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I always have a direct-to-consumer online channel, and I always start that way and may or may not get to retail later. Here’s why:
- Direct-to-consumer online is much more profitable than through retail. I always try to develop pricing so that I have at least a 30% net profit when selling D2C. Whereas with retail, at best I shoot for a 20% net profit, but that can still be difficult to achieve, especially with tradespend. And I never make money in the first year of retail due to additional charges imposed by retailers for new brands. I am better off building my D2C business to build sales and profits to afford retail.
- With D2C, you can start small, testing all elements of your product, from the product itself, to pricing and marketing message. You don’t have such wide latitude with testing in retail – actually, no latitude at all. You cannot play around with pricing at retail. You usually have to have a decent amount of inventory to support retail, so if your messaging is not right, it’s not a simple thing just to switch out packaging. With your own D2C operation, you can test sales with consumers and know if they repurchase or not. You cannot tell this with retail and it takes a long time (at least a year, in my experience) to determine if your product has legs in retail.
- If your product does not sell well, you get kicked out of retail, including having to purchase back product with potential for additional costs in reverse logistics. And, you risk not being able to come back. Better to test with direct sales to make sure you can sell.
- You really want to build your online channel because then you not only own the customer, but you can re-sell to them or hopefully, crosssell and upsell other products to the same customer.
- It is hard to get into retail. If you have prior sales though your direct-to-consumer online channel and can show repeat purchases, that makes it much easier to drive into retail and grow in this channel faster.
- Online e-commerce and marketing tools are becoming easier to use, more cost-effective and automated, so you may not necessarily need an e-commerce team, but might manage online sales with 1-person and outsourcing customer service and fulfillment.
- Retail in-store and online operations are still separated from a lot of retailers, and retailers are typically not good at online, compared to straight e-commerce companies. Further, retailers use legacy technologies and cannot move as fast as a small brand in their own e-commerce operation. Online marketing and sales tools are advancing at such a rapid pace that legacy and large companies cannot keep up, but small brands can adopt the latest tools much quicker.
- Having a retailer sell my product online only is not a long-term viable solution, in my opinion. Volume compared to in-store is quite low, again, in my experience. If all a retailer would do is sell my product online, then I would decline. The action is on shelf. But online can be a path to shelf.
All that said, as much as I like online, selling in retail stores is highly advantageous after a brand has proven itself online, and I usually recommend it:
- Retail still commands 90% of consumer product sales in the U.S., so huge sales can be made in this channel
- It is a different channel for capturing customers.
- If sold on shelf, retail tends to entrench brands better than online. Online customers are more fickle, switching brands more quickly.
- There is more competition online than in stores.
- Consumers trust a brand more if it is sold in major retail, so that ends up benefiting the online operation
- M&A activity is still focused on brands that sell on shelf, not purely online, at least in my experience.