Brand manufacturers have launched their own direct-to-consumer online retail stores as logical continuation of their overall direct retail efforts. This paper presents the drivers and best practices for branded manufacturers when entering direct-to-consumer online retail. The research is based on Magenta Advisory's experience with some of the world's largest consumer brands.

1. Magenta Advisory Research
Magenta Advisory Research
Durable Goods Manufacturers Online:
Establishing Successful
Direct-to-Consumer
Online Sales Operations
Magenta Advisory 2011

2. Magenta Advisory’s point of view on how to successfully
manage a direct-to-consumer online sales entry
Introduction
Following their establishment of branded retail
stores, durable goods manufacturers have
increasingly star ted to establish direct-to-
consumer sales in the online world.
This direct online sales trend was star ted in the
early 2000’s by leading consumer electronics
brands such as Dell, Apple, Sony and HP who
all belong to the top 20 online retailers in the
United States1.
Top 20 online retailers in the United States measured by total
online sales revenues in 2009
FIGURE 1
Top 20 online retailer s in the
United States measured by total
online sales revenues in 2009
2 1
Inter net Retailer, Top 500 Guide, 2010

3. Magenta Advisory Research
Durable goods manufacturers bypassing This trend has also been picked up by Finnish
traditional retailers online are no longer found durable goods manufacturers. Companies ranging
solely within the consumer electronics market. from Nokia to Fiskars and Amer Spor ts have all
As an example, Nike’s direct-to-consumer online established their own direct-to-consumer online
channel generated $260 million in revenues in stores with the topic being a recurring agenda item
20102 and shoe manufacturers Crocs and Deckers in company management teams. In this paper, we
(owners of the Ugg brand) both run direct- will investigate the business reasoning behind this
to-consumer online channels that contribute trend and provide our point of view on how to
already nearly 10% of the total net sales of these manage this strategic transformation successfully
companies3. with a special emphasis on Finnish durable goods
manufacturers. We base our analysis on client and
industry experiences as well as interviews with
Finnish durable goods manufacturer executives.
FIGURE 2
Selected durable goods
manufacturer s’ retail store and
online net sales in 2010
(for Apple 2009 figures) 4
2
Inter net Retailer, Jun 2010
3
Crocs Annual Repor t 2010; Decker s Annual Repor t 2010 3
4
Company annual repor ts; Inter net Retailer ; Magenta Advisor y analysis

4. some private labels have been even able
Why are durable goods to break away from their traditional price
positioning. 70% of UK consumers believe
manufacturers entering that Mark’s & Spencer’s private label products
are better quality than other private label
direct online retail? brands’ products, which enables the setting
of a higher price point for the products.
While each durable goods manufacturer has
its own reasons for establishing a direct-to- Although in Finland private label net sales out
consumer online retail channel, when working of retailers’ total net sales have been much
with our clients we have found three key lower, accounting for 14% in 20087, Finnish
categories under which the rationale can be retailers such as Stockmann Group state
typically grouped: that private labels are an impor tant area of
future development. Stockmann’s private label
products already include a variety of items such
1. Durable goods manufacturers as food (e.g. Stockmann Delikatess, Stockmann
defend against retailers’ Gourmet), clothing (e.g. Global, Zoye M) and
increasing negotiation power home decoration (e.g. Stockmann Casa)8.
2. Durable goods manufacturers Clearly, the major threat in this for durable
goods manufacturers is that they are being
look for new growth by
forced to increasingly compete on price. In
following shoppers online an effor t to regain leverage, durable goods
manufacturers are using direct-to-consumer
3. Durable goods manufacturers online retail as a tool to find new ways to
seek direct consumer contact compete.
Durable goods manufacturers What Finnish durable goods manufacturer executives say:
defend against retailers’
in creasing negotiation power “Until a little over a year ago we were in a
defensive position against the discount retailers,
Globally, the retail market is consolidating but as we realized the strength of the industry
meaning that retailers have increased bargaining transformation, we decided that it’s better to ride
power over manufacturers. Large retailers the wave and be among the industry shapers
constitute a large propor tion of durable goods than drown with the tidal wave of change.”
manufacturers’ annual revenues. For example,
in 2009 Apple’s largest customer accounted
for 11% of the company’s total revenues and Durable goods manufacturers
Nike’s three largest customers accounted for look for new growth by following
25% of the company’s revenues in the US5. shoppers online
Fur thermore, retailers are launching their Internet gives unparalleled oppor tunities for
own private label brands resulting in durable consumers to research products they are
goods manufacturer’s products receiving less looking to buy – and this is exactly what they
marketing effor t and shelf space and in some do. In the US in 2010, 97% of consumers are
examples even losing their entire business searching for products and future purchases
with the given retailer. As an example, Gap online9 and 9% of consumers star ted their search
has moved from being Levi’s largest customer on manufacturer sites (up 3% from 2009)10.
to its biggest competitor by focusing sales
of jeans on its own private label brand6. Whilst a majority of consumers who research
products online still end up purchasing the
For the world’s largest retailers, Wal-mar t goods in traditional retail outlets, online retail
and Tesco sales from private label brands is witnessing significant growth. During the
constitute already more than one third of last half a decade Internet retailing has been
these companies’ total revenues. In addition, the main driver of retail growth in Western
5
Apple Annual Repor t 2009; Nike Annual Report 2009
6
“Private Label Strategy: How to meet the store brand challenge”, Nir malya Kumar & Jan-Benedict Steenkamp, Har vard Business Review Press , 2007
7
4 The Nielsen Company, Press release, Dec
8
2008
Stockmann Group Annual Repor t 2010
9
BIA/Kelsey Group, User View Wave VII study, Mar 2010
10
“The Who, When, And Why Of Visits To Manufacturer Web Sites”, For rester, Sep 2010

5. Magenta Advisory Research
Europe. While physical store retail growth has
been in total $10.6 billion between 2006 and How can durable goods
2009, at the same time, Internet retailing growth
rate has been more than double the amount of manufacturers successfully
physical stores at $28.7 billion11. Similarly, Finnish
consumers are buying products and services enter direct-to-consumer
increasingly over the Internet with the total money
spent on the web rising to 9.4 billion in 201012. online retail?
Combining these two trends, durable goods
manufacturers have a unique oppor tunity to turn For many durable goods manufacturers, entering
consumers visiting their online sites for product direct-to-consumer online retail is a strategic
research into buying customers purchasing necessity as discussed earlier. For them, the billion-
directly from them. This proposition is fur ther dollar question is how to do this successfully.
strengthened by knowing that consumers
visiting durable goods manufacturer sites Our experience has shown that if direct-to-
have a high intention to buy the researched consumer online sales entry is treated solely as
product and are more brand than price focused a technology project to build an online store, it
creating additional cross-sell oppor tunities10. is doomed to fail. A successful transformation
requires a business driven approach star ting
The hard business benefit of this is an increase from formulating a clear strategy, managing
in unit price for the durable goods manufacturer the transformation holistically not focusing on
leading to increased revenue and improved profit technology only, and finally understanding that
margins. real rewards come from relentless continuous
performance improvements.
Durable goods manufacturers seek
direct consumer contact In the following, we discuss some of the most
common issues we have found durable goods
Direct relationship to consumers gives durable manufacturers struggling to address when taking
goods manufacturers control over their brand these steps.
experience and access to customer data that can
be leveraged in product development, marketing,
sales and care. Creating a
Within our clients we have seen the direct winning strategy
relationship with consumers to be one of the
main drivers for building a direct-to-consumer Like any major business development initiative,
online channel. Durable goods manufacturers’ establishing direct-to-consumer online sales
strengths to address consumers directly include needs a clear business driven strategy with
strong brand, possibilities to personalize products defined objectives and targets, means of reaching
to consumers, trustwor thy company image and those targets, and an execution plan suppor ting it.
possibility to leverage organic search traffic thanks In creating such strategies for direct-to-consumer
to their well-known brand sites. online retail, we have often seen durable goods
manufacturers struggle with two major topics:
customer value propositions and channel conflict.
In the following, we will dive deeper into these
specific questions to provide our views on how
to tackle them.
What Finnish durable goods manufacturer
executives say:
“For us it wasn’t even up for discussion whether we want a direct contact
to consumers or not, it was a clear strategic necessity. The direct relationship
to consumers gives us a completely new level of understanding of consumer
behavior. We have been able to, for example, pilot new product offerings in our
own online channel before rolling them out to other channels.”
10
“The Who, When, And Why Of Visits To Manufacturer Web Sites”, For rester, Sep 2010
11
Euromonitor from trade sources/national statistics, Euromonitor Inter national 2010
5
12
”Ver kkokauppa Suomessa 2010”, Federation of Finnish Commerce and TNS Gallup, Mar 2011

6. Defining a customer selection or maintain price parity with retailers.
value proposition To suppor t a price parity strategy, in the US
durable goods manufacturers have been able
Defining a customer value proposition to limit channel par tners’ rights to adver tise
that is at the same time attractive to lower prices than a price defined by the
consumers and aligned with a durable goods manufacturer13. However, local legislations for
manufacturers’ overall distribution strategy this type of price fixing varies widely and for
is a recurring challenge raised by durable example the Finnish Competition Authority
goods manufacturers whom we talk with. has pressed charges to fine durable goods
manufacturers for fixing retail prices.
The common myth in online retail is that
price is the only relevant customer value As a more readily available source of
proposition and the other traditional value differentiation, examples of durable goods
proposition elements of product, service and manufacturers’ differentiating online value
experience are rendered obsolete. We believe propositions on product dimension can be
following a price only value proposition can found in product customization and selection.
be a treacherous path for durable goods Dell’s value proposition is based on full product
manufacturers, who should in our view focus on customization on its direct-to-consumer online
creating an online value proposition that is best store where all Dell products are available
aligned with their overall value propositions. for purchasing, whereas Nike offers product
customization and exclusive products in its
Not downplaying the impor tance of pricing, it online store.
is often the most sensitive area in defining the
online value proposition. A purely price based
value proposition is often not possible for What Finnish durable goods manufacturer executives say:
durable goods manufacturers as this would lead
to major conflicts with the existing distribution “While we seek to be on par with other channels
channel. We have found a typical pricing in pricing, our core value proposition is based on an
strategy for a durable goods manufacturer exclusive product range.”
online to either maintain a slightly higher price
than retailers but competing on service and
FIGURE 3
Dell and Nike offer examples of
online differentiation based on product
customization 14
13
The New Yor k Times , Feb 7 2010
6 14
Dell and Nike online sites

7. Magenta Advisory Research
Retailers have traditionally been forerunners in price is a good star ting point. This approach is
differentiating their online value propositions with equivalent to durable goods manufacturers’
service elements. The most famous example in own branded retail that typically differentiates
this area is the now Amazon owned Zappos.com, itself on product, service and experience
who offers free delivery, free 365 day return and dimensions and as such has been accepted by
24/7 phone customer service. As an example durable goods manufacturers’ channel par tners.
of a durable goods manufacturer differentiating
on service, Nokia is giving its most committed Another way to address channel conflict with
customers a possibility to pre-order new par tners is finding new ways of collaboration.
phones to make sure they will be the first Building on the practice of linking traffic from
ones to get the new products. However, in durable goods manufacturer marketing site to
addition to free shipping, service differentiation retailer sites, some durable goods manufacturers
is relatively little used by manufacturers and capture leads or orders in their sites, but let their
could provide oppor tunity for differentiation. par tners fulfil the orders and provide add-on
services. Some companies, like General Motors’
What Finnish durable goods manufacturer UK brand Vauxhall, have taken this approach
executives say: fur ther and offer exclusively lower prices on
their website, but then forward the orders to
“Our value proposition is definitely based on their par tners for fulfilment. We have found some
service. We will not compete on price.” also paying a commission on online sales to their
physical retailer par tners for customers making
Seeking to differentiate through experience is online orders in their sales area.
natural for manufacturers, as good online product
experience will also suppor t sales through all What Finnish durable goods manufacturer
channels. One alternative is to focus on simplicity executives say:
and ease-of-use, like Apple. Another alternative
is to offer highly engaging and experiential “The fear of channel conflict has significantly slowed
features, like vir tual test drives piloted by many down our [direct-to-consumer online sales]
car manufacturers. development. However, the reality is that the vast
majority of our customers learn about our products
Managing channel conflict online and purchase them from physical retail outlets
which we help them find – and in fact our online
As a majority of durable goods manufacturers’ channel is supporting our channel partners’ business.”
revenue is derived from their existing distribution
channels, a plan to manage channel conflict with
them is an absolute necessity. While some durable
goods manufacturers with strong positions vis-à-
vis their distributors challenge the distribution
network in a head-on competition, many more
will have to come up with a credible answer to
their distribution par tners questioning the durable
goods manufacturer competing directly with them.
One major tool to evade channel conflict is to
differentiate the durable goods manufacturers’
online value proposition from the key channel
par tners’ value propositions as discussed
previously. Most often the point of friction is
pricing and thus differentiation based on product,
service or experience aspects rather than
FIGURE 4
On the Vauxhall website, consumer s can leave their
contact details to be contacted by Vauxhall’s retail
par tner s in order to be entitled to a special
Vauxhall Inter net pr ice 15
15
Vauxhall online site 7

8. Every manufacturer should naturally seek Building a winning online
to create win-win situations with channel organization
par tners to avoid channel conflict. However,
regardless of all best effor ts to manage channel We have had numerous discussions with
conflict, issues with par tners will come up. To durable goods manufacturers regarding the best
successfully deal with these, the single most setup for an online organization. The difficulty
impor tant success factor is top management lies in that there is no one single optimal
suppor t and willingness to suppor t the setup as the benefits sought vary depending
migration of customers to direct channels and on the maturity of a company’s online
risking par tner retaliation. operations and thus the organization should
be seen as a continuously developing entity.
What Finnish durable goods manufacturer Durable goods manufacturers who are testing
executives say: their waters online – typically performing
some marketing, running a brand site, offering
“Our biggest challenge by far is how to find some online product suppor t and maybe
the online sales business models through selling products online in one country – have
which we can build the best possible often star ted these activities as bottom-
customer experience together with our up pilot initiatives led by a specific function
channel partners.” within the organization such as logistics, IT,
sales or marketing. These initiatives are often
entrepreneurial in nature in effect forming
small new ventures within the company having
Successfully executing the limited alignment between one another. As
strategic transformation an example, digital marketing might not be
driving traffic to the online store or customer
A durable goods manufacturer thinking that service might be managed completely
their most impor tant tasks in executing their separately from all other online functions.
direct-to-consumer online sales strategy is
selecting a technology vendor and building Understanding the drawbacks of this
an online store need to revisit their plans. organization, the next step is typically to form
an online team overlooking marketing, sales and
Durable goods manufacturers’ capabilities to care (or the majority of these functions) and
execute on their direct-to-consumer online establish interfaces to other relevant functions
sales strategies are often challenged by the fact in the company, like IT, logistics and finance. This
that they are traditionally business-to-business enables the efficient coordination of all online
companies whose organizations and operational related activities and the creation of a consistent
processes are created to suppor t hundreds or online customer experience. It also enables
thousands of relatively large customers instead the efficient scaling-up of operations around
of millions of consumers. In the following, the centralized team. At this step it is essential
we will dive deeper into the challenges of to manage the interfaces towards the other
building online organizations and operational functions to ensure online/offline alignment in
models for direct-to-consumer online sales. topics such as consumer messaging and pricing.
What Finnish durable goods manufacturer executives say:
“For us, the major change [in establishing direct-to-consumer online sales] was not to
start using the Web as a sales channel rather than the move to direct consumer sales.”
8

9. Magenta Advisory Research
The most online mature durable goods strategic impor tance of the online channel
manufacturers who have defined clear multi- and the speed in which the organization
channel strategies will experience challenges is able to increase its online capabilities.
in creating a consistent customer experience Durable goods manufacturers with existing retail
across the different online and offline channels operations can utilize par ts of their offline retail
and need to break the silos between them. At operating models for their online operations. :
this point, online has become an integral par t of Based on our experience, synergies between
the business and online related understanding online and offline retail operating models are
and skills have spread around the organization. typically found in the areas of merchandizing,
Online can in essence become business as order management, finance, and logistics.
usual and can be integrated back to normal However, the rest of the operating model is
operations of the different functions. To ensure highly online specific needing a tailored approach.
consistency within the online channel, additional
coordination and governance structures are For durable goods manufacturers just entering
required. direct-to-consumer online sales, we often
recommend them to leverage par tners and
outsource many of the operational activities to
decrease time to market and implementation
risks. Typical areas for outsourcing include
site operations, order management, logistics,
and par ts of site development whereas
tight control over planning, marketing,
merchandizing and performance review is
suggested. Once the operations have been
established and experience gathered, fur ther
efficiency gains can be realized by insourcing
some of the previously par tnered activities.
In addition to creating a global operating model,
careful consideration is also needed to take into
account local market variations that durable
goods manufacturers face when opening up
online stores in their key markets. Issues related
to topics such as local legal requirements,
differences in consumer preferences, payment
methods and local delivery options are bound
to create many unpleasant surprises for the ill-
prepared. We have found building a localized
FIGURE 5 operating model focusing on selected key
Organizations typically go through three steps of online
markets first before making a global version
organization evolution
to work better than trying to reach too many
markets simultaneously.
In our client projects we have noticed that
the pace in which a company moves from one
step to the next varies. Some of our clients
have experienced all three steps spending What Finnish durable goods manufacturer executives say:
a year on each, while others have stayed
considerably longer on a single step. The pace “The markets we are in vary significantly in terms
that is suitable for each company varies. Some of channel structure, our market position as well as
factors affecting this pace include organizational consumer behavior. We need to modify our [online
structure, dynamics between functions, the sales] approach for each market.”
9

10. Establishing efficient online
operations
Establishing efficient direct-to-consumer online
sales operations is a significant under taking for
any durable goods manufacturer regardless of
whether or not they already operate a physical
retail chain. When doing that, durable goods
manufacturers need to consider the whole
end-to-end process from business planning to
merchandizing, site operations, logistics, and
performance reviews as shown in FIGURE 6 .
FIGURE 6
General end-to-end
processes for online
operations
10

11. Magenta Advisory Research
Continuously improving
online business
performance
Conducting business online – whether it is We have found two topics to be of extreme
about marketing or selling to consumers or impor tance when our clients have engaged
providing product suppor t – provides durable in continuous online business performance
goods manufacturers with unprecedented improvement: establishing performance management
opportunities for continuous business performance capabilities and creating a culture of continuous
improvement based on the vast amounts of optimization.
available data and fast clock-speed of implementing
changes. Having continuously optimized its online Establishing performance
store for the last fifteen years, Amazon.com management capabilities
today outperforms average US online retailers
in purchase conversion by over sevenfold16 The star ting point of establishing online
leaving their competitors in a very difficult performance management capabilities is to create
position to cost effectively compete with them. a set of key performance indicators that span
the entire consumer funnel from awareness to
consideration, conversion and loyalty as shown in
FIGURE 7 .
FIGURE 7
Online mar keting and sales
funnel for online perfor mance
management
16
“The State of Retailing Online 2009”, Nielsen Online 11

12. FIGURE 8
Example of a continuous
optimization process proven to be
ver y successful for one of our clients
Having defined the data sources and ways – a sor t of kaizen mentality for their online
to calculate the key performance indicators, operations that can be suppor ted with
establishing a recurring repor ting and analysis sophisticated tools such as multi-variate
process to suppor t business decision-making is testing. Creating a culture of optimization
the necessary next step for realizing business is a combination of training people the
benefits. We typically advice our clients to keep required competences for online optimization,
the first set of key performance indicators establishing working processes to suppor t
rather simple and focus their attention on continuous small changes and creating a flexible
analyzing the effect of their actions on these tool platform to enable continuous testing.
metrics. Following the most impor tant direct-
to-consumer online sales key performance The oppor tunities for optimization are
indicators (site traffic, purchase conversion nearly endless. When optimizing marketing
rate, average order value and return rate) performance, companies can analyze their
provides already the same level of information incoming visitors by traffic source, understand
to online retailers as sophisticated shopper how these different customers behave in the
analysis tools give to traditional retailers. store from browsing to car t additions and
purchases, and calculate return on marketing
These three fundamental building blocks investment to reallocate media expenditure.
– key performance indicators, repor ting
capabilities and activity analysis – should then Purchase conversion can be analyzed by
be continuously fur ther developed to provide investigating for example customer click-
better tools for individuals in the company to stream data and site usage heat maps to create
perform continuous business improvement. hypotheses for improvement ideas. These ideas
can be turned into real world tests that are
Creating a culture of optimization deployed on the site in a controlled manner
to find out which of these ideas actually work.
When the basic performance management Similarly different cross sales items can be
capabilities have been established, we advice tested with purchases of different products
durable goods manufacturers operating online to find the combinations that work best –
to invest in creating a culture of optimization and then optimized by customer segment.
12

13. Magenta Advisory Research
Some of these optimizations can be very simple – The week ended by all relevant stakeholders
like when one of our clients increased their online collecting the list of major changes done during
purchase conversion rate by over 20% by simple the week to be leveraged in next weeks funnel
changes in product page call-to-action. Whether meeting discussions when analyzing how specific
simple or complex optimizations, the key is that key performance indicators had developed.
there is a continuous flow of optimization ideas that Leveraging the continuous optimization process
are rigidly tested and deployed when successful. allowed swift reactions to identified oppor tunities
and was a critical contributor to the formation of
Culture of continuous optimization can be built a continuous optimization culture.
around simple ways of working. As an illustration
of this, FIGURE 8 presents a continuous optimization
process implemented for one of our clients. What Finnish durable goods manufacturer executives say:
The approach was built around a consumer funnel “On the web, the cycle for activities is drastically
key performance indicator repor ting process and faster than for companies that are used to B2B
two key weekly meetings: the funnel meeting and business. Instead of looking at a half-a-year marketing
the prioritization meeting. The week star ted with calendar, one needs to operate like the local corner
compiling a weekly funnel repor t, which was then store shopkeeper optimizing sales on a daily basis.“
reviewed in the funnel meeting together with all
stakeholders with any oppor tunity to affect the
key performance indicators.
In this meeting, a list of potential improvement Magenta Advisor y approach
ideas was created and areas requiring deep-
dive analytical investigation identified. The quick We at Magenta Advisory help our client companies’
win improvement ideas were implemented top management in their online transformation,
immediately after the meeting, whereas the bigger from creating business strategies and concepts to
improvements were prepared and prioritized managing business transformation and achieving
together with all the backlog items in the regular business excellence. See FIGURE 9 for examples of
prioritization meeting on Wednesdays. typical projects we do for our clients.
FIGURE 9
Examples of typical projects
we do for our clients
13

14. We at Magenta Advisory 1. We always start our work
from true client needs
believe in pragmatic and client to find a client context
focused strategic management appropriate methodology.
consulting 2. We work hand-in-hand with
our clients to ensure they can
continue business development
work on their own.
3. We believe delivering quick wins
is as important as a sustainable
online transformation roadmap.
4. We deliver results —
not only reports but concrete
and rapid business change.
For more information
www.magentaadvisory.com
info@magentaadvisory.com
+358-40-3573346
Mikonkatu 8, 9th floor
00100 Helsinki
Finland

15. About the authors
Markus Huttunen is the Managing Director and a
Par tner at Magenta Advisory. Markus is an experienced
digital industry executive with management positions
in consulting, strategy development, sales and
marketing and new business development in Europe
and the United States. Prior to co-founding Magenta
Advisory, he worked with global digital industry
leaders including Capgemini Consulting and Nokia.
markus.huttunen@magentaadvisory.com
+358-40-3573346
Otto Söderlund is a Par tner at Magenta Advisory.
Otto is a seasoned online sales and marketing
professional with wide experience ranging from
online strategy creation to actual management of
online business. Otto has helped major European
manufacturing, mobile, telecom and retail industry
players internationally in their online effor ts providing
him with a unique 360 degree cross-industry view of
the online business overall.
otto.soderlund@magentaadvisory.com
+358-40-5241350
Antti Maunula is a Senior Consultant at Magenta
Advisory. Antti is a competent online and retail
professional whose functional exper tise areas include
online business model creation, online business
concept development and execution suppor t, and
retail performance and master data management.
antti.maunula@magentaadvisory.com
+358-44-3533064

16. magenta Strategic
Online
Advisory
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