Over the past few months, I’ve had the opportunity to help a few prominent manufacturers strategize direct-to-consumer e-commerce experiences while balancing their relationships with their retail partners. Entering the engagements, my thought was that any brand should strive to capture their sales through direct channels in order to maximize margins.
But politics are fascinating in the manufacturer/retailer ecosystem; and as a result, the economics don’t always make sense. By the end, I came to realize that there’s a time and a place to sell direct, but there are some very particular cases in which the value of the retail relationship outweighs the incremental margin.
It all comes down to one question: what is the purpose of your website? If the purpose is to sell product, then own the sales process. If the purpose is to educate, then embrace your retail partners and own the education. It’s very difficult to do both effectively.
The Confusing Meeting
Early on in the process, I took a meeting with an in-house marketer at a decently popular consumer electronics manufacturing company. We were pitching a slew of services including SEO consultation. The marketer, Jason, was not feeling it.
Jason: “I put over $150k into SEO last year but people just aren’t buying from our site. The campaign was designed to boost traffic and drive sales. We got a boatload of traffic, but transactions never really took off.”
Me: “You sell a lot at retailers, right? Both brick and mortar and online. Is there any reason why visitors would prefer to purchase at a retailer over your site?”
Jason: “Totally. We make our prices 2x that of our retailers to ensure we don’t compete with them.”
Me: …
So… where to begin? I respect protecting the retailer relationship, but why bear the overhead of an e-commerce platform if you’re not even remotely price competitive?
The brand store should always operate at MAP (Minimum Advertised Pricing), while retail partners can choose to offer discounts that cut into their margin to sell more product. Any other setup is counter-productive to the business as a whole.
Where Politics Reign Supreme
Another manufacturer had the right approach to pricing, but couldn’t take the jump into truly competing with their retail partners. Despite being the brand/trademark owner and operator of a direct-to-consumer e-commerce platform, they opt to concede top paid-search positions to their retail partners. The logic behind concession is to avoid upsetting the retailers.
While it costs money to advertise via paid search, as a brand, you have the right to own your brand and products in search. There is no better property to educate consumers about your products than your own website. Even if the purpose of your site is not to sell, leaving the responsibility of education to retail partners is like putting lipstick on a pig – not pretty.
When The Economics Don’t Add Up
The final case is truly unique. This manufacturer sells their product in every major electronics outlet including their own e-commerce platform. After running a lifetime-value study, we came to the realization that the brand.com purchase LTV is equal to one sale. As a result, the maximum allowable cost-per-acquisition is equal to the margin of the product.
The brand’s retail partners, however, sell much more than this product and can justify a considerably higher cost-per-acquisition, as the value of new customer acquisition can reasonably be 2-5x the value of the initial purchase. As a result, despite garnering considerably cheaper CPCs in paid search, it’s not sustainable for the brand to engage in direct-response based advertising when competing with retail partners.
In the above example, the ROI on LTV for the retailer is so much higher than the brand store that it’s a losing battle to purchase those conversions rather than concede transactions to the retailer.
We came to the conclusion that the brand website is better suited to product awareness and education rather than direct-response sales.
There are always consumers who prefer to purchase from the “Official Store,” but coupon codes and special offers at retailers often make the Official Store the most expensive place to buy the product. If a consumer truly wants the Official purchase experience, we will continue to provide it, but the goal of the website is to engage and educate users measured by activity proven to lead to sales.
Concluding Thoughts
These examples represent the majority of situations we found when evaluating direct-to-consumer e-commerce projects. In most cases, there’s no reason not to pursue a store and get margin where you can. That said, there are always the outliers; and, it pays to take a macro view of your particular ecosystem before investing too much into developing an e-commerce experience.
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