It has been a challenging year for small businesses, as many shops, restaurants and venues had to close their doors. For Volcano Coffee Works, a London-based independent roaster, it was just the push they needed to turn their attention to a fertile new business model, selling direct to consumers.
“There is nothing like a global pause in trade to help you concentrate your mind on developing new channels,” says Tom Delaney, managing director of Volcano Coffee. “We always felt it was the right thing to do and when we saw the revenue numbers accelerate, we knew it was the right decision.”
Fast-forward a year and Volcano’s investment is paying off, with its online shop having grown from 1% to 10% of its overall sales in just a year. Here Delaney and Andy Mulcahy, strategy and insights director for IMRG, share their insights and tips to grow business profitability by selling directly to your consumers
What is direct-to-consumer?
Direct-to-consumer (D2C) is a business model that refers to selling your products or services directly to your customers or clients rather than using a third party, such as a retail store or online marketplace like Amazon. Some brands choose to use a combination of both D2C and third parties, by selling their products through their own website as well as a marketplace. Operating a D2C model means you will have control over the full customer journey, from marketing your products through to pricing, delivery, returns and customer service.
What are the benefits of a direct-to-consumer model?
The most obvious benefit of selling directly to consumers is that you’ll avoid paying mark-up fees to third parties. But the real benefits go deeper. “The primary benefit of D2C is the direct communication you can have with your customers – having full data on customer interactions and the ability to use that for growing sales,” says Mulcahy.
This data provides powerful insights for the whole business. For example, what devices customers are shopping from, when and from where they are shopping, the content they’re viewing, how they’re navigating your website and the most common questions and complaints you receive. This data holds value for multiple teams. Marketers can use it to refine messaging, product teams to identify new features and sales teams to hone pricing.
By owning the sales channel you also have the opportunity to enhance customers' experience with your brand. More than just selling your products, you can strengthen your brand presence by sharing valuable content, such as educational material or inspiring case studies. You can offer promotions and discounts, introduce loyalty schemes and capture reviews and feedback. All of which combine to deepen your understanding of your customers and processes. Insights you can use to optimise your marketing strategy, supply chain and product development for greater efficiency and profitability.
There are a whole host of marketing tools out there to help you better understand your customers. Make your marketing budget go further with the American Express® Business Card, which is accepted by Google, Hootsuite, Buffer, and many others. It gives you up to 54 days until payment is due¹, giving you the flexibility to analyse the performance of your marketing campaigns – before spending more. Plus, you'll earn Membership Rewards® points every time you spend which you can redeem for technology, travel and experiences.²
How to decide if direct-to-consumer is right for your business?
Start by understanding where a direct-to-consumer model would add value to your customers, says Delaney. Then consider the external environment and trading conditions. For Volcano, the events of the past 18 months came together to create a fertile opportunity for them to help their customers experience their coffee at home, without the need to head to a cafe or restaurant.
At the same time, closures and restrictions around shops and supermarkets pushed all age groups towards online shopping, increasing consumers' trust and confidence in the process. In fact, one-quarter of consumers now do more than 90% of their shopping online and for half, it’s over 75% of their shopping. What’s more, over half of consumers prefer to shop directly with brands rather than through third parties. This came together to give Volcano the boost it needed to focus on D2C.
How to conduct a D2C cost-benefit analysis?
Once you’re clear on where your brand could add value by switching to a direct-to-consumer model, the next step is to perform a cost-benefit analysis. Delaney used Excel to plot the upfront investment needed to set up Volcano’s D2C strategy against its projected sales.
Start with your products
Consider the time and money involved in adapting your products for consumers rather than wholesale buyers. Volcano worked out that packaging its coffee into smaller bags for consumers took six times longer than it did for wholesale buyers. Orders also needed to be roasted within 48 hours of dispatch, which meant roasting smaller batches, more often. “We had to consider our staffing levels to ensure we met our criteria, as complexities increased while output remained flat.”
Estimate set-up
Selling D2C means you’ll need a sales channel. For Volcano, this required investment in its website as well as the allocation of one full-time staff member for about one month of work. Delaney estimates the brand spent about £10,000 in total on setting up its D2C model and the brand has since hired a full-time member of staff.
Forecast sales against operating costs
Forecast your projected sales against the operating costs required to drive those sales. These include expenses such as marketing and website maintenance. “We saw that initially, we would be operating at a cost on the e-commerce channel but in the long-term, we could see profit,” says Delaney. Volcano expects online sales to grow 30% year on year.
How to set up a D2C strategy
Understand your USP
“First and foremost, you need to ensure there’s a market need you can fulfil,” says Delaney. Analyse your competition and understand how your products offer something different. Then communicate this point of difference on your sales channels.
“This has informed not only our communications strategy but also where we seek to compete on organic search, paid promotions and even how we’ve made incremental changes to user experience on our website,” says Delaney.
Forecast your online sales
You need to understand whether an investment of your time and money in setting up a direct-to-consumer sales channel will generate profit for your business and how long this might take. Delaney used Excel and Microsoft Power BI, a data visualisation tool, to forecast sales growth from its online shop and the costs involved in driving this growth, such as marketing.
Plot the end-to-end customer experience
Selling directly to customers means you will be managing the end-to-end customer experience with your brand, from the discovery of your online shop to product purchase, packaging, delivery, returns and customer service. Plot out what this journey will look like, factoring in customer contact methods, response times, delivery options and returns processes.
“The precursor to loyalty and retention is consistency in quality, so it’s making sure the customer experience at all stages – from ordering to receiving and enjoying – is matching and exceeding expectations,” says Delaney. “I’d stress the importance of standing in the customer’s shoes – the product may be similar or even the same but the experience of buying D2C can be fundamentally different.”
To boost retention and loyalty, Volcano Coffee uses a combination of emails, loyalty programmes, ad-hoc communications and customer service. “We hope this provides an experience and relationship with our brand that goes beyond just coffee.”
Capture your customer data
One of the biggest incentives of D2C is the opportunity to capture data on your customers. Integrate platforms and processes that enable you to capture and action this data. Many platforms, like Shopify, that make it easy to set up an online shop, also include analytics solutions that track the activity on your site and provide customer insights.
Switching your business model to direct-to-consumer may take time and trial and error, and cause peaks and troughs in your cash flow while adjusting to this sales strategy. With an American Express® Business Card, you get up to 54 days to clear your balance¹, giving you the flexibility to manage your cash flow while these changes take place, and more time to pay your suppliers and expenses.
- The maximum payment period on purchases is 54 calendar days and is obtained only if you spend on the first day of the new statement period and repay the balance in full on the due date. If you'd prefer a Card with no annual fee, rewards or other features, an alternative option is available – the Business Basic Card.
- Membership Rewards points are earned on every full £1 spent and charged, per transaction. Terms and conditions apply.
