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What is Direct to Consumer? Why Does It Matter?

What is direct to consumer?

Direct to consumer is the sale of products or services directly to consumers, bypassing the markup costs of unnecessary middlemen.

Why do direct to consumer brands matter?

It’s a new world with better products AND better pricing, but not everyone fully understands how and why this is happening. Right now, informed shoppers who truly understand the direct to consumer uprising are enjoying better prices—or superior products for the same prices—as well as an unparalleled customer experience.

Revolutionary Pricing

You’re going straight to the source, my friend. No unnecessary middlemen means no unnecessary markup. Selling directly to consumers allows brands the freedom to offer revolutionary pricing, in one of two ways:

  • Create the absolute best products, loaded with features and benefits, for the same price as standard-quality retail products; or
  • Create quality products offered at a fraction of the going price (up to half price or less is common!)

And here’s the best part: you’ll find several brands in our directory that have found a way to offer both the lowest price and the highest quality.

No Compromises

In the traditional retail model where products are sold indirectly through middlemen, every $1 of production costs normally lead to $4 to $5 being charged to consumers. Most of that markup goes to the middlemen.

This inefficient model forces companies to make sacrifices on materials, quality, design, customer service, and more, in order to hit the price points needed to pay all the middlemen.

This is exactly why brands that sell directly to consumers—even if they sell their products for a fraction of the going retail price—have a much greater ability to invest in materials and innovation, and more freedom to truly explore and meet the needs of customers.

Unparalleled Customer Experience

By selling direct, brands gain the massive advantage of having direct communication with their customers every day. This enables brands to receive valuable feedback and build loyal relationships through a superior customer experience.

This direct communication also informs the design of better products and services, as customers can easily connect with the knowledgeable people who actually design, manufacture, and improve the products every day. As a customer, this direct communication with a company is valuable when you are buying, and even more valuable if you ever have a problem with the product.

Is it any wonder that brands like Southwest Airlines, Warby Parker, Zara, and other direct to consumer companies are dominating their industries with superior products and delighted customers?

But wait, you get what you pay for, right?

Not anymore. Not by a long shot.

The belief that we “get what we pay for” is rooted in the assumption that a product’s price is directly tied to its overall quality and the cost of producing it. If a product has a retail cost of $100, and it costs $50 to produce, then it’s assumed that a product costing $200 would be $100 to produce.

This is no longer true. In today’s globalized economy, the price of making things—even premium products like smartphones, carbon fiber performance bikes, and luxury apparel—has gone down. Way down.

At the same time, the cost of distribution has gone up. These costs include things like shipping, retail storefronts, and marketing spend. The most costly factor in distribution, however, is the middleman—or the layering of several middlemen—with expensive labor hours and costs of their own.

The worst middleman, however, is a fully invisible one: manipulative marketing. The most manipulative secret of branding and marketing in today’s world is the intentional inflation of product prices (or the lack of lowering prices as production costs go down), in order to make consumers believe that a higher-priced product indicates a higher-quality product. Or in other words, the long-standing belief that “you get what you pay for.”

Unfortunately for consumers, this is still widely believed to be true. Price is still the primary indicator of quality in the eyes of consumers, whether it’s done consciously or unconsciously in their minds. Branding experts know this well, and they continue to take full advantage. That’s how we end up with $1,000 smartphones and $3,000 handbags.

When you combine these two new realities—that products are now far less expensive to produce, but more expensive to distribute—then you arrive at the new truth: higher prices are often due to expensive distribution and good old marketing manipulation. Higher prices are typically not driven by higher production costs, and therefore, typically not an indicator of higher quality.

Let’s look at how differences in the distribution channel plays out in the new economy, using a common product being sold by traditional brands with traditional distribution.

Traditional Brands

Consider this scenario that is based on an actual example we’ve seen in apparel manufacturing and merchandising. A customer walks into a store, looking for a new ball cap, and sees two hats from a traditional brand (let’s call them Brand A). The customer considers buying the finest $20 ball cap, and right next to it, a cheaper-looking $10 trucker hat.

Since the price of the $20 cap is twice as much as the cheaper-looking $10 hat, it’s easy to believe that the $20 cap likely cost much more to produce than the $10 hat. You get what you pay for, right?

Wrong. The truth is, they’re both inexpensive to produce. The $20 cap might cost around $1.86 to produce, while the cheaper-looking $10 trucker hat right next to it might cost about $1.56 to produce. In our recent business experience, when we discovered this hidden truth behind many of today’s products, we were shocked.

First, our eyes were opened regarding how incredibly cheap it is to produce a product in today’s global economy. Second, we were shocked to learn that even the finest hat could be produced for a mere 30 cents more (or 19% more) than a cheap-looking hat, and yet those 30 cents of production costs ultimately drove twice the price (100% more) to the end consumer.

Lastly—and the most absurd part of all—is that something that costs only $1.86 to produce costs the consumer $20. Why? In large part, it’s because most of the money paid at the register has traditionally gone to the distribution channel and middlemen. Only a fraction of the retail price is driven by production costs.

Even if you buy this traditional brand’s products at Amazon.com or “directly” at the brand’s own website, the prices of the products are still inflated—often up to 6-10 times the production cost—in order to pay for the multiple layers of wholesalers, retailers, and salespeople that still remain in the traditional brand’s distribution channels. Even though traditional brands may sell directly to customers in one channel (like their company website), they’re still unable to deliver lower pricing or higher value, because their price has to be set to properly accommodate the most expensive, middleman-heavy, traditional distribution structure they employ. They just make extra profits in any more “direct” channels they also employ. Customers don’t save anything.

Direct to Consumer (Only) Brands

Now let’s look at the same situation, but introduce Brand B, a direct to consumer brand.

Brand B recently made the decision to opt out of the traditional retail distribution model, and now only sells to customers directly. Brand B can go to the exact same factories and (just like Brand A) can have the finest cap made for $1.86 and the cheaper-looking hat made for $1.56. Since

Brand B has no middleman to pay, the company can price their hats significantly lower than Brand A’s hats. Brand B could sell their trucker hat for $5, if they chose to, and still enjoy a healthy profit.

This type of direct to consumer commerce with transparent margins is happening more often in today’s world, with the internet driving the ability for consumers all over the world and brands to connect directly with one another without the need of any middlemen whatsoever.

If the customer truly “got what they paid for,” then Brand A’s $10 trucker hat would have twice the quality of the $5 trucker hat from Brand B. But that’s not the case. It’s the same hat, from the same materials, made in the same factory. The only difference is that Brand B has no middlemen.

This exact same direct to consumer disruption is happening with bicycles, paddle boards, sunglasses, razors, mattresses, electric cars, and virtually every product on the planet.

The revolution is here. The only problem that remains for consumers is knowing which brands are truly direct to consumer, and of those, which are noteworthy and trusted.

That’s where we come in.

How do we determine which brands to include? And how do we keep the lights on? And what’s our larger mission?

All great questions. And you’ll find the answers here: Our Mission, Selection Process, and Business Model

Interested in learning more?

We’re excited to speak with you about the direct to consumer revolution! Please reach out to us at yourfriends@nomiddleman.com.

A Mark Cuban Company