The direct-to-consumer (D2C) wave continues to sweep across the world of e-commerce, but unlike early examples of D2C brands who started out that way, we are seeing more companies add DTC sales to existing retail strategies. This can be an exciting way to diversify sales channels, reach new potential customers, and boost revenue. It also creates the challenge of brands “competing” with their own retailers, which may be detrimental to the brand-retailer relationship, as well as their product’s overall pricing and competitiveness in the market.
To mitigate this risk, brands can differentiate product assortments between their DTC and retail sales channels. According to McKinsey, those who get the product assortment right “enjoy more sales, higher gross margins, leaner operations, and most importantly, more loyal customers.” To help brands understand the importance of assortment differentiation, Omnia explores the various types, their benefits, and how price fits into the strategy.
Benefits of product assortment differentiation
When brands move toward D2C, they need to differentiate the product assortment to avoid competing with the retailers that sell their products.
Why would a D2C brand differentiate their assortments?
Manage brand experience – There is more potential to improve the brand experience and build stronger relationships with customers when differentiating product offerings across channels.
Increased sales – Brands can see a bump in sales because they are increasing the amount of options available.
Decreased cannibalisation – Differentiating products between D2C and retailers can help mitigate the risk of direct competition or cannibalising sales.
Data access – Brands often don’t get access to any sales data from retailers, but selling D2C provides more data on what customers are and aren’t buying. Thereafter, assortments can be adjusted as needed.
Meet customer needs – Strategically differentiating assortments for different selling environments gives brands the chance to better address customer desires. As reported by McKinsey, a more customer-centric product portfolio could create an additional 2-4% increase in sales.
Additional benefits for retailer partners – Access to more data enables brands to improve products, not only for their DTC efforts but also for the products being sold through the retailers. It’s a win-win.
Types of product assortment differentiation
66% of customers expect companies, including brands and retailers, to understand their needs and expectations, and one type of product assortment goes all the way down to the consumer level with mass personalisation. Nike By You is a shining example of this strategy, where consumers can even make and design their own Nike products on a user-friendly website. They also have the manufacturing process in place for those personalised items to be created quickly, so customers could, for example, get shoes in their chosen colours and style in two weeks. The prices are higher than a typical mass-produced product, but for the customers who want to customise items, there’s a lot of margin to capture.
Another type of differentiation is when brands make unique SKUs for specific retailers, where one feature is added or the colour is a bit different. This gives the retailer a unique EAN code and non-matching products, helping to increase their sales and boost the brand’s relationship with the retailer. The assortment is not personalised at a consumer level, as with Nike, but is differentiated for key retailers. German manufacturer Miele is one example of this.
A third type of assortment differentiation is around the services offered. Some brands sell monthly subscriptions, offer monthly payments instead of one big expense, or provide unique customer service or brand experiences. US Razor brand Gillette launched its own “Shave Club” in 2015 to compete with D2C brands like Dollar Shave Club and Harry’s, and differentiates from its retailers by enrolling members in product giveaways, providing chances to win entertainment and sporting event tickets, and offering a money-back guarantee for unsatisfied customers.
Availability of assortment
Beyond differences in the products themselves, the chosen assortments and amount of products can also be differentiated across retailers and DTC. For example, ABC Shoe Company sends 60% of its running equipment assortment to e-commerce Retailer X, while Retailer Y receives 70% of the assortment since they also offer a wider assortment of hiking gear. A portion of ABC’s assortment is offered exclusively in its own online shop. In other words, the brand experiments with the breadth of their assortment; the products they make available to different retail partners. An example of this would be Adidas: the company’s product assortment can be purchased to varying degrees across a wide range of retailers and marketplaces, but some product lines – such as the partnership with Stella McCartney – can only be bought directly from Adidas.
Categories where assortment differentiation is not the right strategy
Some product categories are not built for assortment differentiation; for example, products that can be easily substituted. Think about a FMCG item like razor blades: They are fast-selling and there aren’t as many features where brands can differentiate: people might not care as much about the colour, for instance. Brands just need to create the best razor blade possible for their target audience, because other brands will step in and take those sales if they don’t.
Even with products like these, however, differentiation can still be done outside of the assortment with your branding or the services offered in D2C versus retailer sales.
Can price be a product differentiator for brands?
Price is an important piece of the differentiation topic, partially because it is always relative. Products are highly comparable these days thanks to marketplaces and comparison shopping engines, with the exception of some unique items, and highly transparent in the retail market, enabling consumers to shop around for the best price or compare products with substitutes.
There are two main strategies brands use to manage this balance:
- Comparing to retailers: Samsung compares or sets a D2C price in relation to MediaMarkt
- Comparing to other brands: Samsung compares or sets a D2C price in relation to LG
What’s important to keep in mind is that for brands who sell through both retail partners and D2C, retailers are clients and a competitor at the same time, so it needs to be managed correctly.
Price shouldn’t be a differentiator with retailers, but something that should be thought about cautiously and strategically. A fair price relative to your retailers is key to avoid triggering widespread pricing changes across all sellers of your products.
Price can be a differentiator with other brands. The price-to-value ratio of the product should be in line with the products of other brands on the market, meaning that if your product is the same quality and a higher price, you haven’t differentiated and the pricing strategy doesn’t make sense.
Managing the product portfolio with dynamic pricing
Dynamic pricing is a tool that enables brands to automate the management of prices and price perception based on large quantities of data. The system can take in data from both retailers and brands, using the strategy you set to automatically make decisions and manage price. Brands can use this to avoid market collisions; for example, they can quickly pick up on whether an action of theirs caused a price to decrease across the market, and can remedy the situation right away.
In a world where brands are frequently selling through a number of channels, especially with the combination of D2C and retail, dynamic pricing can play a key role in boosting sales without ruining relationships with retailers or customers.
Interested in seeing how dynamic pricing could impact your product assortment?