Successful businesses are going direct-to-customer

Business conditions have changed dramatically over the last three years. Decoupling global markets, pandemic interruptions, and high inflation are requiring companies to adjust their operating models. Add to this the fact that today’s customer has very different expectations from just a short time ago, and companies are recognizing that their business must change to effectively serve this New Customer.

The move to a direct-to-customer or DTC business model is underway and was accelerated by the worldwide COVID 19 pandemic. Just as technology has enabled better informed purchasing decisions, technology is also enabling companies to gather more information about customers’ purchasing habits and helping them to better understand what makes a happy and loyal customer. Technology is also allowing companies to enable supply chains to be customer present by tightly integrating demand planning to supply in ways that were previously challenging. At the Digital Supply Chain Institute, DSCI, we call this the Frontside Flip.

Delivering happy and loyal customers in a DTC model, is a journey that requires significant internal change across all parts of the organization as well as new talent and leadership that emphasizes new skills. But when done right, the outcome can quickly impact bottom-line results. This is why many successful companies—both B2C and B2B—are upending their business to directly connect with their customers. In this article, we will examine why tightly coupling demand and supply is so critical in a DTC model.

What is a DTC business model?

Serving the New Customer requires understanding their needs and buying behavior in addition to providing a product and experience that exceeds their expectation.

This requires customer data: What are they buying, when and why. Were they happy with the product and service provided? What else would they purchase if they had the opportunity?

It also requires a supply chain that understands customer demand and can deliver and adjust in a timely manner. A DTC business model understands and delivers to the New Customer by directly connecting the customer with the supply chain.

Apple and Dell are both earlier adopters of DTC, although with slightly different approaches.

Apple opened digital platforms and a network of retail stores to capture mindshare and provide a world-class customer experience. Apple seeks to ensure that experience from the initial sale through the entire product lifecycle. For example, just try to find parts or service manuals for your Apple product. All roads lead to the Apple store. They manage their brand image through controlling all aspects of the customer experience.

Dell on the other hand has a direct online sales model, also wanting to provide an exemplary customer experience that is well choreographed but delivered remotely. Both companies are admired brands but have very different DTC models.

We see DTC gaining traction in all industries whether it be athletic wear at Under Armour, personal care products at Colgate Palmolive or spirits at Diageo. No industry is out of play, and all are overcoming what not too long ago were viewed as insurmountable barriers including regulatory constraints. Digitalization and data are the key components driving this transformation.

Businesses have two clear objectives in moving to DTC:

Create happy and loyal customers, and

Improve operational efficiencies and, hence, the bottom line.

These new business models need to be designed to incorporate key DTC objectives. To do so requires a closeness to the customer that distributor models obfuscate as distributors and retailers sell many manufacturer’s products and want the ability to substitute products that optimize their business performance. They are reluctant to share data about their customer that will enable a product supplier to make better informed decisions about its end-customer. At the same time, customers want a frictionless and consistent experience which is difficult to deliver when you don’t control the buying experience.

Tightly integrate demand with supply

In a DTC world, supply chains must quickly react to demand planning inputs. This means that manufacturing and distribution must be closer to the customer. Tightly integrating supply with demand requires awareness of customer needs, operational integration, and quick adjustments to market dynamics.

Demand planning needs to sense these changes by capturing market and purchasing data so that the supply chain can dynamically react to demand signals. To do so requires reduced lead time with smaller quantities manufactured and distributed closer to the customer. This may result in increased manufacturing and distribution costs; however, knowing your customer more intimately and minimizing wholesale channels provide the opportunity for premium pricing with fewer overstocked products.

All-in-all it’s a path to an improved bottom line with more products being sold at full price. At the same time, less product is available through alternative channels providing more control over brand image. Customer acquisition costs decrease as customer loyalty increases.

Offshoring will be rethought

One valuable result of DTC is its capacity to reduce dependency on offshoring and long lead-time supply chains. It also reduces risk. No longer are goods being manufactured in faraway places with significant trade risk and long transit times. Goods will be manufactured closer to the end customer, using dynamic supply chains and optimized supply chain constellations. Demand will be actively managed in near real-time instead of just forecasted.

The future is promising

DTC business models require horizontal workflows, tight linkage between marketing, sales, demand planning, supply chain and distribution. All of which is more possible today than ever before. However, new skills are required, and new internal operating models are essential to success, but direct-to-customer is a compelling roadmap to future commercial success. The transition will require commitment and insight but for those who are successful, the future is promising. You need to be onboard.

Christopher G. Caine is president of the Center for Global Enterprise (CGE), a New York-based non-profit organization dedicated to the study of the contemporary corporation in the era of global economic integration. The Digital Supply Chain Institute (DSCI), a leading-edge research organization focused on the evolution of enterprise supply chains in the digital economy and the creation and practical application of supply chain management best practices, is housed within CGE. Chris is also president & CEO of Mercator XXI, a professional services firm helping clients engage the global economy. He can be reached directly at [email protected].

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