Before we start with the disadvantages of direct-to-consumer, let us talk about this strategy. Under the direct-to-consumer model, the manufacturer sells the product directly to the end-user. The product does not go through any intermediaries like retailers or wholesalers. It is prevalent for DTC (direct-to-consumer) brands to have only online stores. There are a few DTC brands with minimal retail stores, but online is a popular platform for this business model.
There are numerous advantages of the DTC model for both the consumer and the brand. The brand can retain loyal customers easier and can have complete control over the value chain. The administration of the supply chain becomes transparent, and even small businesses can compete head-to-head with giants in the market. However, one should not overlook the disadvantages of the direct-to-consumer business model too. Here are some of the obstacles and difficulties of the DTC model.
More responsibilities in logistics
In other business models, the middlemen (retailer, wholesaler, or others) would take care of the logistics department. This department is a vast working chain that involves inventory management, labeling (barcode generation, data management, and others), transportation, cybersecurity, etc. It also leads to the storage of sensitive customer information, which would otherwise fall under the middlemen responsibility.
As mentioned before, the brand will now be responsible for a large amount of customer data. You will be familiar with the typical responsibilities of data management, like data handling and error management. Today, the security of the data is the core responsibility of the business. Any breach of data or misuse of consumer data could lead to a series of problems, an embarrassment for the brand, and even a hefty lawsuit. It is not about storing consumer data in files in a cupboard. The brand has to allocate resources or even a dedicated team for handling data, cloud management, cybersecurity services, etc. Data security management is one of the significant and sensitive disadvantages of direct selling.
Well, isn’t a brand responsible for data security even when they deal with intermediaries? Yes, in such a model, the brand has to worry about storing data related to tens of distributors. In major international brands, the distributors might go as high as a hundred. If you turn to DTC, you will be dealing with millions of individual customers, which means loads of data.
Change the company structure
One cannot change the business model to DTC overnight. Although the supply chain becomes smaller, it does become complicated. You will have to recruit a larger logistic team. You will be responsible for handling large and small shipments to various parts of the globe. Your company has to accommodate personnel to deal with customs (in case of international shipments), logistic coordination, etc.
Since you are responsible for the product until delivery to your consumer’s doorsteps, your insurance should be more covering. The complexity of insurance is one of the hidden disadvantages of direct selling. The cost of insurance will vary based on the type of product, delivery system, distance covered in delivery, and so on.
Increase in operational cost
Although the DTC model is profitable and more sustainable, a brand has to invest a substantial amount of capital and a considerable operational cost month after month, until it reaches breakeven. Unless you have a significant amount of money in your resource for initial investment and operational overheads, this model could jeopardize your entire business.
For your business to prosper in the DTC model, it needs to be available on the online platform. The major online marketplace has high exposure, which might outshine individual brands, especially smaller brands. While talking about business risks in a direct-to-consumer model, people overlook the risk of getting less exposure on the internet. If a brand has to shine on the internet, it needs a digital marketing team that can take care of website management, SEO, SEM, SMM, ORM, etc. The exposure of a brand on an online marketplace like Desertcart would be way too broad than an individual online website. According to a study in 2019, a small brand should be able to spend 8% gross revenue in marketing. Half of this budget should go for digital marketing.
The start-ups would feel the adversity of all the risks in the direct-to-consumer model. They will not have enough resources, time, or funding to try in the DTC market. It is not easy to build a physical and digital infrastructure to manage your inventory or create a salesforce similar to that of a digital retailer.
In the DTC model, the brand is not only for manufacturing, logistics, and marketing. The massive department of customer support also will fall under its responsibility. The brand has to take care of customer support for the product and the delivery process. When a brand commits to the DTC model, it should have resources and support for its D2C channels. The support department should have streamlined access to business information (while maintaining data security). The training recruitment and administration cost of even a small customer support department would be sky-high. The disadvantages and hurdles in handling a support department would add to the cons of the DTC business model.
The cons of the DTC business model will geometrically increase if you have numerous products. It is hard to manage in this cut-throat market with lesser choices for the consumers. However, if you wish to succeed in the DTC model, it is best to offer fewer variant products and create a unique identity among the consumers’ minds. The brand has to create an identity for the brand and also its products. However, according to Hick’s Law, offering more variants would confuse the consumers, and they prefer lower options if the quality is best in the market. Can you create such a product line? If yes, it means you will be making a substantial change to your manufacturing process. In such a case, the disadvantages of direct sales distribution include rewiring the manufacturing process, training employees, downsizing or expanding production units, and so on.
Numerous brands have overcome the disadvantages of direct sales distribution and are prospering in the market. 84% of the consumers are more willing to shop online directly from the brand, and in 2020 the DTC market expects a 24.3% increase in market value. Do you think you can beat all the odds of the DTC model and thrive in this market?