D2C is a retail e-commerce model that facilitates the sale of goods directly from the manufacturer to the end user with no middlemen involved.
The D2C model eradicates the need for traditional distributors who would typically handle conveyance and distribution of products from the manufacturer to a retail store.
D2C transactions typically happen online and hence D2C falls into the e-commerce category. There are several brands that have adopted to physical presence via a brick and mortar stores, pop-up stores, and marketing with traditional brands in their retail outlets.
D2C (Direct-to-Consumer) has transformed businesses and customer expectations, hence it is imperative to know how to value a D2C business. D2C brands are slowly but surely storming every sector and altering customer perceptions, preferences, and expectations. These companies are fast becoming platforms where companies can connect directly with consumers.
With a healthy infrastructure and robust online presence, D2C brands will only look to reach out to more target customers in the coming years.
However what begs to be answered is, how have D2C brands managed to stand out, especially in business sectors where competition is stiff?
The D2C Business Model
As the name suggests, D2C (Direct-to-Consumer) companies deliver their products directly to customers without intervention of traditional retail stores or intermediaries. This help them cut costs and ship their products at lower costs than conventional counterparts.
Moreover, since no middlemen are involved, D2C companies have complete end-to-end control over product manufacturing, marketing, and distribution.
When it comes to a D2C model, the objective is not to enhance in-store sales mandatorily. Rather, it’s intended to boost brand awareness and customer engagement. And this will go on to encourage more sales online. This is a part of the D2C omnichannel experience that merges digital elements with the real-world.
So these brands, mainly marketed by startups, have become some of the most prominent players across industries like shoes, razor blades, mattresses, and even healthcare.
How To Value A D2C Business: D2C Metrics
Before investing in a market segment, startups and large organizations must grasp how various business models work, be it B2B, B2C, or D2C.
As a growing business model, the direct-to-consumer segment cuts operational costs by doing away with resellers, middlemen, and other such businesses that may stand in its way. However, since the D2C segment is still in its early stages, you might need to measure its performance using different metrics to understand if it is a viable option.
Many metrics help you learn more about the D2C model, among which eight are the most prominent for businesses today.
1. Cart Abandonment Rate
Potential customers abandon their orders during checkout or before completing the payment, shopping cart abandonment. Companies are constantly looking toward improving shopping experiences, and one of the ways they can do this is by keeping track of cart abandonment rates.
For this, e-commerce companies can use the equation:
Cart Abandonment Rate = 1 – (Transactions Completed / Transactions Initiated) * 100
Cart abandonment rate lets businesses know buyer intents depending on the unfinished initiated and completed transactions.
2. Repeat Customer Rate
Repeat customers are users who have made at least two purchases or transactions. There are no fixed time limits between these transactions. However, many e-commerce companies measure this KPI to determine the value they get from their customer purchases and use this information to improve customer experience.
You can measure the Repeat Customer Rate using the following equation.
RCR = Number of customers who have shopped more than once / Number of customers.
3. Customer Acquisition Cost
The cost involved in acquiring customers willing to purchase your products is the Customer Acquisition Cost. Most D2C businesses maintain low Customer Acquisition Costs by implementing low-cost strategies to get new customers and offering high-quality products.
The D2C space is more about retaining existing customers than acquiring new ones, as it helps businesses expand rapidly and economically. E-commerce companies determine customer acquisition cost (CAC) using the equation:
Customer Acquisition Cost = (Sales Cost + Marketing Cost) / Customers Acquired
4. Customer Lifetime Value
Customer Lifetime Value is a vital D2C metric that allows businesses to monitor and improve their customer experience programs. Since D2C brands cater to a narrower audience than B2B or B2C, relying on metrics such as the Customer Lifetime Value helps them invest in new items, markets, and customers and, more importantly, retain existing customers.
All this allows them to become financially stable.
Companies estimate Customer Lifetime Value using the equation:
Customer Lifetime Value = Average Purchase Amount * Number of Purchases Per Year * Average Customer Relationship Length in Years.
5. Product Return Rate
The product return rate measures how customers regularly return what they purchase from your store. Return rates depend on the retailer’s return policies and products. E-commerce stores determine Product Return Rates using the equation:
Product Return Rate = (Returned Items / Items Sold) * 100
6. Product Margin
The product or profit margin tells you a product’s price over the markup or selling price. Product or profit margins help know how much profits companies make in terms of the sales they generate from their e-commerce stores.
E-commerce companies calculate the product or profit margin using the following equation.
Product Margin = (Selling Price of a Product – Cost Price) / Selling Price.
7. Average Order Value
Average Order Value (AOV) allows you to determine the total value of all the orders that a customer places on your e-commerce store. AOV is a crucial D2C metric that influences several business decisions, including advertising costs, store layout, and product pricing.
Companies in the D2C business estimate the average value of an order that customers place using the equation:
Average Order Value = Total Revenue / Number of Orders
8. Net Revenue Retention
The Net Revenue Retention (NRR) is the income that e-commerce companies manage to retain from their customers. NRR depends on several factors, including upgrades, downgrades, cross-sales, and cancellations.
You can estimate the Net Revenue Retention (NRR) using the following equation.
Net Retention Revenue (NRR) = (Starting MRR – Contraction MRR – Churn MRR + Expansion MRR) / Storage MRR * 100
The Benefits and Challenges of D2C Business Model
Direct contact with customers
D2C companies manufacture and sell their products directly to the end consumer without involving a middleman or distributor. This helps D2C brands to nurture strong relationships with their clients – that is the people who are actually buying their products.
This helps them to gain deep, valuable perceptions into their target market. For example, when firms approach clients for feedback, direct communication is an influential manner to reach out to clients to know what they are thinking and then follow up with effective changes.
D2C brands cut down on their overheads by evading expenditure on store location, rent, insurance, store façade and design, transport of goods, and sales staff where a traditional retail store cannot.
When the costs are cut down to bare minimum, D2C brands enjoy increased margins. D2C brands can now in fact pass on some of these savings to customers thereby further reducing costs and can therefore come up with competitive pricing.
Focus On Marketing & Branding
Traditional B2C manufacturers rely on distributor and retail networks to handle product marketing and promotion. While the success of a D2C brand depends on digital marketing activities. D2C brands must invest in refined marketing and branding to build a brand presence.
Which will help cultivate an influential presence online and help build awareness, engagement and grow their customer base.
Agility and flexibility
D2C brands have the entire product pipeline within their grip. This is right from manufacturing to distribution marketing and customer support. With no middlemen involved, facilitating direct communications with the end consumer is straightforward.
D2C brands can acclimatize quickly with their products, operations, and marketing. Customer feedback and market trends can be studied and corrections can be applied quickly and flexibly than in a traditional B2C setting. This contributes to quicker improvements, better performance, and higher sales.
Handling distribution and shipping
A D2C company must be ready to manage all order fulfilment, manufacturing, processing payment, shipping, and post-purchase requirements like returns and exchanges. This entails a larger set of logistic skills and capabilities as compared to a B2C brand.
Conclusion: How To Value A D2C Business
The bottom line is if and when a company sells directly to its end consumer, it is indeed a D2C brand. Even though operational details such as shipping and distribution may vary. Traditional retail distribution component is evaded in a D2C brand is a vital characteristic.
And after being identified as a D2C brand, it can focus its energies and resources to succeed in the D2C retail. D2C brands are here to stay, thanks to the different e-commerce businesses and platforms thriving today.
Another reason that the D2C business model will prevail is that customers today know more about the other brands and products in the markets. Also, the value of D2C brands is evident with companies integrating their brand strategies and growth plans with customer expectations.
With an Engineering degree and a Diploma in Management under my belt, I worked for 16+ years in the automobile industry with various manufacturers in various capacities. But my passion for writing was overwhelming, hence I turned that into a career. I have been writing for more than 10+ years on various domains including the IT industry. I am sure you will find the 200+ published blogs of mine in here informative, exhaustive and interesting.