Why are more brands going direct-to-consumer (D2C), and how can brands use dynamic pricing to succeed in this new arena?
This week we have a special interview to uncover the answers to these questions. I sat down with three industry experts: Roger van Engelen, and Jean-Paul Savelkoul, Management Consultants at our partner A.T. Kearney, and Jasper Wiercx, Solutions Consultant at Omnia Retail, to learn about brands, the direct-to-consumer world, and more.
Hey guys, thanks for sitting down to chat. Could you all introduce yourselves a bit?
Roger: Hi, I’m Roger van Engelen. I’m a Principal at A.T. Kearney Benelux, specifically focused in Consumer Products and Retail industry. I specialize in several functions, such as business transformation, end-to-end cost improvement, growth strategies, e-commerce…I’ve touched a lot of different areas of retail strategy in my 12 years of being in the industry!
Jean-Paul: I’m Jean-Paul, and I’ve been with A.T. Kearney for less than a year. But before working with ATK I spent 8 years at Procter & Gamble, initially as a Brand Manager covering personal care, household care and health care brand portfolios, and later as a marketing manager across the P&G brand portfolio, with a focus on new business models and digital marketing and data strategy for (e-)retailers. During my period in P&G I worked on direct to consumer (D2C) strategy, and the launch of several propositions in this area.
Jasper: And I’m Jasper, one of the Solutions Consultants with Omnia. I’ve become our go-to person for brand implementation within Omnia, and am currently working with a couple of brands to get them started with our Dynamic Pricing module.
Let’s start with an overarching question: why are more brands moving into the direct-to-consumer sales space? What is changing?
Roger: So, to answer that question we need to go back in time a bit. Back in the 1950s product offerings and brands were scarcer than they are today. Small retail chains were also abundant, and we didn’t have these massive retailers that we have today.
Jasper: Exactly. Traditionally, brands’ biggest customers have been retailers. Retailers would buy products in bulk from a brand, then sell those items to consumers. Up until about 20 years ago, brands have had all the power in the relationship. They’ve dictated how much a product should cost and how retailers should sell it.
Roger: Retailers have been gaining power quickly as they consolidated significantly, and the internet and e-commerce have accelerated this change. There’s now a power struggle between retailers and brands. Retailers have more control now than they’ve had before, and brands have less influence on their products once they are in the retailer’s store. That’s part of the reason brands want to sell directly to consumers now, but it also creates uncharted territory that both parties need to navigate.
So is e-commerce the sole reason this new balance of power emerged?
Roger: Not the sole reason. There are also several other factors that have created disruption in the market, not just the rise of e-commerce. For example, sourcing across borders has become a bigger opportunity for retailers, which adds pressure to a historically-grown margin structure. Furthermore, retailers have made huge steps in upgrading the quality and attractiveness of their private label assortment. On top of this, with e-commerce marketplaces now allowing small players with limited distribution capabilities to sell the same way ‘the big boys’ are selling, new competition has entered the arena.
Jean-Paul: You also see the rise of new business models emerging. Subscription services are a great example, and the rise of disruptive companies like Harry’s Razors in the US mean consumer packaged goods (CPGs) face a new type of competitors. Companies like Harry’s compete through the D2C channel but are at the same time listed in traditional retail channels. This means they are better equipped to optimize for shopper behavior based on their D2C platform knowledge, while also leveraging the reach of large retailers to create scale quickly.
Roger: Exactly. We’re sort of at a converging point for many different moving parts in the entire retail industry. And brands going direct-to-consumer is a reaction to that. The brands need to think more creatively to ensure they add value to consumers in a marketplace where diversity of assortment and points of sale is constantly increasing.
Jean-Paul: The clear winner here is the consumer. Consumers have gained knowledge, price and ingredient transparency, an abundance of choice, higher levels of service, speed, and more relevant advertising. They’ve initially lost their anonymity but are now rightfully getting back in the driver seat when it comes to their personal data and privacy.
Has the internet changed this dynamic?
Roger: No, internet has added a new dimension to the retailer brand relationship that is only accelerating the change already in play. The rise of private labels, which retailers can now offer due to their economies of scale, was the biggest disrupter, in my view. A strong private label assortment gives retailers the means to impact both the brands market share as price levels in a category.
Jean-Paul: The internet has also given consumers new power. A completely new level of “price transparency” has emerged, which lets consumers easily compare the prices of different goods and has driven the overall price for goods down between domestic and international retailers. Consumers can openly interact with brands through social conversation, compare products more objectively and leave product reviews, which increased consumer knowledge and control.
Roger: The internet and e-commerce has given retailers a huge advantage because they hold all the data on consumer shopping habits. They currently fiercely guard this data from brands, because it’s one of the retailer’s main competitive advantages. However, retailers are starting data-collaboration with brands to jointly create value. For example, there is a lot to win in making loyalty programs really personal and attractive, and collaboration between retailers and brands helps both parties make a better experience.
Is this another incentive for brands to go direct-to-consumer? To learn more about their customers?
Jean-Paul: Yes. In order to stand out, brands need to create a relationship with consumers. Gathering consumer data gives brands insights into the profile of the shoppers, how they use the products, how they interact on brand platforms, and how they travel through the shopper purchase journey. This enables more relevant advertising, a smoother purchase process, and, in turn, better relationships between brands and consumers.
Roger: As the playing field levels out in terms of price, brands need to be more innovative in driving brand loyalty. This comes from building a relationship with the consumer. There appears to be a disconnect with a retailer in the middle though, and brands can’t necessarily dictate how a floor display should be positioned in a store, for example. Selling directly to consumers allows brands to gather more information on what buyers want, test and learn from consumers, and drive product and brand innovation from those insights. And they can use these insights to help retailers sell their product better as well.
Okay, so what sort of hurdles do brands need to overcome to sell directly to consumers?
Jasper: To start, there is a conflict between brands and their biggest customers: retailers. When a brand sells directly to consumers, they’re essentially undercutting their own customers, which creates a huge amount of tension between retailers and brands.
Roger: Yes, I’d say that’s indeed one of the biggest problems. Brands are afraid their retailer partners will disapprove of the move as it is seen as ‘direct competition’. This makes brands very reluctant as retail will remain the biggest share of turnover by far. However, it’s a perceived channel conflict as we strongly believe both channels should be complementary What doesn’t help is that many brand owners manage their sales per channel, thus already create ‘internal competition’ between channels that is not necessarily in the interest of the of the overall brand. That makes it hard to overcome.
So, how can brands AVOID channel conflicts with retailers in this new arena?
Jean-Paul: There are two parts to this. First, brands should create a clear channel strategy, indicating in which channels they want to play, with clear targets and tactics to win. Within this channel strategy, smart differentiation between channels is key to avoid conflict.
Roger: For example, brands can differentiate what they sell directly through their own channels and what they sell through a retailer. Brands can focus their direct-to-consumer efforts on unique SKUs that require more explanation and a more elaborate brand story. They can then let the retailers take care of selling the more generic “mass” products, which is what retailers are good at doing. This hybrid channel model means that each company can play to their strengths, but both benefit overall. However, it is key to reflect this into the trade terms (pricing and discount schemes) brands offer to their different retail partners, as this is often the root cause of channel conflicts and margin leakage.
Jean-Paul: Second, brands should use leverage and share what they learn about consumers and the shopping trip to improve the shopper journey in regular trade channels as well. Retailers and brands working together to jointly grow the total category will benefit both parties.
Jasper: Brands should also take this as an opportunity to evaluate their internal governance and organizational structure. It’s a chance to build a more efficient internal structure to avoid cross-channel competition.
What’s the role of dynamic pricing in all of this?
Jean-Paul: A brand’s number one priority in going direct to consumer is to deliver on its channel strategy. Dynamic pricing is what makes this possible. Instead of undercutting retailers, brands can use a dynamic pricing software to follow their recommended selling price, only dropping their price when all key retailers are a certain percentage below your suggested retail price.
Roger: In my opinion, brands need to have dynamic pricing before they start selling directly to consumers because it will prevent them from agitating their retail customers. This, in turn, protects brands from triggering a price-markdown war, which helps protect brand price perception.
Jasper: Exactly. Retailers and brands will use dynamic pricing differently. The retailers will use it to stay competitive in the market. Brands will use the software to guard price perception and prevent hurting retail relationships. And both will use the software to make managing their online assortments easier.
Okay, last two questions! First off, what are your top tips for retailers as they navigate this new relationship with brands?
Roger: Retailers have a lot to offer that brands can’t access, such as a higher traffic and a larger reach. Once a retailer understands how they can help brands beyond straight sales and how they can benefit from insights from their brand’s D2C channel, they can create a powerful strategic partnership. And each side of the equation ends up happier than they were before.
Final question. What advice would you give brands?
Jean-Paul: Evolving from a transactional commercial relationship to a strategic multifunctional relationship is key to unlocking the potential of deep collaboration between brands and retailers. Building this relationship requires time, dedication, resources and, most importantly, knowledge exchange. When brands enter the D2C space, they should be open about their intentions, make it part of a fair and differentiated channel strategy and share insights with retailers to ultimately boost total category value.
Great, thanks guys! Jean-Paul and Roger, what’s the best way for someone to get in touch with you about building a direct-to-consumer strategy, since this is your area of expertise?
Feel free to reach out via LinkedIn or email. We’re happy to meet for a coffee in our Amsterdam or Brussels office.
Get in touch with Roger or Jean-Paul
Are you a brand looking for strategic consulting on the direct-to-consumer market? Feel free to reach out to Roger or Jean-Paul through their contact details below.
Brands, try dynamic pricing free for two weeks.
See for yourself how valuable dynamic pricing is for maintaining your relationships with retailers and protecting your brand perception in the direct-to-consumer market. Try Omnia free for two weeks with your products. Click the button below to get started.
Grace Baldwin is a pricing and marketing specialist at Omnia Retail. Before Omnia, Grace gained experience in content management at EDIA and through a freelance content management business. She holds a B.A. in Government from Colby College.