- The success of direct to consumer brands in the U.S can be amongst other things attributed to the simple design of the products, lower prices, and targeted marketing strategies. However, the DTC strategies that work in the US may not be applicable in China.
- China’s complicated retail ecosystem requires a localized DTC strategy that leverages newly developed digital assets and marketing strategies and develops products tailored to meet the rapidly shifting demands of Chinese consumers.
Recently, the rise of DTC (Direct to consumers) brands is transforming how people shop and attracting the attention of capital investment firms.
In April, the U.S. DTC cosmetic brand, Glossier announced the completion of its series D round of financing (It is a terminology in the financial field, meaning the fourth round to raise fund for developing business), securing around 100 million US dollars in investment and reaching a valuation of 1.2 billion US dollars. 
Similarly, in September, a DTC cosmetic brand in China, Perfect Diary, also completed its latest round of financing and reached a valuation of 1 billion US dollars. 
Given the recent success of the DTC model, DTC brands are undoubtedly worthy of focus and research. To fully understand this phenomenon, there are several questions to discuss. What is a DTC brand? What are the characteristics of these brands? What are the key ingredients of a successful DTC brand in China?
What is a DTC brand?
Direct to consumer companies, also known as DTC companies, manufacture and ship their products directly to consumers without relying on traditional stores and other supply chain intermediaries. This allows DTC companies to sell their products at a lower price and maintain end-to-end control over the making, marketing, and distribution of products. Additionally, they can have access to first-hand consumer data. By analyzing this data, they can provide products their consumers genuinely want.
The graphic below compares traditional brands to DTC brands:
Compared to traditional brands, DTC brands have a much stronger digital focus and a much closer relationship with their consumers. They focus on social media marketing and use data analysis to guide product development, market positioning, multichannel retail strategies and marketing.
DTC brands’ characteristics
- Product design strategy: less is more, avoid segmentation and focus on one vertical field
Compared to larger multinational companies, DTC brands usually focus on one kind of product and make products with a favorable price/performance ratio. For instance, the DTC mattress brand Casper believes that the variety of mattress brands on the market and the large variations in price are too confusing for consumers. Therefore, after careful consumer preference surveying and data analysis it designed a mattress which can meet the requirements of most consumers in terms of design, packaging, price and finished product.
- Focus on user experience: end to end, value every user’s voice.
DTC brands prioritize user experience and end-to-end management throughout the branding lifecycle. The end-to-end concept originally came from the computer industry, meaning a precise direct connection from the input (demand side) to the output (product side). As a result, many DTC brands have recognized from the outset that they need to improve user experience through differentiated service experiences. For example, the Glass DTC brand, Warby Parker, knows that people don't like to buy glasses that haven't been tried, so they let the user test five pairs of glasses, pick their favorite pair and send back the ones they don’t like.
- Low price strategy: price transparency, no middleman
Dispensing with middlemen allows the price of DTC products to be more controllable, transparent and competitive. The price of one lipstick from cosmetic DTC brand Perfect Diary is about 60 RMB (about $ 8.5). According to its manufacturer the production cost is about 30 RMB (about $4.2). The retail price of most traditional cosmetics is about 10x the production cost. This absolutely gargantuan markup is needed to offset the various additional costs accrued during a product’s lifecycle and journey through the extensive supply chain of traditional cosmetics. DTC brands sell products at a price of about twice the production cost. This offers their consumer products with a high price/performance ratio. 
What is special in China?
Despite all the generalities mentioned above, developing a DTC brand in China is particularly nuanced given the differences intrinsic to China’s business ecosystem. Here are three main points:
- China has traditionally been a hub for OEM (original equipment manufacturer) production
China has traditionally been a hub for” high volume low quality” manufacturing with a heavy focus on the OEM model. Its focus on “high volume low quality” has meant that it has traditionally lacked the technical capacities to produce state of the art products. There are two major trends driving consumer purchasing preference within China’s cosmetic sector one of which is a trend towards premiumization and the other is a push towards products with a high price-performance ratio. The trends tend to be polarized by demographics, with consumers in 1st and 2nd tier cities demonstrating the greatest demand for premium products and consumers in lower tier cities demanding cheaper products with a high price-performance ratio. Domestic brands are dominating the latter sector of the market and have consolidated huge market shares in China’s lower tier cities. Most DTC brands started with targeting China’s price conscious consumers focusing on their core strengths and pledging to “eliminate all superfluous intermediate links in the supply chain and provide a better-quality product at a lower price than our competitors”. The success of companies operating using this DTC model has allowed these companies to reinvest profits in R&D and target the higher hanging fruit of the masstige and premium sectors.
- China has a nuanced retail ecosystem where localization and multichannel marketing is vital
While most DTC brands in America sell their products on their official websites, DTC brands in China tend to do their business using multiple ecommerce platforms, such as Tmall, JD, Pinduoduo, RED etc. The shopping behavior of Chinese consumers makes multichannel marketing and retail a necessity in China. The different apps available in China offer unique shopping experiences and offer brands different services to promote their products. Social ecommerce is hugely important and for platforms is an integral part of the shopping experience. For larger multinational brands with deeper pockets, the larger ecommerce platforms like Tmall and JD tend to be more suitable, while SMEs (small or middle enterprises) and startups would do well to prioritize guerilla style marketing which leverages social ecommerce platforms, live streaming, user reviews/testimonials/tutorials and KOLs/KOCs.
- Private domain traffic is playing an important role in Chinese marketing
Sure, we’ve all heard of KOLs, but what about KOCs. KOCs is a uniquely Chinese idea which plays on the fact that Chinese consumers are more willing to trust their friends and people they already know to recommend products to them. KOC is an acronym which stands for key opinion consumer and encapsulates the concept of digital word of mouth in which consumers with a large digital social circle can influence the purchasing behaviors of those within that digital social circle.
With apps like Wechat boasting over a billion users, and a diverse and extensive ecosystem backing the app, leveraging the power of KOCs can be a major part of an enterprises marketing strategy.
The cosmetics brand Perfect Diary even has its own AI system called Xiaowanzi, to help manage its private domain traffic through multiple channels. Xiaowanzi has a personal Wechat account and even posts selfies on Wechat, just like a friend would. “She” also organizes hundreds of Perfect Diary’s Wechat groups and shares some information about skincare, makeup and their products.
Xiaowanzi also has a lot of benefits over standard human KOLs. For one, it is a computer program and doesn’t bring with it the baggage of PR disasters and other issues associated with KOLs, issues that often hurt brand image. Xiaowanzi can embed itself into consumers’ private social circles and provide timely updates, notifications and advice. Through thousands of Wechat groups, Perfect Dairy is able to channel its private domain traffic towards increased brand recognition and importantly translate all the traffic to massive sales.
The success of several Chinese DTC brands proves that it is a feasible business model in China. For new entrants DTC is a tried and tested route to market that offers important advantages over traditional methods. For established brands operating using traditional retail channels, analysis of the DTC model can provide important information on trends shaping China’s cosmetic market and the demands of China’s new consumer.
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