that can assist in nurturing relationships, steering creative ideas or post-purchase experiences direct to consumer and not only from media buys and reach oriented investment like doing through the traditional agency network. This is not a competition between physical and digital ways of business but a democratization of these touch points with numerous ‘Phygital’ combinations. Central to all of this is ownership of data and creation of a personal relationship between the brand and the consumer.
Technology is disrupting everything and that is not a throwaway line. As a consequence, tent pole campaigns and media dependent growth are becoming déclassé. It’s no longer advertising with a capital ‘A’ but data driven, always on, programmatic advertising with a small ‘a’. Today marketing is like an election campaign without a voting day. Tent pole campaigns and tent pole IPs are being outdone by a virtuous combination of data science and creativity .
D2C is –by definition - an accelerated route to market. This acceleration requires change in legacy systems, organization structures and skills. It demands transformation across silos, on scale. Tinkering with digital bits and pieces won’t do. Discrete digital acts within functional silos won’t help. Data driven D2C demands agility, conviction and a painful metamorphosis when undertaken by legacy players. For new challengers, customer experience as a differentiator is also easier said than done.
It will not be an exaggeration to say that the era of mass brands which used to cater to consumers through mass retail stores and communicate using mass media is now giving way to a new era of very nimble customized or semi-customized brands who cater to the most relevant target audience and have a semi-personalized set of targeted communication for marketing. A two way relationship with the customer is even more valuable than a one way impression as it brings in voluntarily provided customer data. Every brand needs to think ‘Direct’ – the future of the business lies in dealing directly with the consumer.
The growth of digital connectivity made a global consumer convergence possible. Digital interfaces don’t treat third world markets in a second hand manner. The virtual store doesn’t have a velvet rope. It doesn’t smirk at any customer, low or high. The expectations of quality products, services, timely deliveries, online capabilities, responsiveness etc. are irreversible. D2C challengers beat indirect brand behemoths who are pushing outdated value propositions and retaining unwieldy, profit eroding, channel footprints. The earlier models aren’t set up to understand fast changing customer expectations. They are unable to attract and retain the best innovators, data scientists and digital marketers.
To make sense of the Terra Incognita the world’s leading product and service brands will need to do several things :
- They need fluid, flexible, nimble team structures to respond to shifting customer needs.
- They must think of offering compelling digital solutions and experiences, not just physical products or services.
- They must move towards taking complete ownership of outcomes and experiences for customers.
- Leveraging digital technologies, they need to go deep into the usage life cycle to fulfill unmet needs.
- Grow selectively where they can claim profitable market share and in ways suitable for the local environment, not everywhere all at once.
- Leading-edge firms are using asset-light, digital, or e-commerce centric business models to enter into new markets and expand rapidly.
- Supplement traditional value chains with dynamic new value webs that can create and deliver solutions, outcomes, and experiences that customers crave
- Invest in high-tech, multi-local factories and delivery centers that, combined with low-cost capacities, can deliver customized offerings fast.
- Today's delivery models must be high speed, responsive, and resilient in the face of disruptions, in addition to low cost.
- Build global data architecture and analytical capabilities. Leading-edge companies regard global data as the precious fuel driving winning value propositions.
- Move away from the traditional matrix organizational model in favour of agile customer-focused teams supported by platform capabilities.
- Bureaucracy and distance from the customer are death in an age of volatility.
- Acquire, retrain, inspire, and empower a digitally savvy, engaged twenty-first-century workforce.
- Embrace always-on transformation instead of traditional one-and done change initiatives.
- To compete and win in volatile, rapidly evolving business environments, global companies must become adept at pursuing multiple transformations on an ongoing basis.
- Creating a new digital value proposition requires a mind-set shift on the part of leaders, a new form of customer centricity. No matter what kind of product or service they currently offer, they must be willing to fundamentally reimagine it so as to maximize the value customers derive over the lifetime of that product or service.
To answer such questions, they must develop a much deeper, more rigorous, and more empathetic view of customers and their needs than the one they currently possess.
Traditionally, companies developing new offerings have sought out the voice of the customer, but they've generally limited their research to fielding surveys and conducting focus groups, involving only marketing and R & D teams. Succeeding with digital-physical business models means bringing together customers, business unit teams, technology teams, customer-behavior experts, and outside partners to take a customer journey, mapping out how customers use and derive value from your product or service throughout its entire life cycle; and then exploring how you might increase that value with digital and other means.
Every business is now direct to consumer. Some are already there. Others are on their way willingly or otherwise.
Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.