Over the years, microbrands have gained momentum as a viable and profitable business option. Kylie Jenner, the half-sister of Kim Kardashian whose net worth is valued at over $900 million, built her Kylie Cosmetics empire through a combination of her celebrity star power and clever use of social media.
She used Shopify to setup webstore front, leverages Instagram, YouTube, and Twitter to market and test new product ideas and uses a contract manufacturer to make her products. It took her all of three years to build her company to this size with just seven full-time and five part-time employees. Kylie Cosmetics is the poster child of new-age microbrands, leveraging social media and direct-to-consumer (DTC) channels while completely bypassing the traditional brick-and-mortar retail experience. Microbrands are upping the ante for both retailers and brand owners.
The term “microbrand” is now used primarily in the context of fast fashion and watches. However, well before the Kylie Cosmetics of the world were introduced, consumer electronics, specifically Dell in the 90’s, made the microbrand concept what it is today. Michael Dell’s genius was in realizing that PC’s could be assembled using off-the-shelf components and could be manufactured at a cheaper price than what the big brands of the 90’s were offering, helping him launch the company from his dorm room. Initially through word of mouth and later through the Internet, Dell pioneered the Direct-to-Consumer model as we know it today. It was quite a novel experience to buy a PC from Dell.com, selecting the RAM, hard disk, screen size and other components. “Direct from Dell” became a mantra.
Dell’s advantage, compared to the leading PC companies of the era, was that it operated completely in a built-to-order mode. The company started pulling the components from the suppliers and began assembling the PCs after the orders were received, letting it operate in a negative cash-to-cash cycle. Customers paid for their PC when they placed the order. Dell paid its suppliers per the payment terms agreed upon. With a short lead time to assemble and deliver the order, the company enjoyed tremendous growth. Dell also gathered a lot of consumer data through the DTC model, which has given the company additional insights.
Several other consumer electronic companies followed the trail blazed by Dell. Once a brand reaches a certain size and scale through DTC, the opportunity for growth comes from channel expansion through entering traditional retail channels and distributors. The challenge these companies face with traditional retail is a degree of separation that emerges between them and the consumer. At the same time, retailers drive hard bargains with the consumer electronics companies for the premium displays and front-page flyer ads, resulting in increased trade spend and reduced average selling price. This places the consumer electronics companies in a bind.
Apple is one of those very few consumer electronics companies that seem to defy gravity when it comes to pricing. However, for the vast majority of consumer electronics companies, price erosion is a major challenge compounded by shorter product lifecycles and the pressure to launch newer models year after year. Additionally, the holiday season places extra pressure on these companies due to the various sales and promotions they need to run. These factors apply margin pressure on the high-tech companies that supply components to these consumer electronics companies.
In light of the above challenge, how should these companies respond? They will have to borrow the following principles from the microbrands’ DTC model:
- Consumer centricity should be drive demand planning: In the DTC model, consumer data is directly accessible to the company in context. In traditional retail, though, access to personally identifiable data is harder to gain. At best, retailers can provide point-of-service (POS) data down to individual outlet levels. However, the manufacturers can use proxy external factors such as employment levels, demographic shifts at ZIP code levels, GDP trends at a granular level, competitor promotions and social media trends to model and shape demand. Machine learning can be applied to mine through this data to identify which of these external causals have major influences on demand and leverage these insights to drive predictions. For example, a major electronics company gained forecast accuracy improvements in double digit percentages by including external causals as proxies for DTC connections.
- Determine service strategies by channel segmentation: The channels should not be treated the same way. Segmenting the channels by volume, profitability and ordering behaviors helps to determine service strategies by segment to maximize the top line and bottom line potential. Segmentation and service strategies drive inventory deployment decisions and will need to be periodically revisited. Postponement strategies will need to be used where lead-times allow to delay assembly so that end-stage customization is practical and cost effective. While DTC companies deal with segments of “one,” a broader segmentation can provide insights to electronics companies that are not otherwise available.
- Design the network to cater to service strategies: Network design is not just about where to place the manufacturing and distribution locations, but it is also about setting up the sourcing, production, inventory, transportation and ordering policies. The product flow paths are determined based on these policies. However, given that the holiday season drives the bulk of the annual sales for electronics companies – coupled with rapid product phase-in and phase-out during this season – any policies that were set during the non-holiday season can get stale rather quickly. These policies will need to be revisited periodically to make any necessary adjustments. Network design is no longer an annual study but an ongoing discipline that is part of the operational fabric.
- Embrace sustainability: Several microbrands differentiate themselves as being green and environmentally conscious. While major electronic companies do have recycle and recovery programs in place, given the rise in electronic devices, more needs to be done to drive sustainability. Borrowing from the playbook of some of the environmentally conscious microbrands, electronic companies need to go beyond meeting the minimum regulatory requirements. The efforts to “go green” go a long way with the new generation of consumers who place high premium on brands that stand for sustainable supply chains and employ ethical practices in providing safe working conditions up the chain through their contract manufacturers and beyond.
Electronic companies that reach markets through various channels can intelligently leverage higher level abstractions of consumer data, design principles and the drive towards sustainability to reap big benefits with a microbrand-like mindset.