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Disintermediation is the process of removing intermediaries from a marketplace, shortenting the supply chain and increasing manufacturer margin.
Many manufacturers are reliant on distributors to sell their products, as they hold the relationship with the end customer. However, distributors take a significant amount of margin, often up to 50%. Cutting out the middle man and building a direct relationship between manufacturer and end-customer can be tricky without upsetting the distributor, and there are various ways of establishing a connection.
We’ve been working with some of our manufacturing clients to help them establish direct relationships with their customers by using a loyalty scheme – building customer loyalty, reducing their reliance on distributors, and ultimately increasing their margins.
In certain markets, the customer is the intermediary between distributor and end-user, for example where a tradesperson/fitter/installer is employed. The distribution channel follows a path of manufacturer > distributor > installer > end-user. For products where it is the fitter/installer who makes the purchasing decision, they are the customer, and there are opportunities to build loyalty between them and the manufacturer. For example, in a bathroom refit, the end-user might specify the tiles, but it will most likely be the fitter/installer who will choose and buy the adhesive. The end-user might select the taps, but it will be the fitter who purchases the pipes. It is in these markets where there is a lot of potential to establish a direct relationship and increase loyalty, by appealing directly to the installer – the customer.
Of course, many manufacturers are wary of disintermediating and going straight to market – relationships built up over many years with distributors could be lost – and selling direct to customers online can be risky if they aren’t familiar with your website or buying the product online. Online promotion and paid search could help buyers find your products, but at a price, and how do you keep them coming back to your website to buy more?
In the early 2000’s, some manufacturers attempted to move away from the traditional customer distribution channel, and sell direct to customers. However, many found at the time that the costs associated with delivering the value-added services usually fulfilled by the distributor outweighed any gain in margin. Many manufacturers moved to reintermediate, and bring the distributor back into the channel. Move forward 15 years, and developments in digital communications, mobile technology, and customer familiarity with websites, all mean that it is far easier (and cheaper) to establish and manage a direct relationship with customers.
And in fact, establishing a direct relationship could help to build loyalty, increase margins AND inform product development.
In a traditional distribution channel, it can be difficult to know who your customers are, let alone understand them, as the distributor holds the key to that relationship.
We worked with one of our manufacturing clients to create a loyalty scheme that allows them to understand who their customers are, and build a direct relationship with them. After purchasing a product, regardless of where it was purchased, customers can use the loyalty scheme website to register and collect loyalty points – and exchange them for rewards.
The loyalty website is fully mobile-responsive, so installers can register their purchases on the go, from their smartphone. Each purchase registered earns reward points, and these can be used to claim a variety of prizes – including product discounts, merchandise such as clothing, and high street vouchers.
Customers can continue to purchase their products from any distributor, reducing manufacturer’s reliance on a particular distributor, all whilst manufacturers build loyalty.
A loyalty scheme also allows manufacturers to open up a line of communication with their customers – for outbound direct marketing campaigns, but also to allow inbound communications – gaining valuable customer feedback, and input into new product development. Manufacturers can gain an incredible insight into their target audience, understanding their needs, so that they can develop better products and promote them effectively.
As customer loyalty increases, installers can be invited to trade events and demonstrations, and provide valuable feedback on product testing.
Having a direct relationship with their customers, manufacturers can ensure the functions usually fulfilled by distributors are still met – using their website and online loyalty schemes to deliver value-added services like product advice, installation guidelines, tutorials and recommendations.
Using a loyalty scheme, manufacturers can continue to sell through distributors if they wish to, but once customer loyalty is established, they could move to selling to customers through their own website, increasing their profit margins, or through an online marketplace where distribution fees are typically lower.