AIQ: The Tech Edition

In brands we trust

Direct-to-consumer, data and the behavioural economy

The tech-driven trend toward direct-to-consumer is transforming consumer brands, their intermediaries and their marketing. Intimate relationships with customers and new shopping experiences are alluring, but companies must tread a fine line between hyper-personalisation and intrusion.

Direct-to-consumer (D2C) looks set to grow exponentially, with far-reaching implications for advertising, traditional offline brands, middlemen like supermarkets, and of course consumers. Companies that can establish and maintain trust should win out.

A new business model

“Direct-to-consumer – buying something on “brand.com” – is a subset of buying online more generally, whether that is on tesco.com, Amazon, or Walmart,” explains Giles Parkinson, global equities portfolio manager at Aviva Investors.

Some platforms like Facebook Shops offer a solution halfway between full D2C and selling through another company’s website, being hosted on the platform but offering brand personalisation to a level not possible on marketplaces where products are presented as a simple line item. Such solutions can therefore be considered D2C, to a certain extent.

D2C can be a very profitable disintermediation route for companies with a strong consumer brand

Ed Kevis

Equities portfolio manager

“For companies with a strong consumer brand and the potential to establish customer relationships, D2C can be a very profitable disintermediation route,” says Ed Kevis, equities portfolio manager at Aviva Investors.

“What is important is having an agile, scalable tech stack, digital brand-building capabilities, and a well-invested, back-end infrastructure to facilitate fulfilment, from warehousing to logistics,” says Charlotte Meyrick, UK equities fund manager at Aviva Investors.

Building an audience quickly and the ability to create content that will go viral are particularly important for brand and product launches. But so is delivering a faultless client experience across the lifecycle of the customer relationship, from the first click to doorstep delivery.

Meanwhile, to build a strong community, brands increasingly need to communicate and demonstrate a sense of social purpose as part of their overall value proposition. A survey by consultancy Accenture found that purpose is at least as important as customer experience for eight in ten global consumers.1

Omni-channel challenges

One difficulty is that the most successful brands have created demanding customer expectations, from cheap or free deliveries to hyper-personalised relationships. From a logistics and technology standpoint, it makes it challenging to progress from the first few customers to a quick expansion, and even more so to maintain a viable offering over the long term.2

Another issue lies in companies’ ability to embrace an entirely new form of marketing. Consumers have become active participants in a two-way relationship spanning offline and online advertising, social media, influencers, product co-creation and, most crucially of all, data collection and analysis to deliver personalised products and communications.3

For traditional brands, one area is particularly delicate to navigate: positioning their purpose in an authentic manner.

D2C brands have a unique opportunity to create a brand narrative from the beginning

Prianka Srinivasan

EYQ insights director at EY

“D2C brands, especially those born and bred online, have a unique opportunity to create a brand narrative from the beginning they can actually stick with in an authentic and transparent manner,” says Prianka Srinivasan, EYQ insights director at EY. “When legacy brands try to change their personas and cater to people's prevailing sentiments from a marketing perspective, it starts to feel manipulative.”

Many are nonetheless demonstrating an ability to create a persona in line with their core positioning, and successfully using specialist outsourced partners or in-house direct marketing channels.4 Parkinson explains that companies’ own perception of the importance of D2C is a key driver for these transitions to be successful.

“One of the reasons cosmetics has gone so heavily D2C is because of the expensive department-store sales model,” he says. “The likes of Macy's and John Lewis were capturing so much margin that it has been wildly profitable for the big brands to shift to D2C channels. Some market commentators estimate that, for every one per cent of L’Oréal’s global sales that moves D2C, it could add two per cent to profits.”5

This raises several questions on what will happen to intermediaries, how online sales will split between brands and middlemen, and who will win the battle for “the new oil” that is customer data.6

Data and the middleman

“There is the term ‘attention economy’. What we are all fighting for now is people's attention,” says Greg Davies, head of behavioural finance at Oxford Risk, a company specialising in behavioural software to help people make better financial decisions.

What we are all fighting for now is people's attention

Greg Davies

Head of behavioural finance at Oxford Risk

This has created several new breeds of middlemen, the first of which is social media advertising, from Facebook to YouTube or TikTok influencers.7

The second focuses on providing marketplaces where consumers can find all available options in one place. Amazon is the epitome of the generic marketplace, while travel sites from Expedia to Booking.com and Airbnb are specialised.

The third type of emerging middleman is more of a solutions provider working behind the scenes to provide various components that make up a D2C offering.

“Some consumer brands are playing catch-up and don't know how to develop a D2C offering quickly at scale,” says Meyrick. “That's where Shopify or Magento come in with their front-end self-service D2C solutions. A company called The Hut Group goes further still and has a full end-to-end enterprise D2C solution.”

The fragmentation of shopping

Another danger to traditional retailers, which also applies to online marketplaces like Amazon, is the ease of shopping across multiple sites compared with brick-and-mortar stores. On the other hand, traditional retailers with a relevant, differentiated client proposition can still prosper as brands shift to D2C.

Meyrick gives the example of JD Sports, historically a store-led retailer and wholesale partner for leading sports brands. “Nike and Adidas are successfully shifting to D2C and shrinking their number of wholesale partners as a result,” she says. “However, they have continued to give more business to wholesalers that complement their offering like JD sports, who help them reach a different customer demographic.”

Companies can explore other avenues to market than the very largest platforms and marketplaces

What this also reveals is companies can explore other avenues to market than the very largest platforms and marketplaces, or even create their own online presence and limit their use of platforms to some advertising.

As firms become more experienced, they are catching up with their digitally native peers and mixing and matching various blends of in-house and outsourced solutions. Eventually, there may be a split between commodity products sold on retail sites and marketplaces on the one hand, and higher value, purpose-driven brands thriving in a D2C model on the other.

With pure D2C, brands will retain more control over their customer data, which they can then use to enhance the client experience, but this must be done skilfully, as using data ineffectively can hinder relationships and jeopardise the entire brand. It is a fine line between personalisation and intrusion, and companies must find the right balance.8

A question of trust

“The phasing out of Apple’s Identifier for Advertisers – IDFA – and of third-party cookies, reducing firms’ ability to target consumers, is the backlash from intrusive practices,” says Parkinson.

Davies says such regulation will mostly change data collection and usage in a good way for customers. “If I know you are profiling me, but you are doing so to help me, and I share by answering questions, I am part of the process. It's not something you are doing to me but with me,” he explains.

Personalise and engage

According to EY’s 2020 Megatrends report, “consumers are hungry for innovative approaches using behavioural capabilities to empower and engage with them rather than exploit and alienate them. Companies able to fill this void could see tremendous market potential”.9

“D2C companies are doing a lot of things behavioural economists would consider effective strategies: creating a differentiated brand on social media; being very active on social media; and creating a sense of intimacy and authenticity,” says Gautam Jaggi, director of EYQ at EY.

“A lot often tap into emotional triggers as well,” he adds. “You will see D2C companies tapping into frustration with the high prices of traditional brands and offering a lower-priced alternative or using social norms and a sense of purpose, with some brands making social or environmental commitments for every product sold.”

D2C companies are doing a lot of things behavioural economists would consider effective strategies

Gautam Jaggi

Director of EYQ at EY

Meanwhile, personalisation can be as simple as predicting when consumers will run out of their favourite products and sending them a reminder to renew, or as complex as asking customers to participate in new product development, explains behavioural scientist Ben Voyer, research chair of Turning Points, Cartier - ESCP - HEC Paris and full professor in the department of entrepreneurship.

“What makes certain companies more successful is authenticity and transparency; that requires showing up in the market in a consistent manner,” says Srinivasan. “If you can do that, it won’t be perceived as manipulative.”

Jaggi explains the greatest danger is when companies are not aware they are using behavioural science techniques. “All companies, including D2C brands, should be thinking about how to use this purposefully, to empower people to do the things they really want to do, as opposed to just getting them to buy more,” he says.

Davies says engagement is an important part of this. “People must be involved. That means not telling them what to do, but giving them a menu of good things they could do and letting them choose,” he says.

Demonstrating trustworthiness is also crucial, which requires companies to prove they will act to the benefit of their customers, even when it is to their own detriment.

Would I lie to you?

Regardless of such efforts, companies could still find themselves at the mercy of malicious fakes capable of harming their brands deeply.

“These have the same effect as counterfeit products for luxury brands: they can tarnish a brand image, and put people off buying the product. D2C brands need to be especially careful to educate customers on what genuine products are and look like,” says Voyer.

Such fakes can affect a company’s share price. Equally, malicious actors can harm the brand by posting negative product reviews by the hundreds. Any of these can erode customer trust and loyalty.10

As hackers evolve, companies must monitor all their brands’ online content and continuously educate their customers

Jaggi says another cause for concern is that our cognitive abilities are declining just as we need to become more sophisticated in discerning fakes and fraud. Hackers also keep evolving, meaning companies must monitor all the online content related to their brands and continuously educate their customers.

Somewhat encouragingly, regulation is being considered, at least in the US, to help protect companies and consumers.11 Technologies to embed authenticity markers into online content are also progressing.

“A lot of companies are using different technologies, whether it's AI, blockchain, or digital watermarking, to indicate what is authentic to consumers,” says Srinivasan.

Despite these risks, online penetration will continue to increase, and the attractions of building direct relationships and increasing margins by cutting out middlemen mean D2C is here to stay.

“I see the emergence of many direct ‘hyper-targeted’ niche stores for virtually everything,” says Voyer. “Think The Hut Group strategy but with D2C, meaning one brand/website/app/e-store but for a niche brand, and as many viable niche markets as one can identify. D2C has the potential to reshape the whole e-retail landscape.”

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