Shark Tank's Kevin O'Leary loves licensing, but is it always the best option? Not exactly, and here's why.
If you’re a Shark Tank addict like the rest of us, then you’re familiar with Kevin O’Leary’s obsession with licensing deals.
He loves the thought of producing a product, handing the time consuming activities like sales, marketing, and customer service off to someone else, and then developing somewhat passive income.
And while this may work in some situations, Kevin O’Leary doesn't always get this one right.
Licensing vs. Going Direct
When a brand moves from product development to product marketing and sales, it must consider how it wants to monetize the products it’s selling.
Generally speaking, the decision comes down to licensing products out to third party retailers and distributors or directly selling to customers without the need for a middleman.
In the past, licensing was by far the most profitable and sensible strategy for the large majority of brands.
However, thanks to the growth of the Internet and the ease of E-commerce sales, going direct is now a very practical and profitable option.
This is something many brands, and particularly young startups, are beginning to realize.
The annual growth rate of direct-to-consumer selling online is more than 15 percent, which makes it the fastest-growing merchant category on the Internet.
Specific Advantages of Direct to Consumer
While the basic concept of going direct is fairly easy for any business owner to understand, most shy away from it because they don’t fully comprehend the specific advantages and benefits of doing so.
In order to help you get a firm grasp on this sales model, let’s take a look at a few of the specific advantages that are typically associated with the direct to consumer approach.
1. Higher Margins
The biggest benefit of going direct is obviously the higher margins associated with cutting out the middleman. No fees, royalties, and additional charges means you can keep more of the revenue you earn.
This is the primary reason brands are moving to the direct-to-consumer model, but it certainly isn’t the only one.
2. Better Cost Control
Outside of the higher margins, the biggest benefit of selling directly to consumers is enhanced cost control.
When selling through traditional methods, such as a brick-and-mortar, you often have to take on additional costs just to encourage sales.
For example, it’s not uncommon for large retail outlets to require brands to pay slotting feeds to place a product on a certain shelf, aisle, or endcap.
It’s also fairly normal for large retailers to require brands to pay for advertising and marketing.
However, when you sell direct, you don’t have to pay any of these fees.
You own the rights to your own product and can sell when and where you want, according to your own terms.
This reduces costs and allows you to control both retail price points and profit margins.
3. Relationship Building
One of the major disadvantages of licensing and selling through a third party source is that you don’t get to build relationships with the end customers.
Instead, your focus is on satisfying the immediate customer (the distributor or retailer).
The beauty of selling directly to customers is that you get this face-to-face contact, which allows for stronger, healthier relationships.
You get to engage with consumers via customer service, social media, and various sales conversations.
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“These multiple points of contact can help to turn a casual buyer into a loyal, long-term customer,” writes Eric Dontigney, a content marketing professional. “Because returning customers tend to yield a much higher profit due to the low acquisition cost, direct sales provides an advantage over more impersonal, mass marketing approaches.”
4. Better Understanding of Products
As a result of engaging with customers and building relationships, you ultimately earn the ability to understand your target market better.
In turn, this provides invaluable insights into your products and how they’re being used and perceived.
“The use of a sales force that deals directly with customers can help a direct sales business avoid issues like a bottom falling out of the market,” Dontigney points out. “Consumers can state explicitly what kinds of products and services they want or need. Businesses can leverage these consumer-based insights in new product development, as well as using the sales force to gather preliminary response to proposed new products.”
In other words, as you engage with the end consumer, you become aware of how your products function in the real world.
This is often much different than how your brand perceives them during testing. Going direct-to-consumer has helped keep many brands in business for this exact reason.
Three Successful Direct to Consumer Brands
So, going direct comes with a number of benefits, but what do they look like in the real world?
There’s a difference between listing advantages of an approach and then showing how the approach looks in practice.
Let’s take a look at three different direct to consumer brands that are currently experiencing successful results to get a clearer idea of how this looks.
When looking back at the past few months, Purple, a new mattress company, is by far one of the most successful direct to consumer brands.
While the founders had the option to license their innovative mattress technology to any of the major industry players, they instead decided to sell directly from their website and Amazon.
It’s certainly an interesting move, particularly for an industry that almost exclusively sells through brick-and-mortar partners, but one that has been very profitable to date.
2. Warby Parker
Perhaps the most famous example of going direct, Warby Parker, the massive online eyewear company, is the perfect example of how profitable you can be by forgoing licensing deals and handling sales on your own.
With their success, the company is valued at $1.2 billion, it’s no surprise that Warby Parker is looked at as the model for future startups.
3. Outdoor Voices
The clothing industry is admittedly very competitive right now. No matter what niche you want to get into, you’re going to face dozens of bold startups and established brands.
However, Outdoor Voices was able to cut through the noise by choosing a unique direct to consumer business model that was relatively new at the time of inception.
While it does wholesale to a very select number of retailers, Outdoor Voice primarily focuses on direct online sales. This hybrid approach has been quite successful for the company.
Consider Going Direct
Is going direct right for every company? Absolutely not. There are reasons, Kevin O’Leary has a bigger bank account than the rest of us.
Thousands of businesses sign licensing deals, and outsourcing sales and distribution is preferred by many. Licensing works in many situations.
With that being said, going direct is something that’s beneficial for many businesses. By cutting out the middle man, you can control costs, enjoy higher margins, build better relationships, develop a stronger understanding of your consumer, and adapt more quickly to changing market factors.
Related Article: How to Make Your Direct Sales Business Explode in No Time
Next time you launch a startup, give the direct-to-consumer model some thought.
It’s working for brands like Purple, Warby Parker, and Outdoor Voices, and it may just work for your own business.
Learn from those who have gone before you and apply these lessons to your own brand.