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Sidestepping Disintermediation

  |  February 4, 1999   |  Comments

What happens to the distribution chain in a wired world? The answer is: Plenty. But Jim Sterne offers a smart solution that completely sidesteps the whole issue of disintermediation.

Here's the setting: A manufacturer of a line of computer peripherals asked me to give a talk to its distributors.

The conversation kept coming around to the issue of disintermediation. What happens to the distribution chain in a wired world? This wasn't experts explaining, or journalists jawing, or pundits pontificating. This was a room full of men and women in charge of medium-sized companies desperate to understand if there was a future in their future.

What was the big answer?

Service, of course. In the past, part of the service they offered was stocking the finished goods for quick delivery. That ended a while ago.

Now, everybody drop-ships. The manufacturer manages the inventory instead of pushing it out into the distribution chain. Distributors still provide installation, programming support, network support and maintenance. They will always be needed on the front lines.

What was the big problem? Pricing. One guy in Chicago posts a discounted price for a specific product and Shazam! the street price has been set. It doesn't matter that the guy in Chicago doesn't pay a team of service people to install the product, repair the product, and train the customer. He's just taking orders and passing them along to the manufacturer for drop-shipment.

The distributor in Duluth has a dilemma. He has based his business on eking out a certain margin. Without it, he's in a death spiral of price cuts. Commoditization on the web strikes again.

So what's the solution? Here's my Big Idea: I'm sounding a knell for the death of margins.

If I need a quart of milk and it's late and it's raining and it's cold, I'm not going all the way to the supermarket where I can get it at the usual price. I'm going to the neighborhood gas station/flower stand/foodmart and pay thirty cents more for the convenience. That store is providing a service.

But if I'm buying several thousand dollars worth of gear to be installed in my company, chances are it's not an impulse buy. I'll do research, and I'll choose from one of various manufacturers and order from one of various vendors.

But what if there were no distribution chain? What if the manufacturer quoted a price -- the price-- the global price? Then the former distributor gets to focus on what they know best: Service.

The first service on the menu? Consulting. Customers want to know, which one of these products is best for my company? The local service rep is going to steer me toward the product he services. His competition is going to sell me on the models she supports. Selling the product is no longer something you do for the margin, it's something you do to build your base of service customers.

This breaks the chain of distribution dependency. Instead of the service provider contracting to sell one manufacturer's products, they are free to choose from whomever offers the best training, the fastest parts delivery, the best factory support, and the largest installed base into which they can sell... services.

The Net takes the price war out of the hands of the dealers and puts it in the hands of the customer. Sites like Compare.net and Ecompare.com are going to pop up in every category. Service companies will no longer be able to subsidize their services with product mark-ups.

Is it the best way to run a distribution chain? Probably not. Is it avoidable? Probably not. But the manufacturer who sees this as an inevitability sooner will have the best shot at coming up with creative new ways to win.

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Jim Sterne

Jim Sterne is an international consultant focused on measuring the value of the online marketing for creating and strengthening customer relationships. Sterne has written eight books on using the Internet for marketing, produces the eMetrics Marketing Optimization Summit and is co-founder and current chairman of the Digital Analytics Association.

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