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Working With Intermediaries

  |  April 3, 2001   |  Comments

Web commerce was once expected to lead to disintermediation -- the classic "cutting out the middleman." But it hasn't been that simple. Still, there may be a way you can manufacture your baked goods and eat them, too.

Web commerce has frequently been expected to lead to disintermediation -- that is, the elimination of organizations between the customer and the manufacturer. The idea is that by eliminating retailers and distributors from the distribution channel, costs would go down and market share would go up.

As with almost all aspects of marketing, it hasn't been as simple -- or as successful -- as pundits had expected.

Traditionally, many types of intermediaries have helped move products from manufacturer to final user or consumer. In the past few years, a new type of Internet-based intermediary has come on the scene -- the public marketplace.

The challenge for manufacturers has been in deciding whether partnering with other companies to attract customers and supply products to them would be beneficial. When it appears that a company can apparently benefit from the help of an intermediary, the next challenge is to decide which companies to partner with.

Who Are They?

Several types of traditional intermediaries, including the following, frequently stand between manufacturers and end consumers:

  • Publishers bring their readers into contact with advertising and editorial material about a company's products.

  • Sales representatives sell expensive products to their customers on behalf of multiple manufacturers, reducing direct sales costs for manufacturers.

  • Retailers, or resellers, display products from many companies to make shopping easy for their customers.

  • Distributors warehouse large quantities of a manufacturer's products and ship small quantities to many retailers.

Some intermediaries facilitate the relationship between seller and buyer. Others want to stand between seller and buyer, keeping the seller from developing a relationship with the end customer.

Publishers and other information-oriented intermediaries provide a "transition" service by helping readers learn about products, then handing these potential customers over to the company selling the products.

On the other hand, retailers and distributors that take delivery of products and pass them on to their customers become a "permanent" part of a company's distribution channel. It's permanent, because manufacturers of relatively low-priced products can't afford to sell directly to customers, while retailers thrive on selling products from multiple manufacturers.

Early on, some thought that the Web would make selling so inexpensive, automated, and easy that consumers could be encouraged to buy directly from manufacturers and that manufacturers could make a profit selling directly to consumers.

Levi Strauss & Co. tried selling directly to consumers -- bypassing its retailers and distributors -- but soon found that this was a mistake.

One question a manufacturer needs to ask is whether it even needs to develop relationships with every consumer. Sometimes it's best to sell directly to a small number of large customers and take orders from the distribution channel for small customers.

What's an E-Marketplace?

Then there's the question of whether to use one of the new Internet-based marketplaces.

The technology offered by online marketplaces is impressive. Many have middleware designed to bring companies together to reduce negotiation and inventory costs, improve upstream forecasting, and standardize product evaluation.

Standardize product evaluation?

Isn't that the same as turning all products into commodities that have the same characteristics?

Marketers are constantly looking for ways to differentiate their products from those of competitors to derive higher profit margins. So it's not surprising that the marketplaces that try to represent multiple companies, such as SciQuest, are having a hard time surviving.

Will Private Marketplaces Work?

So a public marketplace that represents multiple companies may not be a good intermediary for a company. But is it still a good idea to allow customers who know what they want to make online purchases from the manufacturer? It is.

In the business-to-business (B2B) environment, private marketplaces (which used to be called intranets) are helping companies sell directly to knowledgeable customers while building long-lasting relationships. Instead of going around the distribution channel, private marketplaces can be used to sell consumables and other low-ticket items that retailers may prefer not to handle.

In a business-to-consumer (B2C) environment, it's relatively easy to implement a Web-based e-commerce system to sell certain products to existing customers, provide service, and build relationships with customers.

Unfortunately, a consumer-oriented e-commerce system will generally not work well in a B2B setting, because it wouldn't be flexible enough to handle the special sales situations that occur in B2B. This means that a custom or semicustom marketing and commerce Web site is needed to help manufacturers take advantage of the opportunity to sell to this segment of their customer base.

Using today's technology, a manufacturer can create a private marketplace that sells products and services that are not appropriate for their retailers to handle. In this way, a manufacturer has an opportunity to work with the distribution channel while providing extra value directly to consumers, enhancing relationships with both the channel and the consumers.

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Cliff Allen

Cliff Allen is President of Coravue, a company that provides content management software and application service provider (ASP) hosting for Web and email. Allen is coauthor of three books about Internet marketing, including the "One-to-One Web Marketing, Second Edition" (John Wiley & Sons, 2001).

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