With e-commerce surging, building direct-to-consumer capabilities is more important than ever—but how do companies truly scale their D2C business?
The explosive growth of e-commerce over the last five to ten years has confirmed its role as a critical asset for companies as they adapt to an increasingly online world. COVID-19 amplified this: e-commerce was instrumental in surviving the challenges of the pandemic, and will remain pivotal in the “new normal”. Given the limitations on in-store shopping, many consumer segments that were hesitant to shop online were forced to try it in 2020, and haven’t looked back.1 Direct-to-consumer capabilities are primed to take advantage of this trend—but for many companies, there are substantial obstacles to making the move to D2C.
Direct to consumer e-commerce: making the breakthrough
SidebarAbout the authors
Direct-to-consumer (D2C) e-commerce currently presents the best opportunity for innovative brands to build direct relationships with their customers. D2C refers to the practice of selling a product directly to the consumer via a company’s own web store, thus bypassing third-party retailers or wholesalers. For companies, building D2C e-commerce capabilities allows to directly interact with end-consumers, which helps steer brand strategy and innovation based on real-time consumer insights. These insights can help a company answer consumer needs directly, thereby maximizing both consumers’ commitment to the brand and their lifetime value. In the competitive landscape, D2C can act as a defensive measure in the long term, but also allows for immediate share gain: it means the company is less reliant on e-giants like Amazon and Rakuten, and creates an opportunity to capture a larger part of the growing online market.
Many companies are attempting to build out D2C businesses, with varying degrees of success. Leaders in this area have been able to make D2C not only their primary growth platform but a core part of their business. Others, although they have captured some growth in this new channel, are finding it hard to shift priorities to D2C, given the large proportion of sales that come from traditional, indirect sales.
Building a D2C business may be easier for some, as companies differ in terms of their history in direct selling, as well as the attractiveness of their brand and category for direct sales. However, companies of all kinds and sizes have been able to make use of D2C e-commerce by scaling their capabilities, or by accessing capabilities such as marketplaces, ready-to-use platforms, and software as a service (SaaS) that facilitate access to the online channel.
This article focuses on the management shifts required for any company trying to move from existing D2C to “breakthrough” D2C—by which we mean moving away from consistent double-digit growth on a small base to 2–3x the growth, or from say $100 million to over $1 billion revenue.
In order to do so, it is vital to understand why some companies are able to implement and grow D2C e-commerce to become an integral part of their operations, while others see limited growth. We explore the factors that may prevent success, as well as actions certain brands have taken to break through these barriers. These include well-known leaders in D2C e-commerce such as Nike, but also consumer-electronics companies like Lenovo. We focus on industries for which D2C e-commerce is of particular interest because of their ability to build brand affinity, and the propensity of shoppers to shop these categories online. Examples include consumer electronics, luxury goods, fashion and apparel.
Factors preventing success in D2C e-commerce
Our review of leading D2C companies found that factors for success or failure can be categorized by three core elements: top leadership commitment, customer-centricity, and digital talent. Within these, we identified three “individual” and three “overlapping” factors that collectively determine whether companies manage to implement and grow D2C e-commerce (Exhibit 1).
Too many strategic priorities
A lack of prioritization of D2C by top leadership can often lead to D2C being treated as an afterthought, especially if leadership pursues too many strategic priorities. Lack of prioritization of D2C compared to other areas tends to prevent “breakthrough” decisions are being made, and can amplify the other factors preventing success.
Timidity in strategic choices and investments
Brands can make the mistake of attempting to implement a multitude of fragmented D2C ideas and solutions—for example, by using the D2C platform for both brand-building and sales growth in a nonintegrated way, managed by different teams. As a result, new initiatives and investments are justified incrementally in the standard business-planning process, leading to slow progress, which in turn limits buy-in for faster and greater investment, creating a vicious, self-perpetuating cycle.
Misalignment in talent and working culture
Within an organization, D2C teams are often formed organically, with leaders in their mid to late career transitioning into D2C and e-commerce roles. These leaders often lack knowledge of how to build the new type of business needed for successful D2C, which requires disruptive and innovative thinking appropriate to the fast-moving digital environment, including testing and learning new data-driven ways of working. Leaders without specific talent in D2C and the digital environment can struggle to adapt, and may be unable to unlearn certain inbuilt corporate behaviors. This is true across functions, including marketing, merchandising, supply planning, IT, and product development.
Misalignment across channels
In order to grow a new channel, existing channels must often be disrupted. For D2C, the fear of upsetting channel partners (such as retailers) can become a real obstacle to D2C e-commerce growth, as new products or promotions are not introduced or are “watered down” to appease existing channels including retail and eMarketplaces. Similarly, misalignment may result from differences in marketing messages across different communication channels, managed by teams that are responsible for different channels and customer groups. Finally, if supply is short, questions arise as to which channel gets stock allocated, and which has to let customers down.
Short-term orientation impairing development of great customer experience
D2C teams often have little or no incentive to focus on consumer-centricity and journey thinking, which are generally seen as the domain of different teams. Instead, the prevailing attitude is often that D2C “is just a channel to sell” and will optimize for profits. Additionally, D2C typically does not control product or brand development, which makes it difficult to prioritize for long-term customer value creation. Another important example is found in Supply Chain, which has emerged as a differentiator for e-commerce in recent years. Online “pureplays” and large multi-category retailers are lifting the standard on operations-enabled experience elements, including delivery times (“Same Day” and “Next Day”), traceability, product personalization and seamless returns. Having a competitive Supply Chain and Operations function for e-commerce will require something different than serving existing retail customers (B2B2C), and comes with a price tag, collaboration across functions and management of partnerships with logistics suppliers. Typically, these cross-functional dynamics and levels of investment required weaken the ambition to create a world-class customer experience on the D2C platform, and may hamper growth over time.
Unimaginative scope in proposition
Growth in D2C e-commerce may be held back by hesitation to take advantage of the much broader set of product opportunities that e-commerce allows for, especially given the direct-customer relationships D2C can provide. This broader set of opportunities can be leveraged through own-product innovation, white labelling, or even third party products (3P) and marketplaces.
Six must-have management shifts to promote success in D2C e-commerce
Although these negative factors are common to a wide range of companies and can be difficult to combat, our analysis has identified six management shifts which are required to counter them, to promote excellence in the factors crucial to growing D2C, and to allow companies to reap the benefits of robust D2C growth (Exhibit 2). We suggest practical ways these shifts can be implemented.
Management shifts were identified based on areas in which leading omnichannel brands excel, allowing them to achieve breakthrough D2C e-commerce growth and take their brands from good to great.
Commit to D2C—“all hands on deck”
To succeed in D2C e-commerce, top leadership must be fully committed to its prioritization. First, the strategic role and ambition of D2C needs to be clarified. The strategic role and ambition would include clarity around target customer segments for D2C versus other channels, and distinct guardrails for the value proposition that needs to be designed and delivered.
The job of the CEO, the Board, and the whole executive team should then be to shape the details and support the organization’s D2C e-commerce strategy and ambition, and translate these into practical KPIs across different functions of the organization. Succeeding in e-commerce requires cross-functional and cross-channel collaboration at an unprecedented scale, as well as bold decision-making to achieve breakthroughs, to satisfy the extraordinary high standards customers expect from an online business today. These requirements can only be met if the CEO and the Board are fully behind the plan and its KPIs.
We expect that the pressure on top leadership to take executive responsibility for e-commerce is likely to increase organically, given its large and growing contribution to company value. For listed companies, shareholders will increasingly demand e-commerce results, as companies with direct relationships with their customers significantly increase value, for example through subscription models.2 Subscription businesses, which are typically strongly embedded in online and e-commerce, grew their revenue about six times faster than the S&P 500 from January 1, 2012 to June 30, 2020. Further evidence for shareholders of the value of a strong e-commerce business is the fact that companies that have successfully shifted investor perception towards being a “tech” or “online” success have experienced significantly higher multiples, for example in retail, where the Top 25 have been able to capture a large share of total value creation.3 Non-listed companies are possibly even better equipped to enable large investments to achieve success in D2C e-commerce.
A practical way to acquire the necessary CEO ownership and decision-making for e-commerce growth is to appoint a leader with relevant experience in either pureplay or omnichannel e-commerce. However it is achieved, the mindset at the highest levels must be changed before the rest of the company can follow.
Be ahead of the curve, with resources and investment (“Y+1”)
A successful ecommerce business requires the right resources and technology in place to operate at scale. Hiring the right talent and building a new technology infrastructure requires any organization to undergo large changes, and doing so while also managing a “breakthrough” e-commerce business automatically leads to higher complexity and risk. It is imperative to invest ahead and build the required resources, including people and technology, to a greater extent than usual; strategic choices should lean towards e-commerce.
A practical way to manage this reallocation of resources would be to adopt a “Y+1” investment logic. The “Y+1” concept requires adjusting resources and investment in advance of growth, using allocation rules that calculate the share of investment, with the expected revenue that will be achieved a quarter or a year in the future as input. Although this approach would result in an over-allocation of investment in D2C e-commerce compared to other parts of the business, it would help the business to move from “running behind” to “being ahead.”
Investment decisions should be made by adopting an “external investor mindset” to growth and returns. External investors typically put a premium on growth vs. margins as they are seeking long-term returns. With the consumer shift to eCommerce expected to continue, companies should ensure they take more than their fair share of that growing channel, by investing ahead of the curve.
A question which remains is how to prioritize and allocate investments ahead of the curve. One method to evaluate digital investments is based on the cash flows they are expected to generate, making sure to factor in “do-nothing” or base-case scenarios as well as the overarching objectives of the strategy being proposed.4 For e-commerce, the “do-nothing” case may not mean net-zero change, but rather a steady (or accelerating) erosion of value, especially in light of the trends post COVID-19. This type of investment logic is seen in banks, which have been heavily investing in mobile-banking apps and digital channels in recent years, primarily to preserve, and gain, market share.
Another way to stay ahead of the curve is to look at these investments as strategic imperatives and accept a longer-term return—similar to how IT CAPEX investments may be treated. Whichever method is used, executive teams can find creative ways to decide on the right premium to put on e-commerce resources, investment, and strategic decisions in order to maximize the effect of their investment on the growth of e-commerce capabilities.
Five traps to avoid: The long game of DTC and e-commerce
Attract and retain digital talent
A lack of true e-commerce talent is a strong factor preventing growth in D2C. Locating and attracting appropriate talent can be difficult, and takes cultural, structural, and monetary changes. Talent is scarce and competition is fierce, so attracting the right talent may require a radical rethink of the normal methods. We suggest three practical methods to enhance the e-commerce talent pool in an organization.
The first involves selecting top talent from the rest of the organization, and promoting or rotating them into D2C roles. Appropriate talent may be located by assessing skills, mindsets, and suitability for a role in D2C e-commerce. Incoming leaders can also be prepared for their role with structured training programs to help them onboard and hit the ground running.
Secondly, “anchor” hires from other organizations into leadership roles should be prioritized. These anchor hires not only bring in the required skill, experience, expertise, and credibility, but also help enhance the profile of the D2C organization, which in turn helps attract top talent in their respective functions and teams.
Third, “acqui-hiring” could be considered to scale the entire D2C organization rapidly across levels. This involves procuring exceptional talent through acquisitions of e-commerce start- and scale-ups, and providing them with the necessary support to integrate into the larger company and become a catalyst for e-commerce growth. This growth, combined with expertise integrated into strategic positions in the company, can lead to a shift in the mindset of top leadership, allowing the prioritization of e-commerce. This is one of the most challenging but effective ways to acquire talent, and typically requires strong linkage with other key strategic imperatives beyond talent, such as product, customer base, and technology.
These three methods can help to avoid the pitfalls associated with a lack of expertise or mismatch in talent, which can be highly detrimental in this fast-paced, challenging, and dynamic environment.
Resolve the inherent tension between D2C and retail partner objectives. It is unavoidable that a good-to-great e-commerce journey will create some tension with retail partners, in particular about assortment, promotions and pricing. This is seen across industries, including in fashion, sports apparel, consumer electronics, and luxury goods.
In order to resolve this tension, a mindset shift is required. Companies must stop seeing cross-channel tension as a zero-sum game, and instead appreciate the opportunity to turn it into a win-win, where collaborations across the channel help drive growth for both the brand and retail partners. D2C e-commerce growth, if utilized effectively, can complement indirect-distribution channel growth, and lead to overall market-share gain. The natural consequence of achieving this is a renewed level of confidence from retail partners, and a consistent topline and margin delivery that retailers will see and appreciate, while e-commerce gets runway to grow. This mindset shift also needs to be translated into consumer-facing shifts. Several types of interventions have been identified that have been effective in achieving this:
- Cross-channel principles: Ensuring that the D2C and retail channels operate on the same business principles, such as similar profitability thresholds, makes it easier to make decisions that help the totality of the business.
- Allocated “swimming lanes”: Each channel will be able to grow faster if they have a distinct value proposition, including some degree of exclusivity. This exclusivity can be achieved through dedicated lineups, early access, and customizations. Defining clear swimming lanes based on customer segments allows for more flexibility and faster decision-making, and creates separate centers of growth for each channel.
- Investment structure: Our experience shows that companies that are on a rapid D2C e-commerce growth path experience pressure from their retail channels to spend more, including compensation—but don’t necessarily end up doing so. A typical situation of this sort involves retailers asking for funding to execute additional promotional events, while protecting their profitability. Successful companies manage to handle these challenges with smarter allocation of commercial spend, rather than by raising the overall commercial spend as percentage of gross sales.
- Clear lines of communication: Different teams across the organization, including the D2C e-commerce team, the sales team, and the account-management team must have the same understanding of strategy, objectives, and principles in order to build a new level of trust. This will drive collaboration and ease alignment around difficult topics, such as first-to-market launch timings or supply allocation.
In practice, even with such interventions in place, there will be occasions where partners will be upset. A successful D2C business always looks threatening to retail partners, and while all the right preparation, strategy and investment can help to alleviate this, friction between businesses and their retail partners will still occur in the course of “breakthrough.” This is where leadership involvement, up to the CEO, is often required to maintain confidence and a clear line of communication.
Articulate a bold Customer Experience (CX) vision and constantly strive towards it
All of the most successful e-commerce businesses have adopted scalable solutions for CX, ranging from mobile and web experience design, to flexible pick-up and delivery options and to driving personalization leveraging predictive models.5 This notion of predictive models is important, as it means companies can identify the needs and likely behaviors of their customers at scale, as well as what they are expecting from the platform and service levels, and what would change their mind and prevent them from making a purchase or better, registering themselves as a (loyal) customer.
CX and UX decisions should, above all else, be informed by a deep and scientific understanding of customers and their needs with regards to experience, delivery, service, and product (a “360-degree view”). Traditionally, surveys were the main source of this sort of information; however, executives increasingly recognize that survey-based measurement systems fail to meet their companies’ CX needs. Thanks to the growth of digital channels, companies can complement survey-based insights with real-time, customer-level data that is easily accessed and analyzed. In addition, the rise of predictive analytics has streamlined the process to get from data to action.
From such data, a whole set of customer journeys needs to be assessed, shaped, and optimized to deliver value to the customers. This process should leverage technology to develop an integrated proposition for the customers that can be delivered in a profitable way. This is where scalability becomes a major source of value again; in the same way as predictive analytics enables scalability of insights, technology enables scalability of actions across the platform and Supply Chain solutions. Actions translate to CX through design, content, and marketing, but it is technology that enables each of these levers to work for millions of customers.
Finally, to ensure that the customer experience is delivered effectively, it should become a fundamental part of a company’s everyday operations, and as such must be at the core of performance dialogues, incentive systems, and day-to-day discussions.
Go beyond the transaction
The final mechanism to promote the growth of D2C e-commerce is related to the customer experience, and hinges on the fact that, in order to be economically viable, an e-commerce channel must rely on a set of core customers, since keeping a customer costs up to five times less than acquiring a new one.6 On top of this, increasing customer retention rates by just 5 percent could help increase profits by 25–95 percent.7
We have identified three ways to drive recurring long-term relationships with customers: changing the business model to subscription, designing loyalty programs offering real value in return for loyalty, and/or establishing brand communities to connect with customers on a social and emotional level. These mechanisms will be discussed in further detail below.
Subscription businesses can provide consumers with value, convenience, and personalized offerings while fostering stability and growth. There are four imperatives for a successful subscription model: avoiding the “add-on” approach, offering real value, offering a variety of great experiences, and introducing flexible pricing to maintain relationships.8 If implemented successfully, a subscription model can be a useful tool in fostering a long-term relationship.
If subscription is not the right answer for a brands’ value proposition, loyalty programs provide an alternative. However, the number of loyalty programs has exploded recently, and contrary to expectations, this has not increased consumer participation, but rather pushed consumers to become more selective about which programs they use. There are five billion loyalty-program membership accounts in the USA alone, but 55 percent of members do not use the programs they sign up for. However, when they are executed effectively, loyalty programs can drive significant value; members of top-performing programs are 80 percent more likely to choose that brand over competitors, and twice as likely to increase the frequency of their purchases. This can be achieved with a combination of offering the right benefits rather than fees, offering a great variety of experiences, and keeping engagement levels high.9
A final option to drive customer retention in the long term is to start brand communities. While starting a community may appear desirable on paper, it is an extremely difficult concept to get right—and can be a drain on resources, as the initial customer base is small, and content as well as the online experience needs to be built by the brand. Furthermore, it may not be an effective solution for every company type. It is important to assess beforehand whether the company’s brand(s) fit one of four established “community” types: directive, transactional, conversational, or experiential. A combination of company strengths across brand recognition, personalization, purchase frequency, partnership opportunities, content affinity, and ability to offer activities will determine whether communities are viable for the brand. Effectively creating and maintaining a brand community is a difficult task, and one that is liable to fail, but if it is achieved, the business model is set to survive long-term.
These suggested management shifts highlight ways that the challenges of adopting D2C e-commerce can be overcome, and plot a course for companies eager to reap the benefits of this fast-growing and innovative area. Making such changes comes at a cost, but the rewards can be substantial. E-commerce has shown that it will continue to grow, and D2C is a major area in which businesses can change their relationship with e-commerce to maximize its benefits, ensuring that they stay competitive in an increasingly connected and online world. In order not to fall behind, D2C should be put on the leadership agenda—and the most powerful way to do that is by identifying the value at stake, and the opportunity to improve across our D2C management shifts for your company.
Original article: https://www.mckinsey.com/business-functions/marketing-and-sales/our-insights/the-six-must-haves-to-achieve-breakthrough-growth-in-e-commerce-d2c