Disintermediation is the economic term for the removal of intermediaries in a supply chain. Often referred to as "cutting out the middleman", it is a painful process for distributors.
Distributor Reaction
Their first response to this is generally one of indignation. “We've been cheated out of our rightful place!” But the realities of the post-internet world are revealing that some businesses disappearing rapidly. The emergence of the Internet with its easy information dissemination, effective email communications, and e-commerce with its easy product selection and purchase exacerbates this already tenuous situation. The position of the intermediary is untenable and disintermediation occurs.
A familiar example of disintermediation is Dell, Inc. Dell sells many of its systems direct to the consumer bypassing traditional retail chains.
With websites like Cafe Press, and Zazzle out there the market is seeing the beginnings of disintermediation in the promotional products supply chain. For those in the business this may seem like a shocking possibility but for the younger generation raised on YouTube, Facebook, MySpace etc., this is just a natural progression in a way to look at how this business should be done.
For this reason a more gradual transition to this business model rather than a sudden shift is the more likely possibility. The leaders in this shift of course will be those with a full understanding of the possibilities of the Internet. As end users get ever more literate with the possibilities of disintermediation (which will happen as they employ more younger people) this shift will begin to accelerate. While a part of this value chain will always require the services of specialized distributors, their role in the commodity parts of the business will diminish.
The Attraction for End Users
The attractiveness of this model for the end user is the dramatically lower pricing possibilities it offers as non-value-added pieces of the value chain are removed. In this model, the expenses to reach potential customers are low as there are no trade shows to attend, catalogs and flyers to print and mail, or salespeople to put on the payroll. Take those expenses plus a distributor markup away and the result is a platform to reach end users with an incredibly low price structure when compared to the present model. Since price/demand relationships are on a curve and are not linear this also allows for the possibility for an exponentially larger end user market.
The Attraction for Suppliers
Let’s use a simple example of an ad placed on Facebook and make a conservative assumption that .001% of those viewing the ad will respond with one order. With 38,000,000 current Facebook users in the US this translates to 38,000 orders. Using an average order size of $350 yields $13,300,000 in business from one ad. Place ads more frequently and on other social networking sites and suppliers can see how this scales up quickly.
When the cost and resulting price reductions from this approach are weighed in promotional products that used to sell to an end user for $3.00 wil now go for $1.20 with no loss of margin to the supplier firm.
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