Business Model: E-Commerce

Strengthened Relationship Going Direct to Customers

The direct to consumer model has been embraced by businesses who want more control and who want to eliminate having to pay a retailer a huge fee. For example, retailers like Target and Nordstrom often receive a fraction of the total retail price for any product sold, and the product seller is not in control of the customer experience. From the start, businesses can ensure the customer experience is delivered exactly as they intend, allowing them to learn more quickly and have deeper insights into customer data.  

Large Variety, Algorithmic Personalization

Amazon is best known for their ability to cross-sell products that fit with your current search and your purchase history. Using algorithms to analyze user behavior, past and predicted future behavior, is critical to increasing average order value and frequency of purchase.

Strong Marketing: Acquisition, Retention and Upsell

The best E-Commerce businesses are expert online marketers and spend a great deal of time optimizing their marketing “funnel” – monitoring how time, effort, service, offers, and paid media affect customer acquisition, retention, and the ability to upsell new products. E-Commerce marketers aim for a critical ratio: ensuring that their cost of acquiring a customer (CAC) is substantially lower than that customer’s predicted lifetime value (LTV).

Niche Direct Brands 

The other type of Direct-to-Consumer company that has an easier time competing are those that deliver niche products to distinctive market segments. Examples include Tuft and Needle, Caspar, and Bonobos. Customer acquisition costs are kept low at the start because the product truly serves an unmet need, and customer referrals drives initial growth. But as the business scales, these same companies will still need to invest in marketing acquisition.

Free Shipping, Free Returns

If margins and growth plans allow, E-Commerce sites who are able to offer free shipping and free returns tend to outpace those that charge for shipping. Customers are also willing to wait for free shipping, or pay to have the appearance of free shipping, and often balk at E-Commerce companies that have shipping fees of any kind.

Margin Pressure

Most Direct-to-Consumer E-commerce entrepreneurs learn that profitability is hard to attain at the start. While there are margin advantages in going direct-to-consumer, it still costs money to acquire customers, often with higher inventory costs, and higher product return rates than brick and mortar channels.

In terms investor valuation, E-Commerce businesses are less valuable to investors than ad-supported businesses or Software-as-a-service other types of business models in terms of future growth, because of unit economics. For each unit of product sold, there are inherent costs (costs of goods sold, marketing cost, operational costs) versus a purely digital product.

Marketing Economics

Many first time Direct-to-Consumer merchants are surprised to confront the marketing economics required to build and sustain a healthy business. Suffering from the “build it and they will come” syndrome, these startups (or established indirect sellers venturing into direct) spend their efforts on site design and merchandising, but do not plan for the required ongoing marketing investment. Mapping out customer acquisition costs by stage (awareness, sign up for email list, purchase) and comparing to customer lifetime value will give Direct-to-Consumer managers the framework needed to manage the sales cycle profitably.

Amazon Service, Shipping and Delivery Expectations

Amazon is the leader in business to Direct-to-Consumer E-Commerce, and the company’s breadth, depth, and market dominance must be considered for any new entrant. Customers of Amazon, who are able to have their products delivered as soon as one day after shipping, with Saturday and Sunday delivery, have heightened expectations from other online shopping experiences. Companies are keeping warehousers closer to buying hubs.

Amazon’s most radical shift was setting the expectation of same-day or next-day delivery in key metro areas. For example, Amazon Prime customers can get a product shipped within one hour in NYC.

Community Commerce

Chinese commerce brands like BabyTree and Keep started as communities first before launching D-C brands. Brandless in the US is a community-first brand who co-creates D-C products with their engaged audience.

M-Commerce

The rapid rise in mobile based shopping and purchases indicates that all sizes of Direct-to-Consumer company must have at bare minimum a website that is mobile-responsive (adapts to a mobile browser) and/or have an app designed for browsing and shopping.

Super Flexible Logistics

Direct-to-Consumer leaders are investing in their logistics flexibility: adaptable delivery of products, on-demand global fulfillment.

On-Demand and Subscription Direct-to-Consumer

One of the fastest growing forms of Direct-to-Consumer is the monthly gift-in-a-box made popular by Birchbox and similar companies. These business models differ from the standard direct-to-consumer model because of the revenue smoothing that can occur. See Reason Street’s Subscription Business Model description to learn more.