“Data-Driven Thinking” is written by members of the media community and contains fresh ideas on the digital revolution in media.
Today’s column is written by Lance Neuhauser, CEO at 4C.
Direct-to-consumer (DTC) startups are thriving as more consumers expect a seamless online experience with their favorite brands. But what if you are a major brand that needs to move a massive amount of units, and your traditional sales channel has been wholesale, and you don’t collect the last mile of data? How do incumbents become DTC companies if they were not built that way in the first place?
This problem can’t be solved through advertising and marketing technology; marketing is not the fastest or stickiest path to building a direct relationship.
The cold truth is that an incumbent can’t outrun a DTC on its home turf of people-based marketing. Data is the new economy of scale in media. And not only do DTC brands have data that rivals their larger competitors, they are in many ways more comfortable running in-house operations that leverage data management and media facilitation technologies. They are going to bring that strategic edge to TV as it transforms into a digital channel, taking away the incumbent’s last home-field advantage.
That’s why incumbent brands should look beyond marketing to their true place of leverage. For incumbents, that means hardware: physical products that build an intravenous sales model with a direct connection between brand and consumer – one that creates a channel for new, meaningful product extensions. You can’t persuade customers into a direct relationship with marketing savvy alone; you’ve got to give them something they want and need.
DTC brands have the data that lets them understand their customers in unique ways, but most lack the capital or the scale to seize the opportunity to become conduits for intravenous brand extensions.
Herein lies an opportunity for incumbent brands to create some disruption of their own, provided they can harness the courage – and the data – to do it.
Tapping into a vein
When we talk about intravenous sales models, we’re talking about “walled garden” hardware that sets up opportunities for recurring revenue through repeat purchases of products that only work with that hardware.
For example, printer companies don’t make money off their printers. They make money off their ink. Same goes for Keurig and its 2.0 K-Cups: The money doesn’t come from the hardware but rather the recurring consumables that follow. Those consumables would be “direct to consumer” for the incumbent.
For the most part, today’s DTC brands are built around single products and unique business models. As incumbents catch up to those models, DTC players are faced with the need to pursue brand extensions. And that’s where incumbents have a competitive advantage when it comes to making capital-intensive shifts into adjacent and extended territories.
They just need to be the right extensions, ones that deepen the relationship with consumers while solidifying recurring revenue streams. And, they need to have the right kind of relation to the original product, meaning they have to be something that consumers would trust the original brand to offer.
For incumbent brands, this intravenous sales model can flow in two directions. For brands that sell consumables, they could offer hardware at notably low price points, prompting subscriptions to their consumable lines. Imagine Tide offering an innovative new washer alongside a subscription to customized Tide PODS designed specifically for its new machine.
Then, of course, there are today’s incumbent hardware brands. What other lines of recurring revenue are available to them? Keurig owners love their K-Cups, but the brand could go further. What about a branded line of flavored creamers?
This is how incumbent brands go direct. The fact is that many companies are so structurally intermediated from their customer that relying on marketing alone to bridge the gap is unrealistic. Media budgets are no longer an economy of scale for brands in the era of convergent TV, but that scale can still be put to good use if it can help forge legitimate brand extensions that pave the way for incremental growth.
The real lesson from the startups is about harnessing consumer data to nurture loyalty and drive the product roadmap. If the incumbents are daring enough to do the same, their superior scale and established brand presence will show the startups a thing or two in turn.