Innovative business models
How do businesses shift to D2C?
Innovation is hard – particularly when an organisation is attempting to launch new propositions that run counter to most of its established processes.
Picking the right D2C model is critical to maximising revenue, insights and consumer loyalty. Unless your organisation is a pure-play digital business, you face some difficult decisions about how to adapt your people, systems and processes for D2C.
When we examine D2C propositions for clients, we segment the market into six channels (outlined below). It’s vital that organisations understand these channels, because they involve different challenges, opportunities, operating models and levels of investment.
Organisations are typically starting from one of these non-D2C channels:
- B2B – businesses like consumer packaged goods companies (CPGs) that have brands but limited direct consumer relationships,
- B2C without D2C – traditional bricks-and-mortar retailers and hospitality venues, which sell physically, not digitally.
Or companies might have an existing proposition with hyper-growth potential in one or more of the four D2C channels:
- Retailers – this includes traditional eCommerce scenario, encompassing businesses that have both a physical and a digital presence (eg, John Lewis, Sainsbury's and Burberry), as well as subscription models
- Digital pure-plays – eCommerce giants, digital marketplaces and digital-only D2C start-ups eg, Amazon and eBay
- D2C solutions – digital pure-plays that offer D2C as a service eg, The Hut Group, and
- eCommerce service platforms – aggregators eg, Checkatrade and Deliveroo.
In selecting the right channel(s), consider:
- Is your D2C proposition complimentary to your existing business?
- Does your operating model support innovation or do you need to build your D2C proposition ‘outside’ your organisation?
- Do you have a clear understanding of your consumer value proposition?
- Are your existing service providers, e.g. 3rd Party Logistics provider, set up to support new propositions?
- Do your systems and processes support dynamic, rapid decision making and data visibility?
- Can you trial, fail fast and evolve your proposition by using an existing platform or marketplace?
- Can your company provide a service to other D2C businesses?
These are just some of the considerations for getting started on the D2C journey, or for taking an existing proposition and accelerating its growth. Our advice is to always start with an uncompromising assessment of whether D2C is right for your business and whether your business (op model) is right for D2C.
If the answer is yes and you have selected the right channel(s), next you must decide how to engage the consumer. Is the proposition a digital storefront? Or would a subscription model generate more consistent transactions and consumer insights?
Subscription models offer unparalleled loyalty
In terms of growth and stickiness, subscription models have been a winner in the past 12-18 months. They’re a powerful way for consumer goods companies to differentiate themselves in the D2C space.
Our research found that consumers are happy to sign up for subscription models in mature categories (ie, video streaming), and they’re embracing newer categories such as meal-kit delivery services. This uptick in adoption looks set to stay – 48% of the consumers we surveyed had signed up for a subscription service in the last 12 months, and 92% of these consumers expected to remain subscribed for the next 12 months. There’s a strong skew towards younger demographics. 75% of those aged under 35 had taken out a new subscription in the last 12 months.
Covid-19 appears to have sparked a long-term increase in online subscriptions
New subscriptions taken out in the last 12 months % among all online shoppers
We’re also seeing evidence of organisations experimenting with subscription models in new categories. Pret a Manger, for example, launched a coffee subscription scheme to encourage customers back into spending during the pandemic. Existing subscription-based business Hello Fresh saw its sales more than double last year, and it’s expecting 25% growth in 2021.3 Part of its success comes from using social media to rapidly build a loyal following and reach thousands more like-minded potential customers. Indeed, the hashtag #HelloFreshPics has generated more than 200,000 Instagram posts from satisfied customers. This is a great example of a modern D2C strategy – driving growth by combining new channel adoption (social media) with a focused business model (subscription).
However, subscriptions can be a double-edged sword. They command loyalty, but subscribers need to feel that they’re getting value for money. UK supermarkets felt the wrath of existing delivery scheme subscribers early in the Covid-19 pandemic. There was a perception that new subscribers were being taken on to the detriment of longstanding customers, who experienced limited availability of delivery slots and poorer service.
The lesson for companies? If they’re going to offer a subscription service, it needs to deliver.
Localisation – a Covid-19 phenomenon or an enduring trend?
Our research also explored the growth of localisation during lockdown. Has it triggered a fundamental shift in consumers' mindsets and, if so, what’s the relevance for D2C? There were two areas that stood out to us. First, the growth of local shopping, and second, the use of social media as a marketing channel.
More than a third of consumers are shopping locally more nowadays than they were before the first lockdown in March 2020. Our research suggests that this behaviour will increase over the next year, as consumers favour products and services with a local connection.
Consumers are shopping more locally, and this trend is set to continue
Whether consumers are shopping more locally since early 2020, and the forecast for the year ahead % among all online shoppers
The takeaway for D2C? Be aware of this shift in customer behaviour and use it to your advantage. Look to incorporate a local connection into relevant parts of the sales process, whether that’s talking to a local advisor online, highlighting a product’s local ingredients, or knowing your local delivery driver. All of these local touches can resonate with customers.
We’ve seen evidence of large organisations embracing localisation and achieving significant growth. For example, the KitKat team in Japan experimented with the marketing and flavouring of the product to create authentically local KitKats. They established the product as a good-luck charm, and trialled innovative techniques such as allowing KitKats to be used as a letter and a stamp, so they could be sent as a gift through the mail. The result? Sales soared. In one survey, Japanese teenagers said that a KitKat was their second-favourite good-luck charm. 4
Our research also revealed that consumers are more willing to buy from a small independent or start-up business through social media than a big brand.
Smaller businesses have greater success in social media promotions
Percentage of consumers who have bought a product that was promoted on a social media site by… % among all online shoppers
Our hypothesis is that smaller organisations offer a more authentic and personalised experience through social media, which whets consumers’ appetites. Larger organisations looking to execute D2C through social should learn from smaller organisations’ approaches.
The bottom line? Subscription models and localisation offer clear opportunities for organisations to carve out growth in a competitive marketplace.