Thursday, November 4, 2010

The Internet Killed the Middle Man

Before I even bring in the Internet to this conversation, I want to discuss a little about the importance of middle men in the supply chain of an industry. Contrary to popular opinion, middle men--or distributors--do not necessarily raise the prices for consumers. 'Cutting out the middle man' is often the death sentence for a business that cannot handle the cost structure of distributing its products. Without the distributor, the costs for the manufacturer and ultimately to the consumer will skyrocket.

For example, Proctor and Gamble sells Tide through Target--not from the factory. It is true that the cost of the laundry detergent would be less if purchased directly from the factory, but what if you wanted to purchase Crest as well? Oops, that is produced at a different factory. What if you wanted to try Colgate? Now, you've got to find a Colgate-Palmolive factory somewhere. And can you actually imagine buying something from a factory? How would you know where to find it or where to pay for it? The fact is that production and marketing are two different functions of a business. The OEM (Original Equipment Manufacturer, like P&G is for Tide) is production-focused while the distributor (Target) is consumer-focused.

You can buy a car directly from BMW or you can go to a local dealer. You're shopping at a plant in Germany and you ask about SUVs. They tell you that the SUVs (SAVs in BMW terminology) are manufactured in South Carolina. Now, you have to travel across the Atlantic Ocean just to look at another model in the product-line. Is it really worth it? Or is it better to have a dealer?

Distributors make it possible for OEMs to do what they do best--which is producing quality products. Distributors make it easy for consumers to make purchases and, while the price may technically be higher, the overall cost to the consumer is significantly lower. Distribution is why we can find everything we need in one place. Despite the stigma that middle men have, they are of the utmost importance in our economy.

Enter the Internet. Distribution in many industries is much easier. Customers can do research and shop online. Contact with customers can be made and maintained via social media outlets. What consumer-oriented brand doesn't have a Facebook page? In the entertainment industry, music, movies, and books can all be delivered digitally. Will retail stores stop carrying hard copies? Will artists, directors, and authors soon sell directly to target consumers? What about service industries? Does anyone have a travel agent anymore? Car insurance can now be purchased online without ever dealing with an agent. The fact is, the less tangible a product or service is, the more likely the Internet is to eliminate the need for a distributor. The Internet, in many industries, is killing the middle man.

Is this reality good for consumers? Perhaps in some respects. If the distribution channel no longer adds value to the product or service, I don't see the point in keeping it alive just so those people keep their jobs. The distribution channel existed in the first place only because it was less costly for the OEM to use. If it becomes more costly, then it should be eliminated. Yet, in industries where distribution channels add value, it is important that they fight off the Internet to deliver the consumer better value. Maybe you can find a better insurance rate by shopping online but perhaps it will benefit you more to have a real person that is a professional in the field explain to you the particulars of the coverage. Or maybe not.

There is no right answer. The Internet is neither good nor bad, but it is a reality. Distributors, retailers, and middle men need to recognize this fact. Those that survive will be those that adapt--those that find ways to add value despite the superfluity of information and ease of access to products and services that consumers now have. As consumers, it is our responsiblity to seek out distributors that add value to the product or service they are delivering--and to pass over those that don't. In the end, it is all about value--how efficiently it can be produced and delivered to customers.

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