No longer will just a few companies control the supply of essentials and extract obscene margins from you. Behold the world of D2C (Direct to Consumer) – a business approach that only exists because of digital engines.
They are really just modest products we use recurringly in our everyday life – razors, toothbrushes, contact lenses, etc. But we pay a lot for them because their supply is dominated by a monopoly or a duopoly. Let’s look at razors. Did you know that Gillette and Schick, the leading brands, have a markup of over 4,000 percent over the cost of production!
That’s a tempting target. How did they get away with it? The old school consumer product formula for success ran like this:
- Spend significant resources on developing new products (more blades!) that can command a price premium
- Spend even more resources on advertising the new product (mostly on TV) to create consumer awareness and demand
- Spend yet more resources to ensure the new product is front-and-center in retail locations everywhere
The Dollar Shave Club looked at this and using digital tools like the web and social media blew it up.
- First, Do you really need another blade for a better shave? There is a point where the buyer does not value the next feature enough to pay for it. We had three blades to a cartridge, then four, then five but it was still the same shave. What if you could give them the five blades at a much lower price?
- Second, target your consumer and talk directly to them with the web and social media. TV advertising is expensive and not very targeted. Digital advertising is much more efficient. Identify your consumer and the sites they visit and go directly to them. Boom! Another huge chunk of cost out the door!
- Third, bypass the whole retail distribution channel by selling and shipping directly to your consumer. Kaboom! The last big chunk of cost is eliminated!
With this digital jujitsu the top strengths were all turned into weaknesses of added unnecessary costs. You, the consumer, benefit with great value at lower prices.
That’s it! That is the digital disruption recipe in consumer products. Look at daily use contact lenses another market dominated by two providers: Johnson & Johnson and Bausch & Lomb. A new startup, Hubble, is taking aim at them using the same digital magic to supply consumers with lenses at half the price.
Entrepreneurs using digital tools like the web, social media and modern logistics pry apart the brand loyalty that powerful consumer packaged goods companies have built over decades. There is Goby providing electric toothbrushes. Glossier supplying makeup and skin care. Even bigger ticket items are being attacked like mattresses from Casper.
The dynamic is forcing traditional suppliers to scramble as they loose market share. In some cases they try to emulate these innovative new entrants. Gillette has launched it’s own “shave club”. Others like Unilever are executing a “if you can’t beat ‘em, buy ‘em” strategy buy buying Dollar Shave Club for $1Billion in order to attack Gillette and Schick.
- Certain commodities have sustained exorbitant profit because of the advantage that brick and mortar retailing and legacy media (TV advertising) gave the incumbents.
- Innovators need very little capital to destroy that business model.
- Can you think of something you use everyday that might be susceptible?
The venture capital world has read the tealeaves and has now poured over $2 Billion into D2C in the last four years. If you have an idea, money will not be your problem. Of course, if you work for one of the traditional suppliers or in the distribution chain or legacy media you have a different challenge.