January 19, 2014

The Online Marketing Dilemma


How to Strategize Direct to Consumer E-Commerce Programs

Over the past few months, we have had the opportunity to help a number of prominent manufacturers strategize direct-to-consumer (D2C) e-commerce programs while simultaneously nurturing their relationships with retail channel partners. Entering the exercise, our hypothesis was that all manufacturers should strive to capture more sales through direct channels as direct to consumer sales have higher margins.

But as we found out, the economics of a direct to consumer ecommerce platform don’t always make sense. We came to realize that there’s a time and a place to sell direct, but there are some specific situations in which the value of the retail relationship outweighs the incremental margin or your own storefront.

It all comes down to one question: what is the purpose of your website? It’s very difficult to effectively educate consumers about a product while optimizing the experience for ecommerce. Which is your prerogative? If the purpose is to sell then optimize for sales. If the purpose is to educate, then optimize for education and concede sales to your retailer partners.

Step 1: Make Sure Your Strategy Makes Sense

Along the way we took a meeting with an in-house marketer at a popular consumer electronics manufacturing company that currently operates both a D2C storefront and has a number of retail channel partners. We were pitching a slew of services including SEO consultation to drive on site sales. The marketer, “Jimmy”, was not feeling it.

Jimmy: “I poured $150k into SEO in 2013 but people just didn’t buy from our site. The campaign was successful at boosting traffic but failed to drive sales.”

Us: “You sell a lot at retailers, right? Is there any reason why visitors to your site would prefer to purchase at a retailer over your D2C storefront?”

Jimmy: “Absolutely. We make our prices 2x that of our retailers to ensure we don’t create channel conflict.”

Us: [mic drop].

So… where to begin? You gotta respect protecting your retailers, but why bear the overhead of a D2C storefront if you’re not even remotely price competitive?

Standard operating procedure is for the brand store to operate at MAP (Minimum Advertised Pricing) while allowing retail partners to offer discounts that cut into their margins to offset margin with volume. Any other process is counter-productive to the business: undercutting retailers compromised the relationship but pricing yourself out of the market negates the value of operating a store. The sweet spot is right in the middle.

Where Politics Reign Supreme

Another manufacturer was leveraging MAP but couldn’t take the jump into truly competing with their retail partners. Despite being the brand/trademark owner and operator of a D2C storefront, they opted to concede top paid-search positions to their retail partners. The logic being that they didn’t want to upset their retailers.

Let’s get one thing straight: as a brand, you have the right to own your brand terms and products in search. There is no better place to educate folks about your products than on your own website. Nobody knows your products and business better than you do.

Even if the purpose of your site is not to sell, ceding the responsibility of product education to retail partners is retail suicide. Retailers are concerned with moving high volumes of product due to low margins. If you competitor offers a sweeter margin you’re SOL as the retailer will push their product over yours. What incentive do they have to educate their users to buy your product? It’s your responsibility to leverage your right to education and persuasion regardless of where the consumer chooses to buy.

When It Just Doesn’t Add Up

The final case we’ll present is quite the boondoggle. This manufacturer sells their product in every major electronics outlet including in their own D2C store. After running a consumer lifetime-value analysis we came to the realization that the D2C purchase LTV is equal to the value of the first sale (a multiplier of 1 on gross revenue). As a result, the maximum allowable cost-per-acquisition is equal to the margin of the product (for example if cost of goods are 75% then the profit margin is 25% of gross revenue).

The brand’s retail partners, however, sell much more than this product and are more interested in acquiring new customers than selling a given product. As a result, their marketers can justify a higher cost-per-acquisition as the value of new customer can reasonably be 2-5x the value of their initial purchase. Even through the brand gets cheaper paid clicks as they are the most relevant advertiser, it’s not sustainable for the brand to engage in direct-response advertising when competing with retail partners due to the lower lifetime value of the customer acquired.

Simply put – the brand has less money to purchase their sales because the lifetime value of the sale is worth less to the brand than it is to the retailer. As a result, we concluded that brand.com is better suited for product awareness and education rather than direct-response sales.

It’s worth noting that there will always be a sub-set of consumers who prefer to purchase products from the “Official Store” but coupon codes and special offers at retailers often make the Official Store the most expensive place to buy the product (think the Apple Store versus Amazon for a MacBook).

If a consumer truly wants the Official purchase experience, we will provide it, but the goal of the website is to engage and educate users measured by activity proven to lead to sales.

In Summary…

The examples above represent some of the most commonly observed situations we found when evaluating the viability and value of D2C projects. In most cases, it’s in the interest of a business to build a store and get the incremental margin. That said, there are always special situation and it pays dividends to step back and take a macro view of your particular ecosystem before diving into D2C.

 

By the way – we doubled our sales last year, do you want to? Call our bluff by calling our phone number now.

 

1.866.343.4310 – or visit us at sellpoints.com

 

Before your competitors do.

Want more stories like this? We deliver!

Recent Posts