How Not To Be A Victim Of The Disintermediation Trend
Disintermediation is not a new concept, but its impact is growing as technology and other business process improvements facilitate selling without an intermediary.
What, exactly, is disintermediation?
In the simplest terms, disintermediation is cutting out the middleman (“middleperson”). In slightly more complex terms, it is the removal of layers and players (so-called, “intermediaries”) in the value chain.
So, if you’re not the manufacturer or the end consumer, you are an intermediate step in the value chain and are subject to potential disintermediation. This places you in danger of being cut out of the purchasing process completely.
Let’s look at a few examples of disintermediation that have already occurred, or are in the process of happening, to add some clarity to how and why this happens.
Examples of Disintermediation
When you wanted a book before the advent of Amazon, you usually either went to the library or to a bookstore to get it. Once Amazon arrived, you had the option to simply order the book online and have it show up in your mailbox or on your doorstep. Obviously, this appealed to a large number of book buyers, and Amazon has now done this with millions of products, in the process putting large numbers of bookstores and other retailers out of business.
Dell did the same thing as Amazon, but focused on computers, causing massive damage to many entrenched PC manufacturers and intermediaries in the process. Dell started a movement of direct sales of PCs to consumers and businesses that has only grown over time. That movement of cutting out the middleman has had a profound effect on the composition and profitability of the PC industry.
In an example made famous in the book Blown To Bits, a major entrenched direct seller of encyclopedias (Encyclopedia Britannica) was bankrupted by an online/CD ROM encyclopedia (Encarta) that Microsoft included with its PCs. Encarta obviated the need for interaction with a direct seller of encyclopedias and cleared up all sorts of shelf space, in on fell swoop.
Geico has not completely disintermediated insurance brokers in the automobile insurance space, but by 2015 it was the second largest player in the market, with over 11% market share. This trend of direct selling should only continue in the multi-billion dollar auto insurance market, causing more disintermediation of auto insurance brokers, particularly in the personal auto insurance market.
This is an interesting example of disintermediation because it can cut out several different players in the value chain. Meals ready to cook, sent directly to your home by the likes of Hello Fresh and Blue Apron, current major players in that market, obviate the need to go to the grocery store, the farmers market, the warehouse store, the convenience store, or wherever else you may purchase ingredients for the meals you cook at home. So, in essence, upstart, venture-backed players disintermediated a bunch of major players in the food business.
They didn’t put them out of business, of course, as these ingredients are not all those big players sell, and everyone is not buying prepared meals to have shipped directly to their house, but they made enough of a dent to show up on the radar of both consumers and competitors who occupy different pieces of the value chain in home prepared meals. Also, obviously, restaurants would rather have you eat there than have you eat something offered by Hello Fresh, Blue Apron, and similar players.
When was the last time you spoke to a travel agent? Unless you’re in a corporate setting, your answer probably is “several years”.
Most travel agents were disintermediated as soon as the airlines and other major travel players (hotels, car rental companies, etc.) could figure out a way to sell directly to the traveler. The proliferation of the Internet made that possible. Only in corporate settings, where there is a bit of complexity and volume for the travel agent to assist with, were they able avoid being cut out of the picture. There are travel agents who still have individual clients, of course, but they are the exception rather than the rule.
These are just a few of the many industries heavily impacted by disintermediation. That list will only continue to grow. Your goal is to avoid having your business be one of the victims of this trend.
How Can You Avoid The Impact Of Disintermediation?
You need to take a look at the value if any, that you are adding to the purchase (or in the “value chain”). If you determine you are not adding much value (i.e. you are really just a “middleman”) in the purchase process, you should figure out whether you can add more value that would be meaningful to the customer. If not, you’re likely in the wrong business, and you should move on as soon as possible.
Let’s look at a couple of examples of how disintermediation can be avoided.
As with books and computers, which were used as examples above, sporting goods can be purchased online from Amazon or a number of other online retailers. If that’s the case, then why do bricks-and-mortar sporting goods stores still even exist?
The answer lies in one of the key approaches to avoiding disintermediation: provide a human touch and level of expertise to the transaction that, for now at least, is not easy to replicate online.
For example, when I buy running shoes for myself and for my family, I usually buy they from the local running store (Black Dog Running), rather than buying them online.
Why? I do it for several reasons: 1.) Our local running store is part of the running community, as we are, and I’d rather keep the money in the “family”; 2.) Our local running store employs people with expertise in fitting the correct shoe to your feet, which gives me a comfort level that we’re getting the right shoes in the right size; 3.) While the local store is always more expensive than buying online, at least for more commoditized shoe models, it’s not usually so much more expensive that it outweighs the benefits of purchasing locally.
Going back to an example above of disintermediation, I want to revisit the “prepared food” business. There, we established that services like Blue Apron and Hello Fresh are stealing business from major warehouse, grocery, and casual dining places, by disintermediating them and delivering a meal ready to be cooked straight to the consumer.
We have a local example where I live of a prepared meals provider that does not send them to you in the mail or by UPS. Rather, Be Well Meals prepares and packages their meals on daily basis and sells them to you when you walk into their local facility. The meals are still ready to put into the oven or microwave, thus disintermediating the warehouse and grocery giants, but they do not include delivery to your doorstep (at least not at the time of this writing). And in reality, the warehouse and grocery giants are not completely disintermediated in this scenario, either, as Be Well must buy its raw materials somewhere…
So, how does Be Well Meals manage to not be disintermediated itself by the likes of Blue Apron and Hello Fresh? In my assessment, the answer to Be Well’s survival and growth thus far is due to three main factors: 1.) The owner does a great job of incorporating her story and her vision into her marketing, particularly on social media, such that you feel connected to her and her goal of providing people with healthy, fresh food; 2.) Be Well also does nutrition coaching and helps many of its customers plan what they eat and then takes the next step of providing them with much of that healthy food; 3.) Be Well has the feeling of a small business and is more personal than something that arrives by mail or UPS, and people like to buy from other people, rather than a larger, faceless organization.
It remains to be seen whether these differentiators will be sufficient to allow Be Well to survive and prosper in this competitive market wrought with disintermediation, but I know there are many of us rooting for their success!
How can you provide personalized, value added service that is hard to replicate online, thus providing you at least some insulation from disintermediation? How else can you add meaningful value to your customers? Brainstorm all the possible ways you can differentiate your product and service offerings and add value so that your business does not become a victim of the disintermediation trend.
Make sure that as you go through this process, and on an ongoing basis, you stay in touch with your customers’ needs, so that you can focus your differentiation efforts on product and services benefits that are highly valued by your market.