Insights — Channel Creation & New Revenue Streams — 3 min read
What Margins Are Needed for D2C?
A 30% gross margin might be healthy for a B2B wholesaler, but it is often a recipe for bankruptcy in D2C. Selling direct requires a much thicker cushion to absorb the costs of customer acquisition.
In short
For a D2C channel to be viable, you typically need a gross margin (price minus manufacturing/landed cost) of at least 50-60%, and ideally closer to 70-80% for smaller items. This 'thick' margin is necessary because D2C is an expensive way to sell. You must cover a Customer Acquisition Cost (CAC) that often ranges from £10 to £50 per order, shipping and packaging costs that scale linearly with volume, and payment processing fees. The goal is to ensure your Contribution Margin (Gross Profit minus Variable Marketing and Fulfilment) remains positive from day one.
One of the most dangerous assumptions a B2B business can make is that D2C will be 'more profitable' because they are 'cutting out the middleman'. While it's true that you capture the retailer's margin, you also inherit the retailer's costs — and in many cases, those costs are higher than the margin you've gained.
In B2B, a 20-30% gross margin can work because the sales are large, the marketing is relationship-based, and the logistics are bulk-handled. In D2C, once you account for the cost of a Facebook ad click, a single-item delivery, and a 15% return rate, a 30% margin can quickly turn negative.
Gross Margin vs. Contribution Margin
The 'headline' margin on a D2C site is often misleading. If you sell a product for £100 that costs £40 to make, you have a 60% gross margin. But that is not your profit. You must subtract the variable costs of that specific sale to find the 'Contribution Margin'.
| Cost Category | Typical D2C Impact | B2B Comparison |
|---|---|---|
| Ad Spend (CAC) | 20-40% of revenue | Negligible (Salary/Travel) |
| Shipping & Pack | 5-15% of revenue | 1-3% (Palletised) |
| Payment Fees | 2-3% of revenue | Near zero (BACS) |
| Returns/Refunds | 5-10% of revenue | Near zero |
| Remaining Margin | Often < 15% | Often > 15% |
The 'Customer Acquisition Cost' Trap
The biggest difference between B2B and D2C economics is CAC. In B2B, your cost to acquire a customer is largely fixed (a salesperson's salary). In D2C, it is variable. If you want to double your sales, you usually have to double your ad spend. If your margin is thin, you cannot afford the bids required to appear in Google Search or Instagram feeds, effectively locking you out of the market.
When is a low margin acceptable?
A low margin can only be justified in D2C if the Lifetime Value (LTV) is exceptionally high — for example, a subscription model where the first sale is a loss-leader but leads to years of recurring revenue. For most product businesses, you should not launch a D2C channel if the unit economics don't show a clear contribution profit on the first transaction.
The Evans Channel Creation Programme (£1,995 + VAT/month) begins with a 'Commercial Economics' phase. We don't just look at whether people will buy your product; we look at whether they will buy it at a price that leaves you with a profit after the couriers and the tech platforms have taken their share.
Could your business support another route to revenue?
Evans Channel Creation identifies, validates and builds additional revenue channels from capabilities a business already has — B2B to D2C, D2C to B2B, product to service, recurring revenue or partners — and says so plainly when a channel should not be built. Programme from £1,995 + VAT per month over six months.
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