The rise of D2C (Direct-to-Consumer) eCommerce is encouraging for manufacturers, but often it’s observed as the threat for distributors upon whom manufacturing brands have relied on to sell products for decades.
Why is that? Let’s dive deep.
Why is the D2C approach a threat for Distributors / Retailers?
Cutting out the middleman is considered to be the foremost advantage of the direct-to-consumer approach among various others. Why? Manufacturers are not doing this only to establish a direct connection with customers but for better profit margins as well.
The mutually agreed upon rule is that Manufacturers make products. Distributors and retailers procure it in large quantities and sell it at a higher price to end customers. At each hand off, the price level increases but manufacturers manage to get only a fraction of it.
A D2C eCommerce approach enables manufacturers to cut through the middleman. The marked-up prices are now the sole property of manufacturers.
Though this sounds like great news, the actual fact is that manufacturers could experience some shortcomings in the longer run. Why is that? Read on.
Shortcomings of removing distributors entirely from the supply chain
There are quite a few concerns that manufacturers have to address after removing distributors out of the scene.
- Rising fulfillment challenges
- Customer acquisition cost
Rising fulfillment challenges
Owning the supply chain end to end means the tail end, order fulfillment, is your responsibility now. Building a fulfillment team is a more complex thing than building a D2C eCommerce website.
For a start, your D2C brand could opt for a borrowed supply chain, but that won’t work for long. For manufacturers, saving the marked-up prices imposed by distributors would make no sense as it would ultimately be lost to expensive leased distribution.
Also, the COVID-19 pandemic has made fulfillment one of the crucial differentiating factors for consumers. They are expecting brands to provide conveniences like curbside pickup, in-car, in-trunk, and in-garage delivery. All these pandemic-forced fulfillment demands are added challenges for D2C brands struggling to establish their own supply chain.
Customer acquisition cost
Though you own an eCommerce store where customers can directly purchase products, acquiring customers is not easy.
Right from getting the word out to engaging customers on social channels, you need well laid out marketing strategies. Remember, your retail and distribution partners have already been there. Tapping on to their well established loyal customer base and marketing expertise can help save customer acquisition cost.
The points we have discussed above seem to contradict the idea of keeping the entire profit margins in a D2C approach. But wait! There is a fix that’s often overlooked.
The fix – How D2C brands and distributors can co-exist
In a direct-to-consumer model, though you are willing to hand off a portion of sales to distributors, you are more or less their rival. But there are various ways to ensure the continued satisfaction of your distributors.
#1 New sub-brand for products sold via 3rd-party partners
Create a new sub-brand for products that can be sold by distributors. While keeping new or unique products to yourself, you can partner with distributors to sell your evergreen products. You can also create exclusive products for retailers who hold a track record of high sales.
54% of manufacturers said both they and their channel partners saw growth in sales as a result of a D2C model by funneling order fulfillment for larger orders through to distributors and retailers – Fidelitone.
#2 Make retailers your promotional partners
As we’ve discussed earlier, customer acquisition is one of the most important factors that can gobble up the profit margin. Encourage partners to take an active part in promoting your products. By doing so, you can leverage their connection with customers, tap into the brand community they have built on social channels.
#3 Distributor Fulfillment
Manufacturers can take the route of fulfilling orders through their distributors. However, for this idea to work out well, manufacturers will have to decide the payment model. It could be like either the manufacturer collects the payments and then pays the distributors or vice-versa.
Retaining distributors who provide a service to end customers not offered by a manufacturing brand would ensure that the customer is not lost.
But what if none of your distributors don’t enjoy a direct connection with a buyer? In that case, it would be difficult for a manufacturing brand to decide which distributor in your supply chain should be getting the fulfillment project. There are a few options.
- Offer every distributor a chance to fulfill and decide based on results
- Assign fulfillment based on geography
- Grade customers based on their customer service
- Assign fulfillment duties based on products in stock
How Tivoli Audio does it
Tivoli Audio is an American audio electronics brand that sells directly to consumers. It’s an appropriate example of how D2C brands can create a mutually beneficial situation keeping distribution partners intact.
The brand that sells to cross-border markets uses the traditional approach for fulfillment but with a little twist. Tivoli creates a website with a local flavor and domain (ex: tivoliauido.au) to sell products through retailers in that region. The brand takes care of the marketing initiatives while distributors take care of sales and fulfillment.
By doing so, the brand is able to enter new markets without establishing a retail store or own distribution channel in that geography. At the same time, distributors benefit from more sales due to the brand’s focused marketing efforts.
The direct-to-consumer model’s core idea is not to eliminate distributors but to enable manufacturers to reach consumers directly without 100% dependency over distributors. Keeping your distribution network intact should be viewed as an additional opportunity to establish a sustainable D2C revenue stream and ensure continuous growth.
If you are a manufacturing brand looking for a consultation to plan your DTC roadmap Ziffity can help.