October 09, 2017

The Basics of Going Direct to Consumer

Jeff Giordano

Jeff Giordano
CEO/IR Holdings International, LLC

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We all know the data: brick and mortar, at least in its present form, is dying. Macy's is set to close 15% of its outlets; more than 30 Sears and Kmarts will be scuttled by year's end; CVS will shut 70+ stores.  This comes on the heels of a banner DtC-2016 where global ecommerce sales reached $1.9T. 

Look no further than Peloton Cycle's recent $325M raise—from the likes of Kleiner-Perkins—to know that Venture is deep into the space.  Dollar Shave Club's recent $1B sale to Unilever only added fuel to the DtC fire.  

Macro-issues aside, the simple reality is that the economic metrics of DtC have not changed all that much from it's inception.  Regardless of product or channel you need to understand the numbers before you can determine if DtC is viable for your brand. 

  • Margin:  In order to take a promotional risk and buy media [digital, traditional or otherwise], your product or service needs to have sufficient margins. Retail margins [not including Coop Programs] are relatively easy—manufacture a product that you can profitably sell and allows the Retailer a Keystone Markup. The vendor has no significant promotional, marketing, media and/or processing and fulfillment costs to consider. DtC is much different in that media costs alone can reach 30%. For example, if your $100 MSRP product costs $50 to manufacture DtC will be difficult—$100 Revenue less: 30% media, 10% processing/fulfillment and 10% returns [return numbers vary widely by category].  The bottomline, your breaking-even because your Gross Margin is too thin.
  • Measured Media & CPO: DtC is all about your "Allowable"—how much can you profitably afford to pay for a new order.  Media is not measured by traditional brand metrics [brand perception, brand awareness, etc.], but is instead measured by a targeted Cost Per Order. Whether your paying for Digital Display, a Social Influencer, TV, Radio or Direct Mail the calculation is the same. The Cost per Thousand [CPM] for Broadcast TV is now approximately $40—lets assume you have a product that retails for $30 and costs $10 to the manufacturer. Should you achieve 1 order per thousand [$40 CPO] you've lost money.  If, on the other hand, you generated four orders per thousand [$10 CPO] you are profitable. There are a variety of other metrics that DtC marketers use including: ROPI, MER, etc.; but ultimately, they all come down to the same thing: Cost per Order.

So, how do you know what channel to test and what are the historic or likely response rates that make the channel viable?  The short answer is that without experience or data, you generally don't. There are, of course, some fabulous resources and organizations [American Management Association, Direct Marketing Association and the Electronic Retailing Association] but their response data, when available, is not all that real-life trustworthy. My advice is to work with a DtC-experienced CMO, Advisor and/or Agency to craft a thoughtful experience-based marketing budget and testing schedule. 

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