AI Tools are Closing Gaps to Traditional Retail in a Changing Landscape
A few years ago, it seemed all but certain that retail outlets were on the way out and that the direct-to-consumer (DTC) model was the future. An endless stream of media reports was adamant that DTC was a better fit for younger consumers who were more comfortable shopping online and tended to find retail outlets impersonal, expensive, and, worst of all, a major hassle.
The DTC model offered better deals to consumers because it allowed manufacturers and suppliers to bypass brick-and-mortar retailers and it allowed the retailer themselves to avoid all of the costs associated with maintaining a physical location. In addition, DTC’s streamlined, centralized model provided all parties with a more efficient and effective approach to activities that specifically enhance the bottom line, including customer acquisition, supply chain management, and distribution.
Most importantly, DTC appeared to be a far better match for Millennial and Gen Z consumers regarding its values and underlying ethos. Gen Z, after all, is more comfortable shopping (and living) online. From the start, DTC businesses understood and embraced this reality in their messaging and brand values.
The goal was to make each and every interaction unique and personal, as DTC sought to set itself apart with its emphasis on brand equity and brand purpose. As a result, younger consumers immediately began gravitating to this new customer engagement model.
The best example of DTC in action was probably Warby Parker, which started life as a purely online eyeglass vendor, complete with an impressive web storefront and direct-to-consumer sales model. The company prioritized social entrepreneurship and appealed to Gen Z’s progressive sensibilities. In many ways, Warby Parker became the face of the DTC’s rise and set in motion the belief that the direct-to-consumer approach was primed for future dominance.
Not so Fast: Trouble in DTC Paradise
The problem for Warby Parker, and for many others leading up to 2021, was that the underlying fundamentals were beginning to shift…and fast. The pandemic initially seemed like a boon for DTC, forcing all of us to shop online. However, it also had the effect of generating a massive spike in digital advertising costs.
For much of the prior decade, the underlying mentality of the DTC movement had been simple: “Grow at all costs.” Profits had been a secondary concern as businesses assumed that they would soon achieve phenomenal gains.
Investors, too, were enticed by the potential and threw money at the DTCs in droves. Yet the promise of DTC soon vanished as competition for eyeballs became fierce. Placing ads on platforms like Shopify and Facebook was no longer ideal for low-cost, high-yield customer acquisition due to rising costs and scarce space. Simultaneously, heavyweight retailers like Walmart, forced to prioritize their DTC channels, began to adapt successfully to the new environment. This made it harder and harder for the early and smaller DTC adopters to compete.
Since the pandemic, it’s become increasingly clear that generating profits using DTC is challenging. Beyond the issues noted above, lingering supply chain disruptions and chronic inflation exert enormous pressure on the DTC model. It’s also become apparent that, for all of their weaknesses, retail outlets are still an effective way to attract customers and convince them to spend. This realization has eroded the belief that retail is dead and DTC is inevitable.
Indeed, many DTC businesses now do most of their business through retail outlets, Warby Parker included. Some DTCs survived (and adapted) by partnering with department stores, while others were acquired by the retailers they sought to disrupt. The truly unlucky ones went out of business altogether.
As if things weren’t bad enough, the privacy-first era arrived on the Internet. That’s great for individual consumers, but terrible for DTCs who helped develop (and rely on) highly inventive user-tracking marketing techniques. Cookies, pixels, and Apple's Identifier for Advertisers (IDFA) are going or gone, and the impact of newer technologies like Apple Private Relay and Google One VPN is expected to be enormous. With Apple updates now allowing users to opt out of advertising-oriented tracking, marketers can no longer reliably assess the influence of their paid campaigns. This, in turn, has resulted in far higher acquisition costs and, inevitably, misdirected spending. All across digital marketing, there’s a lack of confidence and transparency that’s enormous and growing. With margins already thin, the shift is hitting DTCs hard.
Leveling Up: How AI is Providing a New Turning Point for DTC
However, with the advent of artificial intelligence (AI), the weapons DTCs need to compete, and win have finally arrived. AI is primed to fill massive gaps in capacity and can help the DTCs cope with many of their previous and lingering issues. With AI, DTC businesses once again have the ability to make objective, informed decisions about how best to use their marketing resources and to react on the fly to changes in customer behavior and competitive circumstances.
If we’re honest, the track record of the DTCs is mixed at best. On the one hand, the DTCs delivered an unprecedented understanding of how to monitor and influence consumer purchase behavior. Their success in this area was very real, but in retrospect, it appears that they were more successful in the area of advertising and branding than they were in disrupting where consumers actually shop for goods and services. A large majority of consumers still respond to the immersive, tactile experience of the retail outlet.
Cutting-edge AI capabilities are primed to help DTCs regain their confidence and optimize ad spending. They’ve learned that they will never replace retail outlets entirely but, with AI, they can maximize their ability to do what they do best. Data, as always, is the key and by exploiting the power of AI, DTCs can extract unprecedented value from it and come to understand their customers in deeper, more accurate ways. Emerging AI platforms have opened themselves to DTC brands and offer campaign-specific revenue attribution and unprecedented bespoke insights. Thanks to AI, DTCs have a genuine opportunity to develop a deeper appreciation of how search traffic and web store visits are influenced by digital expenditure across major social media platforms.
DTCs have also realized that “brand love” isn’t sufficient to drive sales in a hyper-competitive marketplace. It’s simply not enough to promote style, feel, and focus on website aesthetics at the expense of the basics, such as fulfillment. Remarkably, DTCs in the past seemed genuinely uncomfortable with the mundane details of accepting and fulfilling orders and actually delivering products and services. Not to mention how to do it economically.
But that has all changed as they now know that their long-term viability in the marketplace depends on their ability to forge deeper and more meaningful relationships with their customers and to do so as cost-effectively as possible. AI gives them the power to analyze consumer behavior in real time and to respond with exactly the right messaging, the right offers, the right alternatives, and, when necessary, even the right discounts.
By leveraging AI, DTCs can drive sales without sacrificing their margins, and deliver unique, personalized experiences that don’t require them to violate their customers’ privacy. And they can do it in ways that ensure that their expenditures actually yield positive ROI. The power of AI to deliver better market intelligence is allowing DTCs to develop new features, new products, and more creative approaches to pricing.
With AI in the mix, DTCs have the chance to engage with the big retailers on a more level playing field. In exactly the same way that these retail behemoths demonstrated remarkable adaptability during the pandemic, brand manufacturers can do the same thing by harnessing the power of advanced AI and maximizing their ability to compete with these giants by offering superior and more personalized customer experiences.
Down But Not Out—Long Live DTC
The DTC model isn’t finished, but it’s been forced to adapt to certain basic realities of the marketplace. Retail outlets exist for a reason. For all of their associated weaknesses and costs, they are still effective and are driving sales daily. Physical stores are a nexus where manufacturers, distributors, retailers, and customers come together in one location and generate invaluable data and insights that DTCs, when acting alone, can’t access.
Today’s AI is giving the DTC model new life. Properly implemented, it can give current and future DTCs the tools they need to better understand their customers, drive sales, and actually deliver products and services in ways that are satisfying for the customers, and that make economic sense for the business.
AI also allows them to “level up,” by deriving actionable insights from their data so they have a fighting chance against brick-and-mortar retailers. The DTC model has gone through a rough patch, but the model is here to stay. Armed with cutting-edge AI tools, it’s well-placed to not only survive, but to thrive by offering unique and personalized experiences for consumers without them having to truck out to the mall.
About the Author
Mridula Saini is Chief Revenue Officer at IKASI, providers of an innovative self-learning platform powered by AI. IKASI specializes in hyper-personalizing engagement experiences for business and marketing professionals at the customer level, aiding them in enhancing their net revenue growth. For more information, follow them at www.ikasi.ai and on LinkedIn.
