As EC continues to make great strides globally in China, the U.S., and Japan, EC is already having a direct impact on businesses around the world, with the successive closure of retail stores and the birth of new business models.
What is D2C? Explained for beginners
D2C stands for “Direct to Consumer,” and refers to a business model in which the entire process from manufacturing to sales is done in-house, without the use of intermediaries.
It’s similar to “B2C” in which it deals with individuals, but the intermediary between the company and the consumer is different.
SPA, also known as a Speciality store retailer of Private label Apparel, is also similar to D2C, but it differs in whether or not it has a physical store. SPAs are sold at their own physical store while D2C mostly sells online.
D2C allows for consistent branding because it creates a special feeling that people can choose “because of this company” or “because of this brand”.
There are two main advantages of D2C:
- no fees commissions
- Free Branding
It’s easy to maintain the brand image since there’s no intermediary. This results in a high-profit margin and free branding.
The main disadvantage of D2C is getting recognized. Since everything (including manufacturing, sales, and branding) is done from scratch with no intermediary help from other companies, this requires an in-depth level of knowledge in your field.
Difference between Japan and U.S D2C: Two unique characteristics of Japan D2C
D2C is a business model where a company conducts all processes from manufacturing to sales by itself without any intermediary.
However, there are differences between Japanese D2C and American D2C. Here are the characteristics of D2C in Japan compared to the U.S.
This emphasizes the craftsmanship and relationships with consumers
The D2C format is familiar to Japan because it is similar to the established various traditional crafts in Japan from ancient times that have strong ties with so-called “fans”.
By promoting their “special products,” “passion,” and “traditions,” these Japanese D2C businesses tend to be profitable even without extensive publicity.
On the other hand, D2C in the U.S. is established by generating enthusiastic empathy in cutting-edge fields and gaining acceptance from a large number of people. Think about tech startups in Silicon Valley. As a result, American D2C deals with cutting-edge products receive a lot of investment and are done on a larger scale.
Compared to American D2C, Japan may seem a bit more modest and smaller in scale. However, it is the culture of respecting traditional craftsmanship and connection with people that is accepted by many people.
Even before D2C entered the market, there’s always been an abundance of cheap, good quality products as well as products with good cost performance which means it has high practical value.
For this reason, there is a high demand for products that are inexpensive but also satisfy the consumers needs.
Japanese D2C tends to sell “good quality products, although at a higher price”. On the other hand, in the U.S., “cheap and good quality” sells well.
The market size of the U.S D2C in 2020 was estimated to be about 1.9 trillion Japanese yen (17.75 billion dollars). Compared to 2017, that number was 700 billion yen or 6.85 billion dollars. This means there’s been an increase of D2C market in the last few years. (See US eMarketer “US Direct-to-Consumer eCommerce Sales Will Rise to Nearly $ 18 Billion in 2020” April 1, 2020).
Looking at companies with high sales, the popular category includes apparel, beauty, and lifestyle-related products such as pet-related, oral care-related, etc.
The opportunity for brands to enter the EC market
D2C News: Major brand company with Unique Startup
For context, let’s use Dollar Shave Club (DSC) in the United States.
Dollar Shave Club is a latecomer to the men’s razor industry. However, it has developed into a distinctive eCommerce with 3 million members and has an annual sales of approximately 20 billion yen. DSC bought Unilever, a global consumer goods manufacturer, for approximately 100 billion yen (See Fortune magazine, “Unilever Buys Dollar Shave Club for $1 Billion,” April 20, 2016)
How can razors sold by DSC that don’t have groundbreaking features generate so many sales? Their secret is D2C. Being a manufacturer with direct eCommerce service allowed them and many others to become a global trend.
The DSC’s business model is a subscription-based business model that recruits members and leads to regular purchases. This means that members will receive pre-selected razors and other grooming products on a regular timely basis.
Compared to other major shaving products, DSC has quickly attracted members with its affordable price which starts at $1 per month.The razor has been perfected for over 100 years, and it’s difficult to differentiate one company’s razor from another. As a result, these companies have engaged in a publicity war, overly emphasizing sharpness and safety.
Since men’s razors are daily necessities, customers will continue to make purchases. This makes the razor a profitable product with an LTV or lifetime value.
Since most razor products can be different from each other, any new entrants without capital won’t be able to compete in the advising war. It will lead to an oligopoly situation where only a few can sell their goods in the market.
This same principle applied to similar products such as shampoo and diapers. While there is no big difference in their function, it’s the way these products are advertised. Depending on the advertisement, these products can be profitable.
Without the use of advertising, there wouldn’t be some recognition for these products to be on the shelf in stores.
This practice has seen occurring for a long time in different products, not just razors or shampoos. While these products are ranked at the top in advertisement expense, newcomers can enter the market. However, the DSC opened new opportunities for that.
DSC was able to generate a stable stream of members every month. This strategy used by DSC is the opposite of what razor manufacturers have done before.
The razor’s function has one use. So advertising only on social media and youtube has allowed DSC’s razor to be as low as a dollar a month and has gained a lot of support.
Youtube video production can attract a lot of attention because of its low production cost to produce content that can be shared with thousands. This video format can quickly generate word of mouth on social media which leads to 3 million members with confirmed sales.
An additional feature to a razor product besides the product itself is that it is a subscription-based product. This makes it easier to know the expected sales each year. Since this product is delivered from manufacture to customers, there’s no need to spend money on salesperson or stocking shelves.
This type of model is a direct-to-consumer (D2C) business model and this is becoming a global trend.
A D2C business model for newcomers can open new opportunities in an oligopolistic business. The impact is significant, but why would Unilever, a globally successful company, invest 100 billion yen? Here are a couple of points:
- New brand value
- 3 million repeated customers
- Securing direct distribution channels
One main reason for this investment was that Unilever didn’t have a men’s razor product in the first place. As seen before, men’s razors are productive products. So Unilever was probably looking for an opportunity to enter the market with their version of the product.
DSC has been developing a brand image with a “pointed/sharp cut” since ordinary multifunctional razors are not cool. Their brand has a good reputation at an inexpensive price.
DSC also has an excellent user experience that only an e-commerce company can offer. Not only the razor is elaborate, but the design of the blade has changed. This concept would be difficult to achieve through traditional distribution channels. In addition to this, the stable revenue directly from the 3 million members is attractive. This results in real retail stores shrinking.
With physical stores already disappearing, there’s been a battle for shelf space. However, with the current trends, one should take advantage of the evolving fields of digital marketing and social media in the U.S. If manufacturers can reach their customers directly, they can eliminate the need for sales staff and streamline operations.
A combination of e-commerce and social media is the essence of D2C.
The current trend where consumers buy products directly from manufacturers is in a form of subscription boxes. Just look at the case of DSC. This will become a global trend in the future. A subscription box is a service where consumers pay a monthly or yearly fee to receive a box of products. There are currently two types:
1) Consumable subscription
This is a type of subscription where daily necessities such as razors and shampoos are sent directly to consumers regularly. Although these prices are exposed to competition, once they are purchased, they are purchased for a long time. This is an attractive feature because of the stability that results in this.
In Japanese e-commerce, it’s important to keep acquiring new customers. So it’s necessary to keep advertising new content and innovative projects. With subscription-based e-commerce, once a new customer is acquired, there’s no need to take measures to repeat their purchase. The shift to subscriptions is becoming a trend worldwide.
2) Surprise subscription
Unlike the consumable type, each surprise subscription box contains something different. There’s entertainment every time consumers receive a box. Some examples include wine that’s been selected by a sommelier, chocolate around the world, clothes, and cosmetics selected by a stylist or AI. This business model allows consumers to enjoy various products while the sellers have a chance to pick and provide items based on what the consumers like. As a result, the business can be expanded even with an increase in the number of customers.
D2C News: Major brand company with Unique Startup
- Crowdfunding is a model where investors are in the development of new products which are then sold to them. The best-known crowdfunding site in Japan is Makuake and KickStarter internationally. From the manufacturer’s point of view, there is a risk of developing a product that may or may not sell. However, by crowdfunding, it is possible to reach out to the interested customers and obtain development funds with low promotional costs. This will lead to a more innovative product in the future. This is a great opportunity for manufacturers because they can raise tens of millions of yen depending on the particular product and idea.
- Sharing Economy is a service that makes it possible to use items that are rarely used at low prices. Examples of these include car-sharing, expensive brand bags and dresses, and so on. This not only provides an opportunity for use but also expands the base users and target audience. As a manufacturer, this is a good match because if a customer uses a product once and likes it, this can lead to a purchase.
This is only possible with D2C where you can promote your product while making sales.
With D2C, projects can be directly sent from the manufacturer to the customer. This eliminates the need for wholesalers, stores, and staff working there. With more than 140 companies, there’s already been several efficient D2C models in the U.S.
The Rise of D2C: Rewriting the Retail Industry Map
As mentioned above, the core of D2C is the combination of social subscription, crowdfunding, and sharing economy for an efficient business. As manufacturer-direct sales continue to flourish at a low cost, then it will be tough for physical retail stores. Amazon is both a manufacturer and the trailer is showing interest in direct sales. This is an opportunity for manufacturers while retailers might face tougher times.
In the past, manufacturers and retailers dominated large-scale productions and mass advertising by investing heavily. Now they are being pushed out by e-commerce, led by Amazon, where both manufacturer and retail stores a reign forced to close one after another. At the same time, the number of channels where products are distributed is steadily decreasing. This leads to manufacturers entering D2C to do business directly with customers.
In this trend, the omnichannel strategy is transitioning where the benefits gained from just this channel alone can leave you behind in the competition.
With D2C, projects can be directly sent from the manufacturer to the customer. This eliminates the need for wholesalers, stores, and staff working there. With more than 140 companies, there have already been several efficient D2C models in the U.S.
Case Study: Apparel D2C Start-up Company
ROCKETS OF AWESOME is a D2C subscription box of children’s clothing that has been personalized by the parents for their children’s clothing. Each box is curated based on the results of a questionnaire each tailored to their children’s sizes and preferences delivered four times a year regularly, based on the results of a questionnaire conducted beforehand.
A box with a complete set of coordinated items according to taste and season is delivered to the home. If it’s not to their liking, the box can be returned with cash on delivery, allowing them to purchase the recommended items for each season from the comfort of their own home.
ROCKETS OF AWESOME attracted the attention of many when it raised 2.3 billion yen in 6 months from when it was first established. This D2C model is a driving force that pushing e-commerce to the next level in not only the USA but around the world
But why has D2C gathered so much attention?
In the past, retailers and wholesalers would purchase products from the manufacturer to sell to consumers. Now with D2C, manufacturers can plan and manufacture products to sell directly to consumers without wholesalers or retailers being the middle person. This difference in distribution channels eliminates wholesale retail outliers and created a new business for manufacturers.
However, new business tactics using D2C such as Instagram, Twitter, Facebook, Youtube, etc have solved this manufacturer’s problem.
The Key to D2C
With the power of social media, it is possible for manufacturers to significantly expand their channels directly to consumers. In addition, with the subscription model, manufacturers can track the number of orders each month. This makes it possible for manufacturers to increase sales without taking that inventory risk.
Content marketing is necessary when using media. Information via the web started as text-based and then moved to photographs. Now, platforms such as Instagram have algorithms that prioritize videos.
The term “unboxing” is used in social media marketing to show the process from when the product arrives, is opened, then used. This is a very popular and frequently shared video genre in the U.S.
Unboxing videos are the spread of information about the company’s product by sponsoring influencers to promote and distribute coupons to increase word-of-mouth. Through the use of a video.
This kind of social media use is similar in China where trust in new advertisements is low. Having well-known influencers increases word of mouth and trust in the product. In e-commerce, consumers are more or less worried about what kind of products they will receive, especially new products. So when people receive positive feedback from a trusted influence through a video, they feel more confident in their purchase.
The number of requests for support from influencers has increased rapidly apply in recent years. This is a result of people moving away from the TV and using other social media platforms more often. The perception of the digital native generation has changed from the previous perception where luxury brands are cool to now things that are “insta-worthy” are selling well.
Content marketing utilizes video is an important method and should be kept in mind.
D2C which supports manufacturing methods is also going through significant changes. Advanced technology such as 3D printers and CAD technology makes it possible to keep manufacturing costs low. In addition, there are manufacturing seminars in China which resulted in U.S companies manufacturing at factories in China. This is called a supply chain.
An exhibition in Shangai was flooded with business people from the U.S who were looking for OEM / ODM partners. In the past, China is known as a “place to make cheap things” however, now it’s being used as a manufacturing base to produce high-quality products, albeit at a high price.
Looking at the information from both U.S and China, this trend is never seen before. This is the global manufacturing trend.
Other changes are occurring in the sale channeled in D2C. Many manufacturers that utilize D2C do not have physical stores. However, there has been an increasing number of companies that are opening physical stores after launching their online shop. This model with physical stores does not have inventory.
One of the most famous examples of this is the BONOBOS, a men’s appeal pinion of D2C. Since opening its stores, the company insisted that the clerk serve consumers according to their tastes and preference.
Normal real stores make it difficult to provide an individual a personalized service due to the unspecified number of customers. BONOBOS has used a table for about two years that uses a CRM system where they can provide the same experience as if it was online e-commerce at a physical store.
The keyword is “personalization” and the word “omnichannel” is obsolete. Omnichannel is conducted from the perspective of how real stores utilize e-commerce. However, since people are not choosing physical stores, the perspective of e-commerce is to utilize real channels that will become mainstream in the future.
D2C Success Analysis
The "Product”
Here are some successful U.S. D2C manufacturers have several success factors. The main focus is always the “product.”
Casper－casper.com
Mattress Company founded in 2014
The mattress market in the U.S is the main source of bedding, has a market of 1.6 trillion yen which is larger than Japan, and has a variety of mattresses. It’s difficult for consumers to compare and consider which product is good with such a huge number of choices. This is one of the hurdles for this industry.
Meanwhile, Casper has a distinctive product strategy of offering only “one model.” In the U.S. where the mattress market is huge, their price is reasonable, and offer delivery. This allows consumers to buy without intervening vendors.
Casper sells its product with the concept of sleep. This includes how to sleep, the correct posture, and sleeping patterns. itself by creating one ideal model The product is developed with the awareness that users do not have to choose from a large number of products, reducing the stress of comparison.
There are a few sales strategies that focus on a singular product. This has gained a lot of support by solving the user’s problem of choosing too many options. Another reason is that Casper offers a return policy if the product does not fit. This produces a sense of security and peace of mind.
HARRY’S ― Harrys.com
Product: Razor (subscription model) Founded: 2011
Merchandise: Razors (subscription model) Established: 2011
Razors are a product that has been upgraded with technology to prevent the price from it falling, especially for major manufacturers such as Gillette.
However, since there has been excessive technological competition for this simple product, the process of going into a store to find a blade that matched the customers’ needs can be tedious and frustrating. In addition to this, there is a problem when the main body or blade needs to be replaced and the customers are unable to find a match. Again this can be frustrating for the customers. HARRY has taken steps to solve this industry problem and has simplified them.
HARRY’S has:
- A razor that cuts well
- Cheap blade / Inexpensive replacement blades
- Direct delivery to your home
These claims are supported by users which have led to 20 billion yen in annual sales.
BONOBOS ― bonobos.com
Product: Men’s apparel Founded: 2007
Merchandise: Men’s apparel Established: 2007
As mentioned earlier, BONOBOS is a pioneer of D2C e-commerce. After six months of being open, they were able to reach 100 yen in sales.
This market was based on the premise that men find it a hassle to shop. Like any shopper, it’s hard to find clothing that fits the person’s body type and style. Because of this, BONOBOS has been thorough research on their targeted male audience and found that European pants do not fit Americans. With this, BONOBOS was able to launch a straight0fit model with cotton chinos.
To add, many users find it difficult to think about the top and bottom combinations. So BONOBOS has developed products where its theme is “one pair.” With these innovative features, BONOBOS was able to acquire a large user base.
allbirds ― allbirds.com
Product: Sneakers Founded: 2014
Trade: Sneakers Established: 2014
While a single sneaker manufacturer such as Nike can offer different types of sneakers and various other items. Allbirds is the complete opposite of this. It aims to be a one model, non-genre sneaker brand. This has attracted the attention of many and has raised 1.7 billion yen in 2010.
The "Social"
The key to marketing strategy D2C of U.S. companies is to gain recognition in a short time at a low price by utilizing social media.
As previously mentioned, Casper has a mattress D2C. They have used serval advertisement methods such as test marketing by focusing on NY and LA. However, what’s distinctive about Casper is utilizing their Hollywood connection to attractively disseminates information through their social media account to gain followers.
One of HARRY’S founding members is also a founding member of Warby Parker which is famous for its D2C glasses. Through one company’s campaign, they can feature another friend campaign. Through this, HARRY’S was able to gather 100,000 emails in just one week during their prelaunch campaign.
Glossier. ― Glossier.com
Product: Makeup cosmetics Founded: 2010
Glosser is a D2C makeup cosmetic company that has continued to gain popularity with celebrities and now has attracted 1.5 billion blog readers. When this company first launched, its blog was titled “Dream Face Wash” and it succeeded in attaching 400 comments. At the time, this garnered a lot of buzz.
As mentioned above, D2C is gaining momentum in the U.S.
However, if manufacturers are already selling through wholesalers and retailers in Japan, then it might be difficult to succeed by just selling directly through e-commerce.
Frequently Asked Questions
D2C stands for “Direct to Consumer” and referred to a business model where companies handle everything from manufacturing, sales, branding, etc., without an intermediary.
The most important point for a successful D2C is “how to reduce the sense of distance between the brand and the customers.”
There are many advanced. Here are the main two:
- No commissions or margins because there is no intermediary
- You can brand freely
Please read the article for more details.
It can be inferred that the D2C business model will continue to grow in popularity from these perspectives:
- Shrinking retail industry and store closures
- Improvement of consumer literacy
- The rise of subscriptions
