Direct to Consumer (DTC) vs. Wholesale - The Pro’s and Con’s of Each Channel
The biggest challenge that any brand needs to solve is how to acquire new customers. Without a consistent flow of new and returning customers, a brand may not survive very long. The smartest brands are constantly seeking new channels to find customers, while also figuring out the best ways to engage their current customers in order to drive growth. And while new channels are popping up all of the time, the two staple sales channels are the Direct-to-Consumer (DTC) and Wholesale channels.
Each channel has its unique advantages and challenges, and understanding these challenges can help you decide which channel—or combination of channels—will best serve your brand’s goals.
In this article, we’ll dive into what each channel is and some of the pro’s and con’s of each, in an effort to help you better understand the pluses and minuses of each one.
What is Direct-to-Consumer (DTC)?
Direct-to-Consumer (DTC) is a business model that has gained significant traction in recent years. By cutting out the middlemen (like retailers), brands sell their products directly to consumers through a company owned and operated website. This approach allows companies to have full control over their brand image, customer experience, and pricing strategy.
Take, for example, Warby Parker, the eyewear company that disrupted the traditional optical industry. Warby Parker’s DTC model allows them to offer stylish and affordable glasses directly to consumers, bypassing the hefty markups typically added by retailers. Another example is Glossier, a beauty brand that has built a loyal following by engaging directly with its customers. By listening to feedback and involving their community in product development, Glossier has created a range of products that truly resonate with its audience. Similarly, Dollar Shave Club revolutionized the grooming industry with its subscription-based service, delivering razors and personal care products directly to customers’ doors at a fraction of the usual cost.
*While these brands started out selling DTC now also sell through wholesale channels.
These pillar DTC brands have thrived by leveraging their direct connection with customers, but the channel comes with its own set of challenges.
The Advantages of DTC
Greater Control Over Brand and Image
One of the most significant benefits of the DTC model is the level of control it offers. By selling directly to consumers, brands can maintain a consistent image across all touchpoints. This control extends to everything from packaging and marketing materials to customer service interactions and communication (through email and SMS).
Having a consistent and cohesive brand image helps brands build trust and loyalty among customers. This control allows a brand to be nimble and operate the business how they want, while not being reliant on a particular retailer or partner for a specific purchase order or to run a particular sale.
Direct Access to Customer Feedback
The DTC approach allows a direct line of communication with customers. This communication can come through email or SMS channels and often includes a brand sending out surveys to collect feedback in real-time - something that is difficult to do when selling through other channels.
This affords brands the ability to gather valuable feedback quickly and use it to refine their products and services. The agility allows for rapid iteration and innovation. For instance, brands can leverage the data, insights and feedback that they are getting from their DTC channels to develop new products or make updates to their old product. This allows brands to make updates to their products that meet the actual needs and desires of their audience and create a more desirable brand.
The Challenges of DTC
While the benefits of the DTC model are compelling, it also presents several challenges that brands must navigate and carefully think through. If they fail to pay attention to these challenges, it’s possible that the DTC channel could sink the rest of the entire business (like Smile Direct Club).
Higher Marketing Costs
One of the primary hurdles for DTC brands is the high cost of customer acquisition. Without the built-in customer base of retail partners, brands must invest heavily in marketing and advertising to build brand awareness and attract customers. Digital advertising costs have risen sharply as more brands move online, making it increasingly expensive to stand out in a crowded market.
You can never acquire enough customers, as customer acquisition for a DTC business is a strategy and tactic that must always be “on.” This could add up to thousands of dollars being spent each month on customer acquisition. And with the cost of advertising increasing due to global retail factors (it’s up over 200% over the past eight years), this cost is only going to continue to rise and stand in the way of profitable growth.
Complex Shipping and Logistics
Managing the logistics of shipping products directly to consumers can be daunting. Every order that comes in through the DTC channel must be individually picked, packed and shipped. Brands need to own everything from warehousing and inventory management to shipping and returns when it comes to the DTC channel. These logistics can become especially complex and costly as a brand scales. Efficient logistics are crucial for maintaining customer satisfaction and keeping costs under control.
Oftentimes, the logistics alone for a DTC site require an entire team to look after them. And hiring and paying an entire operations team is costly and eats away at a brand's profit margins.
High Return Costs
Once the warehouse team picks, packs and ships an order, you’d think that your brand is in the clear. Think again. Online shopping often comes with high return rates, sometimes as much as 15-40%. These returns can significantly impact profit margins, as brands must cover the cost of return shipping and restocking. Additionally, handling returns efficiently is essential for maintaining customer satisfaction and trust and requires additional work and effort from your warehouse and operations teams.
Retention Challenges
Retaining customers in the DTC model can be unpredictable, challenging and expensive. Unlike traditional retail, where customers might make spontaneous purchases while browsing, brands that sell through the DTC channel must continuously engage and re-engage their audience through email and SMS messaging to keep them coming back. Oftentimes, brands that have DTC channels employ entire teams whose sole focus is to develop promotions and offers to get existing customers to come back to shop with them.
This requires ongoing investment in marketing, customer service, and product innovation and takes away a significant amount of profit margin from the brand.
What is Wholesale?
On the other side of the spectrum, we have the wholesale model, where brands sell their products in bulk to retailers, who then sell them to end consumers. This approach allows brands to leverage the established distribution networks and customer bases of retailers, reaching a broader audience without the need to manage direct sales themselves.
Legacy brands like Nike and Procter & Gamble have successfully utilized the wholesale model. While Nike has a strong DTC presence through its retail stores and online platform, a significant portion of its revenue still comes from wholesale partnerships with various retailers (like Foot Locker for example). Procter & Gamble, a giant in the consumer goods industry, distributes its extensive range of products through numerous retail channels worldwide.
The Advantages of Wholesale
Higher Average Order Value (AOV)
One of the most significant advantages of the wholesale model is the higher average order value that comes from selling in bulk. Instead of an order being $75, which is a very likely AOV coming from a DTC site, a typical wholesale order could be in the thousands of dollars. This is because retailers typically place large orders that add up.
These wholesale orders tend to be more profitable sinceoftentimes, wholesale orders don’t typically require marketing costs, while allowing brands to move large volumes of products, freeing up balance sheets from holding inventory.
Reduced Operating Costs
By partnering with retailers, brands can reduce their operating costs. Oftentimes, retailers take on the responsibilities of marketing, sales, and distribution, allowing brands to focus on product development and manufacturing. This can be especially beneficial for smaller brands with limited resources because they get to realize the benefits of marketing and distribution, without needing to worry about the headache associated with them (unlike what happens with the DTC channel).
Personalized Relationships with Retail Partners
Developing strong relationships with retail partners can lead to more stable and predictable revenue streams. Retailers often provide valuable insights into consumer preferences and market trends, helping brands make informed decisions about product development and marketing strategies.
Similarly, unlike on the DTC channel, when a brand sells into a retailer, they can truly develop a personalized relationship with them and learn about the retailer as an individual. They can learn about a retailer's family, favorite sports teams or travel destinations for example. All of these items can be useful for a brand developing a lasting, profitable relationship with a retailer.
Simpler Customer Retention
Retention in wholesale can be more straightforward because retailers manage the end-consumer relationship. Retailers often have established loyalty programs and marketing strategies to keep customers coming back, reducing the burden on brands to be responsible for this. And as long as the retailer keeps pushing your products, they will be coming back to you on a regular basis to place a reorder. You won’t need to spend thousands of dollars and tie up lots of resources focused on customer retention.
When you have a good product that is in the right retailers, your sales become more predictable and more of an “always-on” channel.
The Challenges of Wholesale
While there are many positive aspects of selling wholesale, you do have to be mindful of several issues when you begin selling through this medium.
Brand Risk
When partnering with retailers, brands must relinquish some control over how their products are presented and sold. This can be risky, as retailers may not always uphold the brand’s standards or values. Poor presentation or negative customer experiences at the retail level can damage a brand’s reputation and potentially ruin your brand.
In order to mitigate this risk, brands must be very mindful of what types of retailers they decide to sell their product into. So long as they do this, they will be in a better position to control some vital elements of their brand.
Lower Profit Margins
Wholesale margins are typically lower than DTC margins, as brands trade the ability to sell directly to customers through the DTC channel, with the ability to move a larger amount of products faster. This equates to brands needing to rely on higher sales volumes to achieve profitability through the wholesale channel. Scaling up production and distribution to meet this demand can be challenging and costly so brands need to pay careful attention to their inventory levels and production costs when selling through wholesale channels.
Integrating DTC and Wholesale for Maximum Impact
The most successful businesses often find a way to integrate both DTC and wholesale strategies, leveraging the strengths of each model to create a robust and resilient business. In order to pull this off, we’d suggest looking into the below strategies and tactics.
Create Exclusive DTC Products
Perhaps a customer discovered your brand at a local retailer and has become a loyalist of your products. In order to try to get that customer (and others like them) over to your website, consider creating a unique or limited-edition product exclusively through your DTC channel.
This approach not only drives visitors and sales to your DTC site, but also enhances the perception of exclusivity and value, while not damaging your relationship with a retailer.
Cross-Promotion
Use your wholesale presence to drive traffic to your DTC site. Including promotional materials or exclusive online offers with products sold through retail partners can encourage customers to visit your website. Perhaps this looks like including your website on your packaging or including a QR code on your packaging with a special offer that is unlocked on your website.
This strategy helps in building a direct relationship with customers who might have first encountered your brand through a retailer, while also using your DTC site.
Data Sharing and Insights
Leverage data and insights from both DTC and wholesale channels to make informed decisions about product development, marketing, and customer engagement. Retail partners can provide valuable feedback about market trends and consumer preferences, while direct customer feedback through DTC channels can guide innovation and improvements.
While data on your wholesale business may not be as readily available as your DTC data, reach out to your retailers and ask them for qualitative feedback on your products. Additionally, you can leverage the quantitative insights from the sell-through reports that your retailers are providing you to combine them with your DTC sales data to draw impactful conclusions.
Consistent Brand Experience
Ensuring a consistent brand experience across all touchpoints, whether customers are buying directly from you on a DTC site or through a retailer is essential. This consistency helps in building trust and loyalty, making it easier to transition customers between channels.
Takeaways
Choosing between DTC and wholesale is not an either-or decision for many brands. Instead, the key lies in understanding the unique advantages and challenges of each model and finding a way to integrate them effectively. By leveraging the control and direct customer connection of DTC with the broader reach and efficiency of wholesale, you can create a comprehensive strategy that drives growth and builds a resilient, sustainable brand.
In the changing world of commerce, flexibility and adaptability are crucial. As market conditions change and consumer preferences evolve, having a balanced approach that incorporates both DTC and wholesale can position your brand for long-term success.
And if you have a wholesale channel and are thinking about how you deliver a better retention experience to them, set up time to chat with us.
