This article is for educational purposes and does not constitute legal, financial, or tax advice. For specific advice applicable to your business, please contact a professional.
Finding ways to expand your business and reach new audiences is always a top priority when you make and sell products. Wholesaling is perhaps the most common avenue for getting your goods the broadest exposure. However, another option is selling direct to consumers (DTC).
While it seems like the two forms of distribution conflict, it’s possible to successfully do both if you understand the advantages of each and how you can strive to create a healthy balance where each method can thrive.
What is DTC?
The direct-to-consumer, or DTC, model is when you sell directly to your customers and end users through a marketplace, retail store, or on your website. Examples of successful DTC businesses that launched their businesses by selling directly to consumers include Allbirds, Peloton, and Glossier. A growing number of large manufacturers, like Nike, are shifting efforts from wholesale to retail, especially after suffering lower orders from their retail clients during the pandemic, According to Retail Dive, DTC made up just 15% of Nike’s revenue in 2010, and that number is grow to 60% by 2025. An eMarketer study projects overall DTC sales to increase by almost 17% from 2021 to 2022.
What is wholesaling?
A wholesale selling model is where producers sell their products in bulk to a retailer. The retailer, which serves as a “middleman,” markets and sells the products to their customers. This approach has been around since the 18th century Industrial Revolution, when factories produced textiles, hardware, and lumber, making it easier to mass-produce and sell goods. While its growth percentage isn’t as robust as DTC, the wholesale trade in the U.S. market is a behemoth, worth $10.4 trillion in 2022. From 2017 to 2022 it grew by 3.8% and is expected to increase by 4.3% in 2022, according to Ibis.
Pros of DTC
Product producers who want to try selling DTC should understand the pros and cons. A significant advantage is the ability to build relationships directly with your end users, bypassing the retail middleman. This direct connection allows you to create and offer great customer experiences to generate brand loyalty. DTC companies are often hyperfocused on their customers, especially those that started their business selling directly to consumers. And customers are responding to the attention, with 60% going out of their way to purchase directly from brands.
Another benefit of building relationships is by talking directly to your customers is that you can collect insights that help you improve your business and product offerings. Whether you ask questions or simply pay attention to what’s being said on social media, you’re likely to get unfiltered feedback that you may not get if a retailer stands between you and your customer.
And then there’s the money. With DTC you collect the highest-possible profit from the sale since you aren’t splitting the earnings with a retailer. To get products into retail locations, you will likely have to offer a discounted price, which can be as much as half of the manufacturer’s suggested retail price (MSRP). With DTC, you aren’t giving away a cut of the profit.
Cons of DTC
There are also some disadvantages of DTC selling. First, purchases from consumers will usually come in smaller quantities and without a set cadence, unlike a bulk wholesale order that is larger and can be more reliable, especially with consumable or trending products. You’ll also need to figure out the logistics of shipping individual units, which can be more complex and require additional materials. Instead of sending crates of your items, you’ll need to have a system in place for packaging individual pieces. And you’ll have to deal with individual returns, which can be time-consuming and detrimental to your bottom line.
Finally, you’ll be responsible for marketing to consumers, which can be a significant expense. While you have more control over your messaging, you’ll also have to pay for your campaigns. This added cost will shift your available cashflow from production and innovation to marketing operations.
Pros of wholesaling
Of course wholesaling has its pros and cons, too. One advantage is the ability to move more products and with greater predictability. Instead of selling your products one at a time, your bulk wholesale orders generate a lump amount of income. These orders are often on a more predictable schedule than customer orders, which can be helpful for timing your production process.
Another benefit is that your wholesale clients will help you grow your consumers because you will be tapping into the customer base that they built. This can be a massive win if you sell your products to large retailers, like major big-boxes or national chains. You can focus more time and attention on improving your products instead of chasing after the individual end users by selling wholesale.
But there are disadvantages to wholesaling. First, your margins will be significantly lower since you are selling goods at a smaller fraction of the retail price. Depending on your cost of goods, your profits could be substantially impacted. Another potential con is that you have less control over the pricing of your goods. While you can set an MSRP, some retailers, such as Walmart or Target, routinely sell items at a lower price as part of their business model. Your retailers could potentially harm your brand by heavy discounting or periodic sales, especially if you are considered a premium product. In fact, some companies, such as MAC Cosmetics, have their retailers exclude their products from storewide sales or coupons.
Finally, your marketing days aren’t over when you sell products by wholesale. Instead of courting consumers, though, you will constantly need to recruit new retailers. Cultivating these mutually beneficial relationships will take lots of time. If you’re a small product producer, you may need to hire a sales rep to gain traction and be effective with your wholesale efforts. Whether you outsource the task to an independent agent or take on an employee, wholesale sales will add a new cost to your operations.
Finding the right balance
Now that you understand the ins and outs of each type of selling, you may be wondering which is right for your business. If you’re currently selling wholesale, adding a DTC branch to your business can feel like you’re cheating on your existing retail customer base, cutting them out of the transaction. You could risk losing some of your wholesale customers. However, having a mindful DTC strategy can help you create a mutually beneficial arrangement that helps you and your retailers grow your businesses. Here are three things to keep in mind so you can walk that fine line.
If your DTC efforts only focus on making sales, you will create a conflict and competition with your retailers, and neither of you want that. In fact, it has the potential to hurt both of your businesses. Instead, consider how your DTC website can play a different role with consumers.
Start by differentiating your product offering from the items you sell through your outside retailers. One way is to hold back certain things you exclusively sell to consumers so you aren’t competing with the retail base you worked hard to build. It can help if the products differ greatly from those your retailers offer, such as a unique shirt design or food flavor.
Or, you can take an apples-to-oranges approach by selling items in different ways. For example, if you sell consumables, your site can offer different product sizes than those available through outside retailers, such as a box of trial sizes or samples that allow the customer to try things out. They can then purchase the larger size through your retail partners. You could also provide unique bundles or custom-made products directly to the consumer. You could also add products to your DTC website that serve a different market. For example, a women’s clothing manufacturer could launch coordinating items for children on their DTC site that they don’t offer through retailers.
Another way to create a distinct offering is by adding a complementary product direct to consumers that enhances the products available through your retailers. For example, if you’re in the business of making athletic wear, you could sell accessories on your site such as coordinating hats or branded athletic gear. You can also sell subscriptions on your DTC site that complement your retail store product line. If you sell home goods, for example, you could offer your own brand of care products such as fabric scents or special cleaners that are delivered on a monthly basis.
Another way to strive for balance is by finding ways to work in tandem with your retailers. For example, you can use your DTC site to test new products before rolling them out to retailers. This creates a win/win scenario since you would be proving the concept before asking the retailer to take a chance on ordering and selling a new item. And since you have an opportunity to get direct feedback from customers, you’ll have helpful information to share with the retailer once you’re ready to start offering the product through wholesale.
For customers who prefer to shop in person, you can add a page to your website that advertises and lists your nearby retailers with brick-and-mortar locations and links to their sites. You can also find ways to create co-branded marketing campaigns, such as adding your retailers’ logos to any printed advertising so customers know where they can experience your products in person. Or you can even hold events at your retailers’ locations. For example, a furniture manufacturer could have classes inside your retailers’ stores, sending a designer out to teach customers how to accessorize the pieces by using products you sell on your website. Or have a pop-up shop inside a partner store that displays a greater range of your items than the retailer carries. Pop-up shops can be especially effective during the holidays.
You can also work together on delivery. For example, you may want to partner with your retailers’ eCommerce division, asking them to fulfill your DTC orders for a smaller-than-wholesale cut of the profits. This approach can be beneficial when you’re just starting your DTC operation and don’t have your logistics fully in place. You can also share sales with your retailers by offering a buy-online-pickup-in-store (BOPIS) option. This form of delivery has increased in popularity since the pandemic, with 64% of U.S. shoppers opting to “click and collect,” reports Retail Wire. BOPIS helps increase your retailers’ foot traffic and allows them an opportunity to upsell or cross-sell other items to customers.
Your DTC model will allow you to build relationships with customers and gather information that you can use to improve your business. One way to work together is to share these insights with your retail partners. Sales data and trends could be helpful as they build their retail marketing strategies. By opening the door with information, you might become the recipient of some of their intel, too. The goal for both of you is to serve your customers better. By working together to understand them, you can develop new opportunities to create extraordinary experiences.
Another way your DTC website can be helpful to your retailers is by using it as a wholesale portal that streamlines your wholesale order process. Dedicate a unique part of your site to special discount codes where your wholesale customers can place orders and then track them online. Your wholesale portal can also provide your retail customers with access to invoices and product information. This improved flow of information can free up your wholesale sales team’s time to spend on business acquisition instead of business administration.
Once you have a clear DTC strategy, be sure to share it with your wholesale customers so they understand your goal is to be a partner and not a threat. You don’t want to field calls from angry retailers surprised by your splashy new site and wanting to know if you still intend to offer wholesale opportunities.
Your customer base may be the same, but finding ways to work together can be a win/win/win for everyone: the customer, the retailers, and you. By sharing how you plan to be an asset and not an adversary for your valued retailers, you can help set the stage for a continued partnership.