Manufacturers D2C Best Practice – Part 2: How do world-class organisations sell direct?

In Manufacturers D2C Best Practice – Part 1 I looked at the “Why” of selling direct to consumers. In this post I wanted to pick out some of the top ideas that 20 Manufacturer e-commerce managers discussed at our recent industry table event in Amsterdam.

All participants agreed that success with Manufacturer D2C (Direct to Consumer) depends a great deal on the following points:

• Strategy
• Defining a solid value proposition
• Clear communication internally and externally
• Persistence
• Operational excellence
• Customer focus

The issue of Channel Conflict so dominates the setting up of a manufacturer direct sales operation that it’s essential to have strategy at the top of the agenda. We largely covered “permission”, or overall mission in Part 1.

But once the go-ahead from the board has been given to sell directly – how can it be sold internally?

1. Set Clear Objectives

What is the expectation for direct sales? Is it possible to define a revenue target, or number of customers served? Around the table (and in private discussions) several revenue numbers were mentioned, in the EURmillions. But without the ability to control all the marketing mix a solid target is tough to achieve (more on mix later).

A more common way of starting is to set a target of a proportion of sales in a category, or country. Example: “5% of accessory sales to be sold direct in 2 years”, or “1.5% of high end ‘X’ to be sold direct by 2010, without cannibalising channel sales”. The last phrase implies that direct sales can be incremental, which was accepted and agreed by the group (of course, retailers might disagree!).

Key to consider: How to bonus internally. Best practice is to include direct sales in same organisation as channel sales – then the channel sales manager can balance apparent conflict, and still meet revenue targets.

Once the targets have been defined, it should be clearly communicated internally.

2. Create a real value proposition

Manufacturers are not able to compete in the same way as retailers. Of course there are advantages of web traffic, brand name, and trust – but one delegate likened D2C selling as “fighting with both arms behind your back”

The traditional “4P” marketing mix components of Price, Product, Promotion, Place should be used with care.

Price setting: Sell at low “internet prices” (to discounter levels), and the result is punishment by high-street retail partners de-stocking lines. In fact nearly all of the delegates reported that their pricing policy is “recommended price” (where allowed in law),  which in practice means at, or above retail prices. This mitigates any accusation of price-cutting. Some delegates admitted to occasionally dropping prices to boost sales, but usually got around the issue by putting together premium bundles – a collection on products with slight discount.

Product range: Best practice seems to be to work towards stocking ENTIRE product range. Stocking in depth is a key value proposition. This translates to:

• • wide range of accessories, especially hard-to-find items for  ‘end of life’ products;
  • latest products (sometimes available for pre-order)
  • Limited product editions (colour, spec variations, bundles)
  • Stock highly available

Products in short supply should not unfairly be only available in the D2C store, but should also be sensibly rationed among ALL channels.

Promotion: D2C stores are normally on separate platforms to manufacturer “catalogue” sites. Best practice is to include channel partners in a “where-to-buy” box on a catalogue page, with one of the options “buy direct”. Sensible monitoring of traffic can help predict channel sales.

“Place” - for this part of the mix read convenience, and premium customer care. Some of the organisations use  call-centres to provide  concierge services.

Interestingly, the D2C channels had adopted generous and flexible Terms and Conditions – well above those demanded in the EU Distant Selling Directive. The leading companies are making it easy to buy and return, after the statutory minimums.

A new trend here is widening use of personalization: Engraving and gifting, plus software or image/music pre-loading.

Services are becoming more important: Installations, extended warranties and insurance.

3. Clear communication internally and externally

The most advanced D2C organisations had spent time and energy consulting with channel partners, had explained strategy, value proposition and looked for ways to work more closely with retailers. However, progress towards joint ventures like “collect in store” was slow, or had stalled (even though this has been talked about 5+ years) so maybe it was not a real objection or need for retailers.

4. Persistence

“Not giving up” was the message from both keynote speakers. One organisation had tried, failed, tried again, failed again many times before hitting its stride. Pushback had not been as a result of sales, but perceived channel conflict. Winning over internal politics was seen as most essential to succeed.

5. Operational excellence

The steepest learning curve is in perfecting the operation. Manufacturers struggle to build the consumer distribution systems that retailers nailed years ago.  Typical weaknesses are in logistics, returns, cash collection (and fraud prevention), and credits. One keynote speaker noted: “Nice website is good, but great back office is key”.

Monitoring metrics is the first step. “If you can’t count it, you can’t get better”. See our article “77 Essential Metrics” for a few hints…

Best way of improving the operation: Listening to customers, measuring Net Promoter Score®, which leads us to…

6. Customer focus

Biggest surprise of the round table session was the emphasis on customer feedback and Net Promoter Score as measure of success. One keynote speaker held the room in thrall as he outlined how they act on EVERY customer feedback, DAILY, and reply to every comment. Success in customer focus had been due to understanding Net Promoter Score. All staff in the department had been schooled in NPS, including call centre staff, to the extent that team managers had asked their boss to be bonused on NPS.  Bonusing managers on Net Promoter Score helped to improve scores. After two years of tracking NPS they had ramped up score by 100%. They also attributed their significant growth to using the Net Promoter Score.

Some useful stats from one company:

• Web conversion improved +40%
• Contact centre conversion improved +25%
• Revenue ratio from returning customers increased +100%
• Daily monitoring of customer feedback helped reduce support issues later – Ratio of goodwill funding reduced 50%

All the organisations who were using NPS were prioritising customer feedbacks and taking actions each month to improve. Examples: making phone support line free for customers, extending delivery hours to Saturdays, reduing packaging material (and 28 others!). NPS focus means that the D2C organisation can also set a (good) benchmark for the channel, and help enhance brand.

The state of art is calculating value of promoter or detractor in revenue terms, and using for ROI purposes. Net Promoter Score then becomes a growth and profit driver rather than quality exercise.

Some other learnings:

Customer direct contact had produced some surprising facts, namely that customer profile can be completely different to previous assumption. The thinking was that hip young things were the main buyers.  Reality was that the typical customer had been retired three years.

Final soundbites from the round table:

“Speed and trust are the most demanded products”

Agents should not be upselling, but rather “Right-Selling”

Arguments with resellers over “who owns the customer” should be combated with “No one owns the customer”

Resources:

If you work in a manufacturer and wish to know more, I recommend you join the LinkedIn group of professionals “Manufacturer D2C e-commerce Europe” – the group is limited to managers and execs who work for major-brand, wishing to sell direct. News of future events are posted here, forums for sharing best practice, plus some presentations are available.

Manufacturers D2C Best Practice – Part 1: Why Sell Direct?

As the banking crisis unfolded around us, we held our  “Manufacturer Direct to Consumer Sales” industry round table event in the grand Kings Chamber of the old ABN Bank Building in Amsterdam. We were delighted to welcome 20 direct-to-consumer executives from some of the biggest names in direct sales to debate some of the issues in D2C (Direct to Consumer) sales, which included Philips, Sony, Nokia, plus other major brands who are in various stages of direct ecommerce evolution.

Hot issues at this event:

1. Why sell direct? How to sell direct without upsetting existing channels
2. How to give magical experiences to consumers

I’ll cover some of the issues in the next few posts, but in this post I want to look at why a company would sell direct. Let’s establish a baseline:

Definition of “Manufacturers D2C” (direct to consumer sales) v1.0 Oct-2008:

A large brand/manufacturer offering a direct relationship to a segment of customers by transacting, delivering and offering post-sales service on all or part of its product portfolio

• By Telephone
• By Internet
• By flagship branded store

State of Art

Some examples of successful D2C commerce include: Dell, Apple, Sony (SonyStyle), Philips, Nike, Logitech, Nespresso, Nokia, Panasonic and Bose. Examples differ across geography – the US is usually the first-mover, Northern Europe strong follower, Southern Europe slower.

Quantities of sales differ (and it’s hard to get broken out figures): we speculate that the average D2C gross revenue accounts for around 1% – 3% of the total manufacturers turnover. However some companies are much higher: 50%+ with Apple due to combination of shop and ecommerce), and Dell at 85%+.

Blockages

On the surface, it appears that selling direct should be just about setting up a web-site and selling to consumers. However, if that were the case, all manufacturers would be selling directly.

There are some blocks that prevent many major brands from selling D2C. The major ones are:

• Fear of channel conflict - setting up an online shop can be seen as challenge existing channel partners – the manufacturer appears to be competing with own partners
• Learning to become a retailer – successfully selling directly requires different skills to that of selling to resellers – a philosophy of dealing with multiple small problems (logistics, finance, web) needs to be adopted
• Technology barrier - a good website can be expensive to produce, and it needs extensive back-end systems to make work
• Differentiation – what value can a manufacturer offer by selling direct?

Some stories were shared by the group included major retailers threatening to delist products if a manufacturer sold direct (echoed by several attendees); a investment of nearly $50m was made over the years by one major company on their e-commerce solution, internal politics in another manufacturer continue to threaten the success of the direct sales division.

If it is so hard to set up a direct sales organisation, then why bother to do it?

Why Sell Direct?

Each manufacturer that has taken the leap into Direct Sales seems to have a mix of reasons.

Experience, and a poll of the room brought out these points:

1. Balancing the Power Retailers Oligopoly: A few powerful retailers control market, and brands struggle to show “added value”, typically products displayed price low-to-high or on aisle ends. This may mean that products are delayed to market as stocks are run down; brand image can be eroded or commoditised.
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Power Retailers Oligopoly: A few powerful retailers control the major share of the market

2. Customers now expect, or demand web interaction: Each manufacturer invests heavily in a “catalogue site” (usually without prices) which details locations of resellers, service information. Increasingly a proportion of customers expect to be able to buy – in one survey quoted more than 57% of customers expect to be able to buy direct.
3. Marketing test bed for new products: Early adopters can be key to a successful new product introduction, and getting products out without channel logistic delays can boost this.
4. Source of unfiltered customer feedback: Asked in the right way, customers will tell exactly what they think of products, service and support without the “noise” or filtering of a channel partner.
5. Creating “Net Promoters”: Two manufacturers identified that their primary mission is to give an excellent experience and create customers who will recommend the product or service to others.

Customer choice and marketing value are the key motivators for major brands. Profit was noted as a secondary driver, if at all. Most operations seem to be at break-even, or just above – but the value comes from “nearly-free” marketing.

Contributors spoke of the marketing benefits:

• Learning about customers: The online customer was a very different profile to the one predicted by the consumer research. The vision was of a young, hip customer – reality was retired person who was highly demanding but a loyal spender (note: especially relevant ro build on these relationships in times of recession).
• Customer feedback: Verbatim comments from customers helped more than one  product manager (battery life was poor in one; product killed, unexpected uses for another; product marketing changed and sales increased in all channels).
• Pre-sales: Companies found that they could take several hundred advance orders for products before general sale. This helped convince retailers of a products success (and later helped them predict eventual full sales over the lifecycle)
• Niche products: Small quantities of hard-to-find products or limited editions were sold out. Later marketers asked further questions of consumers who had chosen for example pink or orange variants

Profit can also be interesting (but generally not at first). Margins are continually being eroded in Consumer Electronics. Selling direct allows a degree of control and retention of margin. The delegates agreed that in general direct sales can capture higher prices than the channel due to a combination of premium products and lower discounts. When all costs and contributions are taken into account, selling direct can be even more attractive. It’s easy to forget retailers “soft-margin”, training costs, restocking, support and marketing taxes… In one case, just 1% of total sales sold direct resulted in 10% of total profit.

Evolution

Most of the sites discussed had a similar path of growth, all generally designed to appease fears of retailers.

1. Non-threatening sales of spare-parts and accessories (“test the water”, test logistics)
2. Sales of “dog” products that retailers can’t sell
3. Return products or excess (sometimes on less visible channels like eBay)
4. Sales of new products (but at uncompetitively high prices)
5. Sales of full range. Regular prices. Some interesting offers
6. Exclusive products – Direct only: Variants of colours or specs
7. “Superstore” – complementary products (Apple sells 3rd party accessories, SonyStyle US sells DVDs, phones, gaes etc from Sony companies)
8. New Services – extended warranties, installation, software, downloads (Apple iTunes is the pinnacle of the this currently)

As the manufacturer moves up a level, channel conflict can become more problematic. Additional competencies and technical abilities are also required.  There is a shortage of skilled people in this sector – it’s not just a technical competence but marketing and retailing skills are also needed.

Which initiatives succeed?

The critical success factor stressed in all cases was Executive-Level Commitment to direct sales.

Without this, a direct sales initiative is almost doomed to fail (or at least languish in the 1 – 4 numbers above). The sites that have succeeded have been where top execs have set out a strategy to sell direct, and communicated it widely through the organisation and the channel.

Once that happens, it’s possible for the organisation (and retailers) to see that D2C sales can benefit the channel as well as the company.

In addition, the organisations that were most heavily committed to customer service had faster growth than others, and could use customer feedback to help all aspects of the organisation – from support, through marketing and channel management. Three of the organisations present were strongly committed to using the Net Promoter Score to measure customer sentiment.

Summary

• To succeed in manufacturer D2C sales a clear manifesto is needed.
• Commitment from top of company
• Customer and marketing focus key to eventual sales success
• Communication of reasons internally and to channel is essential

What next?

In part 2 we’ll look at the “How” of D2C sales – share some best practices and look at what works.

Resources:

If you work in a manufacturer and wish to know more, I recommend you join the LinkedIn group of professionals “Manufacturer D2C e-commerce Europe” – the group is limited to managers and execs who work for major-brand, wishing to sell direct. News of future events are posted here, forums for sharing best practice, plus some presentations are available.

Strategy plan for manufacturers: I have a bare bones plan that can help a brand structure a plan for a start-up (or failing) D2C initiative. Let me know if interested and I can send.