Over recent years we’ve seen a broad transition for retail companies with a strong brand profile and how they grow their businesses in the most efficient way. From a heavier focus and dependency on resellers to a bigger direct-to-consumer focus. The reason for this shift we’re seeing is due to a number of factors. The most eminent reasons being higher margins and full ownership of the customer experience. This transition changes the playing field for sales and marketing.

How to grow with a reseller vs. direct-to-consumer strategy?

A business that focuses on a reseller strategy will most likely find it more difficult to grow in a fast and scalable way at the same time as keeping the quality of the reseller accounts to be aligned with the brand. If the brand wants to scale, they will probably have to hire more salespeople to work in their showrooms etc. which can be time consuming and a big cost. It can also be difficult to measure the return from hiring x amount more people. Increasing the reseller portfolio can additionally lead to more competition on digital channels such as Google & Facebook. It’s often difficult for smaller brands to control how the resellers communicate the brand in their marketing channels, which can damage the perception of the brand. Marketing and growth with a reseller-focus has usually been looked at as a “cost” instead of an investment and opportunity.

A business that focuses on a direct-to-consumer strategy will most likely have a higher margin which makes it possible for them to either invest more in growth (marketing spend) and increase the growth further or simply a higher profit. Due to this, it’s easier to quickly scale your business where you see opportunities such as increasing digital investments in a good performing market or if you want to launch  a new market. To own the customer journey & data is one of the biggest advantages vs. the reseller focus as this data can be used for a more relevant targeting audience and precise message. Furthermore returning customers usually contribute to a considerable size of the sales (depending on product) and will increase the life time value which makes it possible to invest more to acquire a new customer.

An important aspect to think about, what is the purpose of the reseller? Are they creating value in terms of exposure (marketing & brand awareness) or just ‘stealing’ sales that the brand can acquire themselves with a higher margin through their own direct-to-consumer channels? If the latter, it might be better to sell those products yourself and possibly invest the extra margin in further digital efforts for a higher growth depending on overall goals and strategy.

As with everything in terms of investment, it’s recommended to diversify it. Align your investments and marketing presence with customer behavior and a balanced mix of e-com, wholesale & own physical stores would also be less exposed to fluctuations. Try to use all types of channels with a purpose and timeline. In a market where you have low brand awareness which in general leads to more expensive acquisition through your own direct-to-consumer channels, it can be worth expanding the reseller portfolio with a reseller that has a strong brand in that market and, over time, create more awareness to the single brand which will lead to more cost efficiency for the brand to penetrate the market themselves with their own direct-to-consumer strategy such as e-com and/or physical stores and start to take over more and more share of the sales from the resellers.

Setting the right goals corresponding to the brand’s strategy

What is the most important overall goal for the business – top of line revenue growth, or a certain profit %, a mix of both? Depending on the strategy, a way to increase the likelihood of achieving the goal is to look at the business starting from the top as in overall revenue down to channel contribution (SoMe ads, SEM, organic, affiliates, resellers, own physical stores etc.).

How to approach budgeting for marketing

Underinvesting and losing potential revenue can be as bad as overinvesting and bleeding money. Following this approach will reduce the risk of this problem.

Based on strategy, calculate the blended online ‘Cost of Sales’ goal and use this as a benchmark to determine how much marketing spend the company can have to reach the business goals. 

Example simplified CoS-goal calculation:

[Revenue(100%) – all costs % (except performance marketing spend) – Profit % target = CoS-goal%]

The Cost of sales in this case would be the digital marketing spend divided by the total revenue from all channels online. The CoS-goal will be very different from business to business depending on how the cost structure and margins are and how aggressive growth they want. 

If the business has different margins in different markets, it is worth being more granular and calculating a CoS-goal for each market. Sales might be more profitable with a 20% blended CoS in one market than 10% in another market which means you can spend more for an acquisition in that market and still be more profitable.

When the goal is set, this should be the baseline of how much money you can spend on digital advertising to reach your business goals. If possible, use a dynamic budget strategy which means that if you, for example, are exceeding your forecasted revenue goals and have a lower CoS% than you expected, you should increase the spend in the markets / channels where you see the best performance to make sure you’re not losing potential acquisition. An important note is that the company needs to have access to liquid assets (money) to be able to use this strategy.

Attribution model and downsides of looking at channel performance level

The attribution model sets rules that decides how to credit for sales and conversions to different touchpoints in the conversion path. For example, Facebook’s default attribution window is 1d view-through & 28d click-through. 

  • Click-through attribution: A person clicked your ad and took an action within the attribution window.
  • View-through attribution: A person saw your ad, didn’t click it, but took an action within the attribution window.

What happens if the company sells a product that in general takes longer than the attribution window? This is an issue that might undervalue the actual impact of the channel and a reason why it’s so important to test these kinds of aspects. Facebook’s Conversion Lift Tests are a great way to start exploring the true value of the company’s Facebook investments.

A reason why looking at the overall revenue growth goal instead of channel only is that you might perform really well if you look within the channel and its attribution model, but the total revenue goal for the business is not reached. What is the real impact of these channels then? It might be that we are focusing too much on direct sales and/or cannibalizing sales from other channels.

Incremental effect of digital channels

With this approach, it is crucial to identify the true value of a channel’s performance. For example, if you are running Youtube ads in a market, it might look like the performance is underperforming in terms of revenue using the own channel’s attribution model. In this case, doing a test with a control group that gets exposed to the ads and another one that doesn’t see the ads and investigate if the overall revenue from all channels (other paid channels, organic etc.) in the control group that are exposed to the ads is increasing vs. the group that is not exposed to the ads. Then, you hopefully get a result that is more tangible like “People seeing the Youtube ads increased the incremental sales of all channels in total by xx% vs. the people not seeing the Youtube ads”. With that said, even with these tools, it is difficult to know the true value of the digital advertising through people visiting the physical store, word of mouth etc.

Are we over-invested in performance marketing?

There is a risk of focusing too much on ROI and lower funnel campaigns. If you see a channel performing really well with a high ROI, it can be tempting to increase investment to those campaigns as it might grow your sales quickly initially, but what happens in the long run is that the bucket of people that you can target for these type of campaigns will start to decrease in size which will most likely lead to more expensive acquisition (lower ROI) and high risk of overall decline in revenue growth over time. This is exactly what happened to Adidas, in this article they explain what can happen when you focus too much on efficiency rather than effectiveness*. In this case they ended up with a split of 77% into performance and 23% into brand awareness. Even though work by Les Binet and Peter Field suggests a split of 60% into brand awareness and 40% into performance.

*Being effective is about doing the right things, while being efficient is about doing things right.

Summary

In short, make sure to have a purpose for why you use a digital channel, reseller etc. and start looking more at what the overall goal of the business is. It is still important to optimize in the digital channels based on their attribution models & algorithms, but make sure to test the incremental effect of the channel to make sure you get closer to the true value of the investment.

Anton Höjding Senior Digital Specialist