How Do I Build a Successful Direct to Consumer (DTC) Business?

If you don’t have a DTC business, you lose your competitive advantage. You don’t manage your customers yourself and don’t build long-term relationships with them. In short, you are putting yourself in the hands of third parties who have no direct interest in your success.

Our message is simple – manage the relationship with your customers yourself. That is the only way can you keep and defend your margins!

What does Direct to Consumer (DTC) mean?

The Direct to Consumer (DTC) model is mostly associated with eCommerce businesses, but it is, in essence, used when a company sells a product or service directly to customers, without the involvement of third parties, wholesalers, or any other intermediaries.

It is generally used in:

• eCommerce
• tourism

Companies and brands that do not have online stores on their websites are nowadays losing their competitive advantage. The reason for that is simple – they do not manage communication with their customer themselves.

It is very important to remember that the main reason for starting a DTC strategy is not to cut out the middlemen. On the contrary, you need to collaborate and build your brand together.

DTC brands are nowadays becoming increasingly sophisticated with customer retention, finances, product development, brand strategy, and omnichannel communications.

The main reason to start using the DTC model is to own, or manage, the relationship with your customers yourself. That is the only way can you preserve and defend your margins.

What are the basic characteristics of Direct to Consumer businesses?

We divided the basics into 7 basic characteristics of DTC companies.

We focus on these basics because we have noticed that it’s very easy for brands to get lost and put their destiny in the hands of Google, Facebook, and similar channels when looking for success.

Success doesn’t come from Google or Facebook. Success comes from you, your strategy, product, communication, and your ability to absorb and manage market changes.

We are not going to talk about your values here, although they are also extremely important, but we would like to focus on the main characteristics that we see as essential for success in today’s market.

7 basic characteristics of DTC companies:

• Delivery or production time
• Supplier payment terms
• Operational costs
• Margin
• The ratio of organic traffic to paid traffic
• 60-day customer lifetime value
• The number of distribution channels

Delivery or production time

We will focus on delivery time, mainly because most brands do not have their own production. If you have it, that’s great, as it helps you manage the delivery time better.

Delivery time (or lead time) is the average time period between the vendor’s order and the receipt of the product, i.e. the delivered goods from the producer.

The longer that period is, the more you have to be good at something that is basically impossible: forecasting.

The further into the future you forecast, the more the risk increases. Likewise, your ability to capitalize on new opportunities declines.

You need to manage your delivery time as well as you can for a simple reason: an opportunity will present itself and will be a high demand for your product, and there will be a great possibility of you losing income instead of capitalizing on that opportunity. In most cases, the Pareto principle applies: 20% of products bring 80% of income!

Tactics to improve your delivery time

Manage your products and the sell-through rate

In order to manage your inventories, you have to manage the sell-through rate and make sure you don’t run out of inventories. As Croatia is characterized by pronounced seasonality, some products and services are also characterized by high seasonality. Maximize that market potential rather than sell your inventories during the low season.

Negotiate lower minimum order quantities and maintain your margin

Producers naturally want you to order as many products as possible so they can make a better profit on volume. However, they will likely be willing to negotiate the lowering of their minimum order quantities if you are a trusted partner. Maintain your margin with smaller order quantities.

It is better to pay more to order smaller product quantities more often when testing new products.

Again, it is very important that you pay close attention to customer behaviour so that you can determine whether you are overstocked or understocked at any given time.

Work with local contractors and producers

Local contractors and producers can receive orders at predetermined frequencies and can create small batches. Moreover, once the order is ready, they can ship their items directly to customers.

This process helps you minimize the need for projections and reduce warehouse space as local suppliers can act as micro-fulfilment centres.

Take over parts of the production process

Go through the entire supply chain and find out how you can reduce delivery times by taking over part of the production process.

Supplier payment terms

What percentage of your inventories do you pay for in advance?

Cash flow, i.e. liquidity, is quite prevalent in eCommerce. However, supplier payment terms are somehow overlooked and are among the least valued characteristics of a healthy business.

If you can negotiate payment 30 days upon delivery, you have the opportunity to realize every vendor’s dream: a negative cash conversion cycle (CCC). In short, you have 30 days to sell your goods and reduce your cash flow.

This will become key as you grow.

Tactics to improve payment terms

Research all suppliers

Research all suppliers and request multiple quotes in order to have more options when negotiating.

Being familiar with supplier costs, payment terms, and production times puts you in the best possible negotiating position. It’s time well spent if it helps your business maintain its margin.

Pre-sales

By pre-selling products and tracking the sales rate, you will know the exact quantities you need, as well as be familiar with future demand. This increases your chances of negotiating better payment terms with the supplier.

Product pre-sales are extremely effective when measuring demand or testing new products.

Operational costs

Unlike variable costs, which should increase proportionally to the volume of orders, operational costs are fixed costs that increase with major milestones.

This is where you estimate costs such as salaries, rent, utilities, equipment, and technology (tools, licenses, etc.).

Generally, in a DTC business, if you want a 25% profit, you have to allocate 25% for operating costs, 25% for merchandise and shipping costs, and 25% for customer acquisition.

It is very important to keep in mind that e-commerce and marketing costs are not linear. There is always the law of diminishing returns to consider.

Tactics to manage operational costs

Clarify the costs and the value of people

Employee costs are fixed as if they had a maximum value, but this is not the best presentation of such costs. Those costs are in fact monetary costs related to hiring employees, salaries, equipment, etc. They are also related to how much time it takes to hire and train a new employee.

Finding the right candidate has a huge impact on the overall value to be brought to the company.

Link agency fees to outcomes

We’ve already seen this happen to our clients: consumption goes up but efficiency goes down. Of course, you don’t want to pay more to make less money. How can this problem be solved?

This requires a certain level of transparency and negotiation. One way is to contract lower percentage classes as your spending grows. Another is to link your agency fees to outcomes so that your agency has a greater share in the positive impact on your business.

Margin

You’d be surprised to hear how unfamiliar entrepreneurs are with their margins. For us, this is the most important piece of information for every company.

It’s very simple – the higher the margin, the more money you make every time you acquire a customer or the more money you have to acquire a customer.

That number is a key piece of information when it comes to customer acquisition costs and your growth potential.

If you are wondering how high your margin should be, we believe that anything more than 100% is good enough.

Tactics to improve your margins

It’s not enough to increase the AOV (Average Order Value) – you should also manage your customers

The problem is that increasing your AOV does not guarantee you a higher margin. A more expensive product does not necessarily mean a higher margin.

Moreover, an uncontrolled increase in the AOV can have the opposite effect, namely a decrease in the number of orders.

To increase your income and profitability, use analytics to find the orders that are most frequent within a certain price range and focus your strategy on encouraging the purchase of higher profitability products.

Test prices, that is, increase them

The price is far more arbitrary and flexible than we believe. We often spend a lot of energy on “guessing” what a “reasonable” or “acceptable” price for our products would be.

Moreover, it often happens that once we set our prices, they become sacred.

Consumers don’t care about them nearly as much as you do. In fact, increases in prices are hardly noticeable. The fact that there are a couple of comments on Facebook about your prices does not necessarily mean that the same applies to everyone. Focus on an adequate number of comments and then make a decision.

In the end, it is not the price that matters, but the perceived value of the product.

Take the time to test everything and find the perfect balance between profitability and purchases, as an increase in prices can lower conversion rates.

Even though your AOV and margins are higher, you will make less money than before, and each click will become less valuable.

At the end of the day, even though this happens rarely, if a customer complains about seeing items on your website at a lower price, sell them to that customer at a lower price and move on.

The ratio of organic traffic to paid traffic

If more than 50% of your business comes from paid traffic, you are not doing well in the long run. Advertising costs will only go up – in most cases much faster than your margins.

The iOS 14.5 update and similar ones are just a symptom. The more your business depends on any one channel, the greater the risk to you.

If you want to do business sustainably, start using organic traffic:

• Email
• SMS
• Chat
• Organic social media
• SEO
• Blogs and useful content.

All of these are much more stable forms of traffic, and they are mostly resistant to any updates and algorithmic changes.

Organic growth takes time, but it becomes a constant source of traffic that is more resistant to change.

Are you interested in a healthy ratio of organic to paid traffic?

We find that a minimum of 60% of organic and 40% of paid traffic is optimal for a sustainable business, and 80% of organic and 20% of paid traffic for a sustainable and profitable business.

Tactics to improve organic traffic

Aggressively search for email addresses and mobile phone numbers (direct contact with the customer)

Think beyond the initial purchase. How can you capture emails from the overall traffic you’re currently generating (even paid traffic)?

A 20% off pop-up is better than nothing, but there is also the possibility of quizzes, style guides, competitions, workshops, comparison guides, etc. Experiment with different offers that link directly to the product you’re promoting.

Set clear goals

Set an income goal for your organic channels each month. Use your own historical data and growth rate to forecast goals. Moreover, create a marketing calendar to hold yourself accountable

If we take emails as an example, and if they generate only half of what you expect, you can find ways to grow later in the month. This may include adjusting your calendar, changing your offer, or sending more emails to reach your goal.

Identify and invest in existing communities

Don’t forget that some great marketing happens within communities. Choose the community you want to target and make your brand enter their conversations.

The more you stay relevant in these communities and the more you work with great influencers, the more you’ll establish yourself and your products.

To be clear, this is not about building a community around your brand, but rather

about injecting your brand into existing communities where your target market already exists. How do we measure this? You’ll know you’re doing it right if you get an increase in brand mentions and searches for keywords including your brand.

60-day customer lifetime value (60-day CLV)

We won’t go into what LTV or CLV is because you surely heard of them before, and there are various models and formulas to calculate them. It is important to know that there is no unique formula, but that it is crucial to define what we want to see as LTV and how that contributes to our business.

What we would like to refute here is the fact that, in most cases, people talk about the 1-year LTV. We strongly recommend that you do not look at the 1-year LTV. Better yet, you can look at it and optimize yourself based on it only if you have the liquidity that can handle it.

We find that the 60-day LTV has proven to be a metric that is easy to track and that can have a huge positive impact on your business.

The formula is simple:

60-day CLV % = Average 60-day additional income of the user ÷ Average value of the first order

As for the additional income of the user, we are talking about additional orders after the first purchase.

The goal is to fully manage communication with the customer within 60 days following the purchase.

Tactics to improve the CLV

Set up a 60-day email automation

In the beginning, set up 60-day email automation for your top-selling product. Let’s be clear, not every email should be for sales purposes, but we recommend that you use the analysis of sales data and your knowledge of the purchase pattern and create an additional offer for different products that complement the purchase.

Prepare 60-day email automation and try to generate additional income from users.

After that, your goal is to increase the 60-day CLV, initially based on individual product categories, and finally based on user segments (when you have enough data).

Product development and diversification

Research and development are key to product development and diversification. They help create better versions of the same products and create new products to support existing products.

Think about what your customers buy and what accompanying products they need each month or every few months.

What can your business sell to make people keep coming back and buying more every month or every few months?

Number of distribution channels

Omnichannel is no longer a buzzword, it’s reality. That’s how people buy. You reduce risk when you diversify demand and distribution.

If you have your own website, or eCommerce, if you are on Amazon or other marketplaces, if you own retail stores or do wholesale, your business will be much more resilient. And that’s how you grow or scale.

Expand your business to wholesale and retail

With the Direct to Consumer (DTC) model, there is no involvement of third parties, wholesalers, or any other intermediaries. However, this doesn’t mean they are not good channels to expand and diversify your business. True, you won’t have access to real-time customer data. And yes, your margins won’t be as high, and you won’t have the same control over retail.

But larger orders, extended reach, and brand recognition are really valuable ways to offer your products to customers.

Get larger orders through corporate gifts

It’s not uncommon for large companies and government entities to buy products in bulk, especially around the holidays and other times when people tend to buy gifts. Take advantage of that opportunity to offer your products to customers.

Moreover, investing time in building relationships with corporate customers can be a lucrative source of ongoing income for all businesses.

All in all, stick to the basic features and don’t rely on just one channel. The more diversified you are, the more complicated everything becomes, but at the same time, you become more resistant to different market situations.

When times are good, when CPMs are great, your brand will thrive. When they are not, you’ll be a good fighter!