Business thrives on having a strong relationship with their customers. For this to happen, an entrepreneur must understand the needs of their target market. But this is not enough. You must connect with the customers one-on-one to learn about them better. However, this can be a complex objective to achieve.
Many markets have long supply and distribution chains with multiple intermediaries. Sometimes, it is impossible to know the brand owner. But with personalization becoming the next big thing in the business world, brands are developing strategies to enable them to connect with their customers directly. Disintermediation is one of the common business models. But what does it involve?
What is the Disintermediation Business Model?
Disintermediation is a business model that focuses on cutting off the middlemen or intermediaries in the supply chain and financial transactions. This means that a producer or service provider directly deals with the target customers.
Typically, any market has a leveled supply chain that involves various intermediaries. For instance, a supply chain can have manufacturers, distributors, wholesalers, retailers, and customers. Manufacturers and customers are the two crucial parties in this arrangement. Other players are intermediaries and middlemen whose role is facilitation.
However, a manufacturer can decide to run their business without involving them. This is where the disintermediation model comes into play. The approach eliminates brokers and retailers, allowing a firm to work directly with its target customers.
How Does the Disintermediation Business Model Work?
Every market has central players called intermediaries. These players act as the bridge between the producer and the consumer. Their role is to facilitate transactions or the distribution of products by linking the two parties. However, a business might consider working one on one with the consumers and cutting off these intermediaries’ roles.
This aspect is the objective of the disintermediation business model. The model opens up the playing field and allows producers to sell directly to the final consumers. For instance, a firm can sell shares to investors without involving stock brokers. Your clothing factory can decide to deal with customers without considering fashion stores and boutiques.
As such, this model advocates for having two players in the market. The first player is the producer who designs and creates a product or service. The other party is the consumer/customer, who is the final user of the products.
Examples of Disintermediation Business Model
In the past decade, disintermediation was a tough route for many businesses owners. You had to use intermediaries to get a footing in the market. However, technology is changing the business world. The disintermediation business model is becoming the norm in many organizations.
Dell is one of the best examples that applied the disintermediation model effectively. This leading computer manufacturing company stands out as the best seller in the United States. Dell achieved this goal by dealing with customers directly without involving intermediaries. This model enabled it to grow from $6 million to $25 billion worth by 1999.
Lulu and Kylie Cosmetics is another example of a business practicing the disintermediation strategy. This company sells beauty products directly to customers. It ships the products to different customers across the globe.
As digitization becomes the real deal, many manufacturers opt for this distribution approach. Companies such as HP and Apple are running online stores where customers can purchase products directly from the manufacturer. Hence, this model might be the next big thing in the business arena.
Pros and Cons of the Disintermediation Business Model
Disintermediation stands out as an ideal model that you can adopt to scale your business. You can connect directly with your customers and harness your profits if you are a producer. But like other models, it is not a merry. The model has several benefits and shortfalls. Here are some of them:
Pros
Boost profits while reducing prices for customers
Working directly with customers eliminates the intermediary’s expenses. The producer does not need to pay sales representatives, field officers, or distributors. Saving this cost adds to the company’s profits.
Also, the approach lowers the product prices for customers. The model eliminates the predatory aspect of the intermediaries in the distribution chain. This way, it puts prices under control, enabling customers to pay less for quality products.
Enhances producer and customers relations
The success of any business lies in the establishment of a long-lasting relationship with its customers. However, customers trust the person they interact with within their day-to-day life. This means that much trust goes to the intermediaries than the brand owners and manufacturers.
With disintermediation, you open up your business to your target customers and product consumers. This aspect allows you to get firsthand information from the customers. Such information helps you customize your products and services to meet their needs.
Also, it allows customers to participate in the product development processes directly. This way, it enhances the relationship between the two parties guaranteeing long-term business to your venture.
Faster and speedy delivery
Customers want to receive every item they purchase in real-time. However, delays are inevitable with a series of intermediaries on the processes. Disintermediation works perfectly in enhancing fast and speedy deliveries. The producer or manufacturer sends the products directly to the consumers. So, there are no chances of delays in shipment and dispatches.
Cons
Increases the distribution costs
Intermediaries play a central role in the market, such as bearing the distribution costs. They help the manufacturer move products from their stores to customers’ doorsteps. Also, they take over the inventory holding expenses. By eliminating the middlemen, your business has to take up the storage and distribution costs which hurts your profits.
Impacts your brand awareness
Despite delaying the delivery process, intermediaries offer free marketing. For instance, they showcase your products in the stores, enhancing your brand awareness.
The disintermediation model cuts off the intermediaries and denies you their essential services. Since you deal with customers directly, you will miss getting new customers due to lack of brand awareness.
Conclusion
In a word, the disintermediation business model is a powerful strategy that can enhance your venture as a producer or manufacturer. It can work as a great way to enhance your customer relations. However, you need to understand the possible impacts on your brand before considering it as your operational model.
