Different tools & vast amounts of information available online have made it easy for anyone to run a DTC business. Connecting with customers is as easy as writing a DM.
But there is stiff competition in the market. Each category has multiple players and wide-ranging products to sway customers from one brand to the other.
There is little to no loyalty among customers due to a large number of choices. People either buy the best or the cheapest.
Brands are seeing getting new customers by using growth hacks, influencer marketing, or spending cash on ads. But profitability is still a challenge. Brands must realize that being non-profitable in the long term will put them in a danger zone, and the sooner, the better.
The decade of growth at all costs is behind us. Investors have started favoring businesses that optimize for profitability and achieve hyper-growth.
Let's unfold what factors contribute to profit and how we can tweak those while not compromising on growth.
Profitability is a simple math of how much you finally gained in your wallet after subtracting all the costs of running a business.
The Net Profit Formula
Increasing revenue could mean increasing expenses and reducing profit margins. Cost-cutting measures may lead to decreased sales and lower profit margins if market share is eventually lost. To increase profit, we must focus on improving revenue and lowering total cost simultaneously.
65% of shoppers compare prices and features online before they make a purchase decision.
How can you ensure that you offer the best price in the market at any time? And do that without being pushed by the competitor's pricing.
Here are some ideas to win in this market:
● Identify products in your catalog with high price perception. Promote or markdown just enough to tip the buying decision. Profit margins need not be squeezed to run such loyalty programs. Find out more about it here.
● Identify your frequently occurring baskets and the products in those baskets with the highest probability to ‘tip’ the sale. We call them basket-tippers.
● Identify price interventions for the basket tippers based on competitor price intelligence. You do not always need to match competitor prices; being close enough is good. You may need to conduct experiments to identify the “tipping” price.
● Implement pricing rules –minimum price stipulations, minimum margin rules, the price differential between a 6-pack and a 12-pack, and so on.
● Implement price interventions as promos or markdowns that last for a day. That way, we can measure the impact of the intervention on the everyday price
● Use market-driven dynamic pricing to get deep insights into trends, competition’s prices, and how they compare with business strategy.
Lastly, remember to choose an ERP that gives you Speed, automation, and integration of pricing into your system without much hassle.
If you want to buy sneakers but enter a warehouse full of shoe boxes stacked up to the ceiling without any labels. What would you do? You would leave that and go to a store where there are different sections of shoes — for walking, running, hiking, fishing, etc. — decide to buy a pair in a few minutes and go out. Without even checking the price! So sometimes, the pricing is not even an issue.
If your online store doesn't have the right UX to help customers find what they are looking for or discover new products, then they will abandon it. After all, customers can't purchase what they can't find, even if the pricing is suitable.
If you don't have many product categories, you can put the categories available in clickable tabs that take people to the right collection.
You can make it visually appealing by putting up image tiles for various categories and directing people to them with the right CTAs.
If you have a large product catalog, go for the search bar plus a product navigation menu.
Check how YETI executed it with a navigation menu on the left side and a search section on the right side of the website.
Search will be preferred by the user when they know exactly what they want. They will go for the navigation menu when they are browsing your website to check out what products you sell.
A report from PipeCandy predicts that 75% of DTC brands will have a subscription-based offering by 2023. It is estimated that the U.S. comprises 47% of DTC subscriptions, followed by Europe (21%) and China (14%).
If you are not selling bundles and subscriptions, you might be losing to your competitors.
Bundling in DTC is a strategy where multiple products are sold together for a lower price than if each product was sold separately. The small discount acts as an incentive for purchasing multiple products together.
For example, Graza only sells two products — Drizzle and Sizzle olive oils. They offer their products individually but also encourage customers to buy the products together as a bundle and save money for doing so.
Bundling offers the following benefits:
● Increase the average order value
● Reduce inventory waste: For example, you can add a not-so-popular product to relevant, popular products and make a bundle to sell stagnant inventory.
● Improve customer experience by grouping related products with the customer's needs in mind.
On top of bundling, you can offer a subscription — a model where customers pay a recurring fee for products to be restocked weekly, monthly or quarterly. Subscriptions keep a customer loyal to your brand each month instead of purchasing once and moving on.
The subscription model works well for pets, wine, food, tea, grooming products, etc.
● Explain the benefits of your product with a short, simple copy that someone can understand without much explanation.
● People like to buy what others like them are buying & getting benefits from. So add testimonials from your ideal customers. If you have different sets of audiences, include at least one testimonial from each set. This builds social proof.
● Use the space under your CTA to eliminate objections & nudge customers toward the finish line. You can put the free shipping offer or your return policy to remove some of the indecisions associated with taking action at this stage.
According to a report by Scdigest, U.S. retailers are currently sitting on about $1.43 in inventory for every $1 of sales they make. When it comes to inventory, the simple math is — the larger your stock, higher the cost of handling it and higher the risk of obsolete inventory. All this will eat into your cash flow.
Does it mean not stocking enough inventory will solve the problem?
Not really. Understocking will lead to poor customer experience as they will see their favorite items mostly 'Out of Stock.' It will lead to poor sales and ultimately harm your brand reputation.
By optimizing your inventory, you can avoid spending money on overstock and create a consistent cash flow. The money freed from overstocking can be used to invest in growth.
As a brand trying to create a wow-worthy unboxing experience for its customers, you may be tempted to reject the usual brown boxes for shipping to choose your custom packages.
But that can lead to an added cost of designing and manufacturing the packages, which will eat into your profits. Most often, specialty packaging also adds more weight to your parcel, and you end up paying more than you anticipated in shipping costs.
Here are 4 ideas to tackle it:
● Create customized boxes for shipping individual products or bundles.
● Collaborate with your manufacturer to create 'ship-in-own containers' (SIOCs) so that the items go to customers in the same boxes that you receive. This reduces the need for over boxing.
● Switch to mailer envelopes instead of mailboxes wherever possible.
● Consider ordering your packages in bulk, as there is little to no risk there as long as you continue to run your business.
It's a well-known fact that it's easier to get an existing customer to buy again from you instead of getting a new customer on board. There's no need to convince them of your product's quality. But most importantly, you also don't need to spend on ads or influencers again to get repeat customers. Hence, you save costs.
How to calculate repeat purchase or customer retention rate:
Customer Retention Rate = [(No. of customers at the end of the time period - No. of new customers gained during the time period) / Number of customers at the beginning of the time period] x 100
Here's how you can get customers to come back to your store again and again:
● Run customer loyalty programs where people get rewards (exclusive discounts, free shipping), free gifts, invitations to events, and more when they purchase from you a certain number of times.
● After a customer receives their order, send them a coupon they can use for the next purchase and get their favorite product at a discounted price.
● Improve customer service. A live chat or help desk tool is useful for converting consumer inquiries into deals or complaints into solutions. A complaint or problem can frequently be effectively remedied, converting a dissatisfied customer into a loyal, returning customer.
Growth-at-all-costs is not what the investors want now because customer growth does not generally equal profitable growth. Rising Facebook ad prices, new iOS updates, soaring shipping costs, & supply chain issues are giving DTC companies a hard time.
Profitability seems like a long road. But it's not impossible. Gymshark and FIGs are examples of profitable brands while experiencing high growth.
Investing in the right building blocks of your brand — operational efficiency, branding, new channel, and accelerating innovation will deliver long-term profitable growth.
One of the easiest things you can do today to get closer to profitability is to let the experts look at your pricing and suggest corrective measures to add more to your top line. Rapidious collates, enriches, and aligns data with your business goals to deliver insights that can bring profits to your business. Rapidious has helped DTC brands improve GMV by 6% by implementing pricing strategies based on competition monitoring and yet keeping a balance with profitability. So if you are looking for growth without compromising on profitability, learn more about us here.