What is D2C model? Direct to Consumer (or D2C) means brands manufacture and deliver their products directly to the customers. No middleman is involved.
How does D2C model work? In Direct to Customer model, customers get the products directly from the brands that manufacture them. Hence they get a great experience while the brand gets higher margins.
The D2C model is gaining popularity in countries like the US, China, Japan and India. India is the 4th largest D2C retail market.
Before we discuss the direct to consumer model gaining popularity, let's explore what we'll be covering today:
- A Simple Meaning of Direct to Consumer Model
- The History and Evolution of D2C
- Difference between D2C, B2C and B2B
- Why is D2C is so popular in India (+Stats)
- Pros and Cons of D2C Model
- Different Types of D2C Model
- And Examples of D2C Model
Without further ado, Let's dive in
What is Direct to consumer (or D2C) Retail?
Direct to consumer (D2C) is a retail model where brands can market, sell and ship their products directly to the consumer without any middlemen involved.
Primarily, D2C brands distribute their products via their own channels Such as their eCommerce platform, social media or a retail store. Physical stores by D2C brands are purposely designed to boost brand awareness and customer engagement, encouraging more sales online.
Many Indian startups and brands have already emerged in the D2C segment, including mattress brands such as Wakefit and sleep. fashion startups such as Bombay Shirt Company and Bewakoof, and personal care brands such as Sugar, The Man Company, and Mamearth.
The History and Evolution of D2C
If you look back in time, you can see how it all began with the concept of direct selling, which involved trained salesmen covering different geographical areas on foot, going from door to door.
Brands need to follow a traditional supply chain where their product needs to bypass multiple gatekeepers such as distributor and wholesaler before reaching the customer.
Then came E-commerce, which replaced all these middlemen with an online marketplace with brands advertising on it. Of course, It makes sense as these marketplaces were having traction.
However, there were two major problems the above approaches:
- The middlemen were directly in contact with the customer, not the brand itself, which may hurt the customer experience with that brand.
- The middlemen hold a large chunk of consumer data. This means brands may not leverage consumer insights or marketing and future product enhancement without gatekeepers.
But, that all changed when the D2C model was re-introduced in digital form.
Brands got complete control over their distribution channel. They were no longer reliant on wholesalers, retailers, and other intermediaries. In other words, Brands decide how they distribute their product to customers without sacrificing their customer's experience.
What is the Difference between D2C and B2C and B2B?
D2C is when a manufacturer sells directly to the consumer instead of selling through a third-party retail shop.
But, In B2C (or Business to Consumer), a company sources a product from a manufacturer and then sells it to the customer.
Whereas B2B involves selling a product in large quantities to another company or a business. This type of model goes through long term deal structures, unlike B2C or D2C.
Why is the D2C Model So Popular in India?
Businesses are going D2C because it’s now easier than ever for them to reach their customers directly through a website or social media channel.
This is because:
- Increasing internet penetration
- Shifting consumer behaviour
- E-Commerce platforms with improved logistics operations
- India holds a highly positive outlook for Direct -to -consumer businesses.
- an increase in first-time internet users and rising household income
Stats on the Popularity of D2C in India
According to an Avendus report, the country's D2C business will be worth $100 billion in five years i.e 2025. Currently, there are up to 600 Indian direct-to-consumer (D2C) brands, a figure that is Out of which, more than 16 brands with annual sales of more than $60 million.
Why you should choose the D2C Model?
Simple: To increase your profits.
Although it’s simpler to use a middleman, it reduces your profit greatly.
Pros of going D2C are:
Benefit #1: Reduced distribution cost
By eliminating gatekeepers, brands can reduce distribution costs and gain major control over their profit margin.
Benefit #2: New distribution channels
Before D2C, the discovery of products primarily happened through brick-and-mortar stores, radio Television and Print ads. With an effort to drive foot traffic and sales, brands used to spend heavenly on these channels.
Benefit #3: Strong customer relationship
With consumer data in hand allows D2C brands to understand consumer behaviour, identify patterns, trends, wants, preferences and know the tastes of their consumers Having full control over data also facilitates brands to create new product lines, market effectively and engage consumers in a personalized way.
With fewer barriers to entry, D2C brands can deliver higher margins while maintaining greater control over their data, marketing, and sales strategy.
Benefit #4: Space for product development & testing
One of the most valuable assets Direct to Consumer brands have is the ability to obtain immediate feedback and use it for product innovation.
Most brands have a research team that is constantly speaking with customers and a product development team that incorporates those insights. Due to access to rich data, brands frequently test new concepts on early adopters before executing on a large scale.
Challenges for D2C brands
By now, you would be convinced that going direct to consumer provides opportunities for brands to improve customer relationships and increased profitability.
Nevertheless, these opportunities are not without risk and challenges. It is important to reflect on some of these problems a D2C brand might face:
Challenge #1: High competition
While the number of current D2C brands may seem fairly low, However in the coming years, you should expect an increase in competition in the space, becoming a key battleground for customer acquisition.
Challenge #2: Increased Operations complexity
The good thing about going D2C is giving your brand complete control over operations.
But it makes daily operations a lot more complex. Brands will be juggling a lot more aspects of their business (e.g. payments, logistics, manufacturing, orders, shipments, transport, customer care etc.), increasing not only responsibilities but their points of breakability.
And with complete control, comes responsibility.
You’ll be responsible for protecting your customer’s financial and personal data from cybersecurity breaches.
Challenge #3: Growing online marketing cost
It may sound confusing because the D2C model opened gates to new distribution channels such as online marketing. Still, as gates are opened for every other D2C brand and this space is also becoming competitive, similar brands are usually targeting common keywords to acquire customers making social media marketing expensive. (Cost of advertising through Facebook have seen 43% increase since 2017)
This challenged brands to look for other ways to reach consumers for brand building and sales, resulting in a few D2C companies utilizing traditional marketing through TV and moving to online marketing.
Different Types of D2C Models
Type #1: Pure Play D2C Model
In a pure-play D2C model, products are sent directly from factories to customers, with no middlemen. It also involves controlling everything from manufacturing to logistics to online marketing of the products. But that is nearly impossible in a market like India, especially considering the complexities in first and last-mile delivery operations.
Examples of Pure Play D2C Model: (in detail below)
Type #2: Omnichannel D2C Model.
The primary idea of the omnichannel model is to keep the customer at the centre (instead of the brand) and engage with them in numerous ways across different platforms (website, brick & mortar stores mobile, social media, e-commerce etc.) at the same time.
Examples for Omnichannel D2C Model: (in detail below)
- SUGAR: an Indian cosmetic start-up
Type #3: Hybrid D2C model
In simple words, the Hybrid D2C model = Brand website + e-commerce marketplace.
It's no easy task to compete with the existing eCommerce and channels (Read Amazon and Flipkart). These platforms directly collaborate with D2C brands to deliver products and take a large share because of the reach and data they can supply. This is why D2C brands frequently put their pure-play ambition on hold and move instead to the marketplace model.
Examples of Hybrid D2C Models: (in detail below)
Examples of Different D2C Models
Diving further into the Indian D2C space, we see a scope of models used by the various D2C brands. Let us understand each of them in brief:
Example #1: Bewakoof (Pure-Play D2C)
Founded by two IIT-ians, Prabhkiran Singh and Siddharth Munot, Bewakoof is a T-shirt brand. They print T-shirts with trendy movie dialogue and quotations, targeting mostly young people between the ages of 16 and 34.
In the early days, the brand first employed two primary platforms: Justdial and Facebook to market their products. The result was tremendous: within 3 months, their Facebook page had engaged over 75 thousand users.
Apart from this, they built a meme page, posted memes regularly, shared current memes, and grew their social media following.
Currently, They have over 5 lakhs monthly website visitors, 10 lakhs Instagram followers, and a social media following of over 15 lakhs. They ship T-shirts to over 90 countries with a range of 3000 t-shirt styles.
The startup had a 100% in-house production facility before COVID-19. However, it later began to outsource its manufacture. Third-party players now account for 50% of this activity. It also built warehousing facilities outside of its Mumbai headquarters and currently has offices in New Delhi and Bengaluru, with aspirations to expand into Northeast India.
Bewakoof made INR 210 crore in revenue in FY2020. Of which, product sales contribute to roughly INR 202 crores, and INR 4.6 crore from service sales, and INR 2 crore from other operating revenue and income. The increase in income was primarily due to an increase in the number of customers and the variety of products available.
Example #2: Licious (Pure-Play D2C)
Licious is a meat and seafood startup from Bengaluru. The company sells the freshest, cleanest fish, chicken, beef, and eggs on the internet.
Licious operates on a farm-to-fork model controlling the back-end supply chain with world-class processing facilities to maintain the quality and freshness of each product until it reaches the end customer.
Apart from delivering meat to the customer's home, Licious offers a subscription model with pre-set delivery dates. As a value addition, premium subscribers are assigned a relationship manager by the company, who is responsible for all issues ranging from placing an order to product delivery.
Licious marketing initiatives include offline, BTL activation, tasting sessions at parities and surrounding housing complexes with word of mouth responsible for 70-75% of new client acquisition.
In the FisCal year 2020, the company reported its income increased to INR 138 crore, while its costs increased to INR 283.8 crore. The sale of items such as meat, seafood, marinades, and eggs, accounted for about 91% or INR 125.3 Cr. of their total annual earnings.
Example #3: Sugar (Omni Channel D2C)
SUGAR Cosmetics, one of India's fastest-growing makeup and beauty startups. Launched in 2015 as a direct-to-consumer cosmetics brand with goods tailored to young Indian women between the age of 18-25 years old.
Over the years, the brand also built a massive omnichannel distribution network with 2,500 + retail locations in more than 130 cities.
SUGAR products are also available through retail chains such as Shoppers Stop, Lifestyle, Central, Health & Glow, and NewU, getting products from the company's logistical partners in the same way that it does in its standalone stores.
The USP of this favourite brand among young Indian women is that their products are designed to last on Indian skin in all weather situations by being compatible with the widest range of Indian skin tones.
They have carved a niche in the INR. 600-700 price segment, their lips category (accounting for over 65% of sales), while resting by their face and eye category. A few of their flagship products include lipsticks, eyeshadows, eyeliner and primer.
With over 650K Instagram followers, 200 million impressions across all social media channels, and 2 million monthly visits to its website, SUGAR has generated an income of INR 100 crore for FY2020.
Example #4: Wake fit (Hybrid D2C)
Founded by Ankit Garg and Chaitanya Ramalingegowda. Wakefit was launched to provide individuals with inexpensive sleep solutions and raise awareness about the science underlying a good night's sleep.
The company has expanded its product line from selling mattresses directly to customers online to include bed linens, bed frames, neck pillows, pillows, back cushions, and mattress protectors.
Wakefit own website generates 65-70 per cent of total revenue, with the remaining 30-35 per cent coming from eCommerce marketplaces. One of the USP's of Wakefit is they can provide costs that are 50% less than their competitors (usually between INR 5,000 and INR 26,000) since they are a well-established D2C brand with no middlemen.
The startups claimed to serve 5 lakh+ consumers till now, across 19K+ Indian pin codes. In addition, factories have been established in Pune, Jodhpur, Hyderabad, Delhi, and Bengaluru.
Example #5: Mama Earth (Hybrid D2C)
Mamaearth is attempting to solve a common Indian parenting problem through an innovative product line.
In a country where the majority of baby products available contain harmful chemicals that can build toxicity in a baby’s body, Mamaearth offers safe, cruelty-free, and organic products by international standards.
Founders, Ghazal Alagh and Varun Alagh, the company's founders, began their journey with their native platform and marketplace presence on Amazon and Flipkart. As they realized the potential of their products, they expanded into large retail stores such as Shoppers Stop and standalone retail stores.
The company began with only six products and has since grown to over 100 SKUs. They also introduced nearly 12 new products during the lockdown, including ingredients such as Vitamin C and Bhring Amla. Initially selling baby care products, the company has grown over the years to become a household name in the personal care industry.
Apart from that, the Gurugram-based direct-to-consumer (D2C) personal care brand has increased its revenue by more than 6x to INR 112 Cr in the fiscal year 2020, with online platforms making up 90% of Total Sales.