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TODAY’S STORY
28 Sep
,
2022

To D2C or not D2C?

I want you to imagine this:

You are a direct-to-consumer (D2C) business owner of a brand called Dumbak with product offerings in quirky clothing and stationery.

Launched in 2016, you are first listed on Amazon and Flipkart. Meanwhile, you launched a page on Instagram (IG) that shows the work your designers do with a few posts on how the products look. Your communication is a bit weak but you’re learning how to up your IG game.

All is going smoothly, but you have a lot to learn with regard to paid marketing. Google and Facebook ad-campaigns are a work in progress too. You keep at it because clothes and stationery is the category you want to carve your brand’s niche in. You are aware it is going to take time.

Just as you are mastering the host of new skills you learn as a D2C business owner, you realize a few stressful things — the most stressful of them being that the category you’re selling in is fiercely competitive.

You’re able to drive sales traffic from IG to Amazon and Flipkart, which keeps you afloat. But on the marketplace, you’re unable to create Dumbak’s quirky identity.

Additionally, in spite of driving traffic from IG, you’re paying a huge commission cost to both platforms, sometimes in the range of 28% to 33%! What adds to your stress is the recent rise in order returns. Your manufacturing, shipping, and quality control processes are now standardized, and you’re unable to put a finger on what is causing all the chaos.

You’ve started second-guessing your strategy of selling via a marketplace but you also know that it is a sales channel that you currently cannot get rid of.

Now that we’ve set the context by visualizing some factors you would have to consider as a D2C business owner, let’s dig deeper into why we are currently seeing shift in businesses moving away from marketplaces and investing in their own D2C stack.

In a previous Stoa daily piece on marketplace businesses, we highlighted the reasons why all businesses, big and small, are unbundling from marketplaces.

Here’s a quick recap:

We established that internet speed, smartphones, and marketplaces made it convenient for buyers and sellers to transact without limitations of space and time.

However, the initial glory around hyper-discoverability, hyper-choice, and hyper-convenience that a customer enjoys by using marketplaces, costs a great deal to the sellers on these platforms. It could, at times, be lethal for the seller.

So, what does a seller do in such a situation?

To understand this, we will need to first understand all the reasons why a seller might choose to register on a marketplace like Amazon in the first place.

If you observe carefully, most D2C businesses or sellers start by getting listed on a marketplace. Why?

Because marketplaces allow an entrepreneur to gauge demand for their product because of the distribution and organic discovery the marketplace offers.

Secondly, marketplaces offer a convenient technology and logistics stack to entrepreneurs who are just starting out and want to minimize their investment while they test their product-market fit.

But simply relying on organic discovery on a marketplace isn't enough. A D2C seller has to pick marketing channel/s and run paid performance advertising campaigns in order to enhance product discovery and drive consumers to their product pages.

These channels could be Instagram, Facebook, Twitter, LinkedIn, Tiktok — based on what the product is, who the target audience is, and what the price point is.

And even after driving traffic to a marketplace, a D2C business like Dumbak is not immune to commodification. Every listing on a marketplace like Flipkart or Amazon looks the same, with little to no customization possible.

Brand-building on marketplaces is tough. People visit Amazon for the platform and the choice it offers, and rarely for a specific brand or product.

Moreover, a significant amount of opacity seeps in when D2C sellers deal with a marketplace. What exactly do I mean by opacity here? Opacity, basically refers to those factors which add to the uncertainty a business deals with. What are these factors for a D2C business?

Making sense of vast datasets

Marketplaces throw up vast amounts of data that a D2C seller can use to make strategic sales decisions. But for the data to be of any value and generate useful insights, the volume of sales has to be huge.

This gives rise to a cyclical problem.

For sales volume to be higher, digital marketing campaigns and SEO have to be foolproof. If there is any discrepancy in the backend processes mentioned above, of leading a customer to your product on the marketplace, it will alter the sales volume, which technically decides the usefulness of your data.

When you’re starting out you would prefer data that is useful for you and can immediately inform the next steps you’re about to take. But this cannot be guaranteed when you use a marketplace.

This creates opacity for a D2C owner because they’re shooting in the dark until they do enough iterations of the process and get it right.

The time between the iterations to get it right costs the D2C owner, because they’re spending on creating awareness, and paying heavy commissions anytime they make a sale.

Appropriate use of marketplace add-ons

Most often a marketplace has a fulfilment service, which takes care of logistics for the D2C business.

When starting out, it makes sense for a D2C business to use this readymade logistics stack simply because it would involve a lot of investment in building one's own logistics from scratch.

But as soon as a D2C business hits a threshold of sales revenue, they realise that the commission costs and fulfilment service costs take up a huge chunk of their profits: profits they would much rather invest in building their own D2C stack.

Unless they have enough revenues to justify investing in a custom stack, it makes sense to pay the commission fees to a marketplace. But beyond a certain volume of sales, D2C business owners start thinking of fleshing out their own online and offline D2C stack.

I think Gumroad’s commission structure is a perfect representation of what I'm saying.

FYI, Gumroad is a marketplace for creators. It has an elegantly designed commission model that tries to keep creators on the platform, even after they cross that revenue threshold.

You see, for Gumroad, as distribution for a creator increases, the fee charged by gumroad to the creator, decreases. There is an incentive for person who wants to self-publish to stick to the Gumroad platform and not be negatively affected by it.

In case of most marketplaces, the fee is standard regardless of the sales volume. This adds to the opacity to be dealt with and creates a real incentive for marketplace leakage, with an eventual departure from the marketplace.

So, what does a D2C seller finally do?

The D2C owner is faced with a couple of choices. They can either continue selling only on a marketplace, pay the commission, discovery, and fulfilment costs or shift towards independent services that can be customized to sell their product better.

In either choice, there are enough moving parts a D2C business owner has to deal with but they would prefer to unbundle from a marketplace to enjoy higher revenues and not feel a total loss of control, as they would, if they continued selling on a marketplace.

The prospect of operating independently does sound lucrative, doesn’t it?

Almost, until…

A D2C business can dream of operating independently, but to survive, it has to reach a volume of sales in the marketplace, establish a strong brand identity for itself using the communication channel and strengthen its own logistics.

When a D2C business is successful in building its own stack, the marketplace can often become a secondary sales channel for the business.

But until then, a D2C businesses has to cope using brute force, and survive to achieve the ‘direct’ aspect of the D2C business model.

Will all D2C businesses succeed in the ‘direct’ aspect?

I am afraid, the answer might be

"No."

Why?

You see, one of the major reasons for success in a D2C business is determined by its ability to build a brand.

And content marketing — the dominant form of brand-building — is a domain that is quite susceptible to extreme power laws. It is hard for a business to gain attention and build a brand today.

In fact, here is a graph by CB insights that captures the state of content marketing today.

In the present day, building a brand is not just expensive because of the cost of digital advertising going up but also because building a brand requires a constant flow of creativity. It is expensive also because good, creative brand building requires time. It doesn't happen overnight!

Creativity, unfortunately, isn’t in as great a supply as the number of D2C businesses that we come across daily on Instagram. And building a solid brand is not everyone's cup of tea.

Additionally, because of the constant noise from all sorts of brands on IG, it is difficult for a brand to gain long-term attention from the second stakeholder of the D2C business model — the consumer!

Many businesses start on Instagram and do business only on Instagram. Some sell via marketplaces only, and many sell via brand apps, offline stores and marketplaces.

But I am not sure if the success achieved by the first few D2C brands of India such as Lenskart and Mama Earth will be replicable by everyone.

Have we come full circle?

Why do I say that?

We started as consumers and sellers in physical, retail shops.

That changed because of the internet and everyone adapted to online shopping as a more convenient and snappy medium.

But as successful D2C brands like MamaEarth, Sugar, and Lenskart chart their next phase of growth, we notice them slowly shifting from their dominant online presence and again making inroads into retail — building offline presence in the form of exclusive stores, mall kiosks, and even DMart aisles!

Why are successful D2C brands moving back to retail?

There are some strong reasons for this. However, I will explore that question in an upcoming essay. Stay tuned. And till then, use the illustration below as a summary.

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