Extinction of the middlemen species
Let’s break it down. The labor costs for a denim shirt made in the USA are around $7.47. The materials are estimated to cost $5.00. Together with $0.75 for industrial laundry, this adds up to an average cost of $13.22. Typically, the wholesale price of this shirt will be about $25 and the MSRP will be $60.
The vast majority of the value is captured by the markup that goes to the middleman, the retailer. Sometimes there is only one middleman, but often there are many. Thousands of miles far from there if you reach Bengaluru, India and buy a kilogram of onions it will cost you INR30 though the farmer had sold it for INR 10 to ‘the agent’. A whopping 200% increase of the price.
Natural Selection theory demanded a practical way out for the consumer to come in direct touch with the producer and extinction of the middlemen species. Middlemen can be distributors, wholesalers, brokers, retailers or agents are the largest pie eaters.
In economics disintermediation is the removal of intermediaries in a supply chain, or "cutting out the middlemen" in connection with a transaction or a series of transactions. Instead of going through traditional distribution channels, which had some type of intermediate, companies may now deal with every customer directly, for example via the Internet. The trend towards B2C firms selling through internet-hosted platforms is inevitable.
Trust and convenience are the two primary factors. Backed by big names like Amazon, consumers feel assured that certain consumer protection policies are in place. ASOS for instance, offers a 14 day returns policy. Given the multitude of alternative options on the internet, maintaining trust in the platform is central to its success. But is it feasible to disintermediate now? Yes, if you have a check on the following pointers :
- Size. This is important for bulk commodities, much less so in specialized products. For instance, are we talking about trainloads or truckloads of corn? Or is it a 20-pound package of steaks that UPS can deliver by 10 a.m. tomorrow morning?
- Capital. It’s needed for storage, logistics (trucks and storage bins) and insurance. In the old system, intermediaries provided much of it.
- Structure. It needs to fit the processes of a distant supplier. In the past, you met local suppliers in the coffee shop. Deadlines are different now; contracts are more formal.
- Cooperation. Suppliers and buyers share your interest to reduce the distribution costs. Disintermediation appeals to everybody.
- Initiative. Sell your farm’s capabilities to suppliers and buyers. They aren’t waiting for you, and they may not know you qualify as a direct partner. Actually, you might upset a cautiously crafted balance. Good outcomes don’t always come easy.
- Follow-up. Quality, volume control, and fiscal accountability are no longer responsibilities of the intermediary. They’re yours. Selling your abilities is constant. They’ll never stop evaluating your ability to deliver.