How manufacturers of complex products and retailers can grow together
The traditional B2C supply chain, consisting of manufacturer, wholesaler (if applicable), retailer and end customer, has patently come under pressure in recent years. In view of the opportunities that digitization offers, more and more manufacturers are wondering why they should not take on the retailer’s role themselves and go in for direct selling. The motives behind this move are many and varied: a higher margin, control over the brand experience or valuable end customer contacts. Setting up direct sales is not a sure-fire success for every manufacturer, however. Depending o the industry and the specific starting position this strategy could well prove to be a boomerang…
What do the technology company Apple, the sportswear manufacturer Nike and the luxury clothing label Hugo Boss have in common? They all manufacture products and have succeeded, along with a classical distribution network of different kinds of retailer, in setting up a direct sales channel to sell to end customers both stationary and online without using the services of an intermediary. In view of these positive examples it is no wonder that other manufacturers are also considering not only supplying their trading partners but also addressing direct selling to the consumer. After all, online retail in particular, which continues to boom, offers the widest range of opportunities.
That said, the starting position of many manufacturers cannot be compared with the comfortable position of trailblazers like Apple, Nike, or Hugo Boss. In addition to the aspects already mentioned these firms have further factors in common that must be taken into account in respect of their direct sales strategy. For one, their products require relatively little explanation so that advice is not really needed on buying and using them. For another, their brands are so attractive that many retailers are unable or unwilling to delete them from their product range even when the companies in question set up in competition by means of direct selling.
The starting position of many manufacturers cannot be compared with the comfortable position of trailblazers like Apple, Nike, or Hugo Boss.
So a lack of brand recognition and/or some need to explain their products can make it more difficult for many manufacturers to gain a foothold in direct sales. Manufacturers of complex products have in some cases for decades had to rely on a dense network of competent specialist retailers to advise customers on purchasing their products and after the sale to continue to provide assistance by word (help with using the product) and deed (repairs and maintenance).
Setting up in classical direct selling, such as by launching an online shop that would compete with retail sales channels, might therefore not only worsen the customer’s shopping experience because he would then no longer have a competent local dealer to consult; it could also seriously compromise longstanding, tried and trusted relations with sales partners. The risks attendant on a confrontation of that kind have so far stopped many manufacturers from verticalizing their business.
These manufacturers are nonetheless still naturally keen to utilize the opportunities of digitization and both come closer to the customer and generate new revenues. In contrast to companies like Apple and the others, however, they must take care to incorporate their existing sales partners in any such venture in order not to jeopardize their traditional sales channels while continuing to be able to offer the end customer a dense network of competent contacts.
The Open Marketplace: Tough Price Competition
One way to integrate specialist dealers in your digitization endeavors is for the manufacturer to set up an online marketplace. In principle there are several ways in which this marketplace could be designed. The open marketplace is a model that is just as frequently discussed in theory as it has been tried and tested in practice. It is a platform aimed at the end customer where in principle any retailer can offer all his products for sale, expressly including competing manufacturers’ products. In this business model the operator’s focus is on connecting many retailers with as many products as possible to the marketplace with the result that the platform is so attractive for customers due to its comprehensive product range that they shop there more and more often.
For the platform operator this strategy has two advantages. For one, if successful he will control more and more of the end customer access or footfall; for another, he can earn money from the marketplace traders’ business – and possibly from the competition – by charging transaction fees. The best-known representatives of this business model are without doubt Amazon and eBay, but comparable platforms have already emerged in so-called niche markets. The steel firm Klöckner, for example, is working hard to develop its XOM marketplace into the “Amazon of the steel trade” as an industry-specific platform economy. The Wucato B2B platform of the “King of Screws” Würth pursues a similar approach.
While open marketplaces are usually a win-win situation for the customer and the platform operator, they are frequently less attractive for the dealers in the marketplace. They not only have to pay dearly for their customer access via the above-mentioned transaction fees but are also competing with many other retailers that have a comparable product range in a price war due to what is usually a lack of other distinguishing features.
Due to these problems that beset retailers in open marketplaces manufacturers of complex products are likely to find it difficult, especially in the early stages of the project, to convince their sales partners of the benefits of collaborating in a platform of this kind. Involving as many dealers as possible is, however, a prerequisite for the platform’s success. That is why we would now like to present a marketplace alternative that much more strongly addresses the dealers’ needs and is therefore in our view more suitable for persuading dealers to collaborate.
The Half-closed Marketplace: Dealers Differentiate Yourselves!
Manufacturers differ from the above-mentioned platform operators like Amazon, eBay or, indeed, Klöckner, whose origins lie in retail, in one key respect. When retailers sell one of their products they always earn money. The retailer buys it from them beforehand. That is why manufacturers, in contrast to Amazon & Co., do not need to finance themselves and the platform provided by means of transaction fees. Instead they can concentrate on helping their dealers to sell more and thereby indirectly boost their own revenues.
In contrast to Amazon & Co., manufacturers do not need to finance themselves and the platform provided by means of transaction fees.
A marketplace strategy that is based on this concept should thus mainly fulfill two requirements. For one, the marketplace should address the specific requirements and reservations of the dealers in order to convince them to cooperate. For another, the focus should be on building a quality platform that in addition to a competitive price offers customers other purchase-deciding added values such as availability, regional proximity, advice during the purchasing process and a wide range of pre- and after-sales services. That is why the marketplace should be designed with a focus on the customer rather than on the product a concentrate on the customers’ many and varied use cases.
Let us imagine, for example, a customer who regularly has to chop wood in his garden, in a park or in woodland. What he needs is a wood chipper. What would seem to make sense from the manufacturer’s viewpoint than to set up a marketplace where different dealers offer the customer the entire range of the manufacturer’s wood chippers? That concept would have two serious weaknesses. For one, dealers in a closed marketplace of this kind would be forced to wage a price war to win the customer’s favor. For another, a marketplace of this kind would with the sale of a wood chipper satisfy only one aspect of the use case that had brought the customer to the platform. He might need protective clothing in order to work safely with the chipper. Or he might want from the outset to ensure that his chipper is well cared for by buying the right engine oil for it. Or he already has a chipper and merely needs replacement blades. Or he has never handled a wood chipper before and first needs an in-depth introduction to using one. Or he would like to share with others his experience of working with wood.
A platform that satisfies all of these needs and enables the consumer to purchase all the products and services he needs for his use case in one place is highly attractive for the customer. The keyword here is, of course, one-stop shopping. So the marketplace should not only map the manufacturer’s own product range but also offer matching or complementary products from other manufacturers and additional services such as training offers, maintenance and servicing or even an exclusive customer forum. The result is a half-closed marketplace that offers not just customers convincing added value; its partial opening enables retailers to set themselves apart from the competition on the platform by more than just their pricing, convincing customers with their own specialties and strengths.
A platform that enables the consumer to purchase all the products and services he needs in one place is highly attractive.
These strengths must not necessarily be a wide range of products, services or low prices. Retailers can set themselves apart in the marketplace by demonstrating professional competence and helping customers to solve problems – such as by creating editorial content in the form of, say, tutorials, by offering individual advice or by responding especially fast and reliably to customer inquiries.
All of these differentiation opportunities increase the platform’s attraction for retailers enormously compared with the open platforms described above so that the inhibition threshold to committing to the marketplace is much lower – especially as direct cooperation with the manufacturer leads to further benefits. The manufacturer provides product data, images and videos directly, ensuring not only a professional presentation by the retailer on the platform. Interested retailers might also like to be hooked up to the manufacturer’s central warehouse and send products they do not have in stock directly to their customers by means of, say, a drop shipment. In this way the retailer gains additional sales opportunities without having to run risks of any kind.
Conclusion: Indirect Direct Selling Squares the Circle
As we have seen, the half-closed marketplace concept is highly attractive for both customers and retailers. So the most important preconditions for the platform’s success are in place. But is the manufacturer not abandoning his own direct sales ambitions by providing a marketplace of this kind? The concept forces him to continue to collaborate with retailers who both claim a part of the profit margin and block his access to end customers.
This argument is doubtless partly justified. Classical direct selling looks rather different. But it does not take into account the fact that the manufacturer improves his position at crucial points:
1. The manufacturer receives valid data about his end customers.
Within the concept described above the retailer may continue to be the end customer’s main contact and partner, but provision of the platform means that at least part of the end customer business no longer takes places in channels to which the manufacturer has no access. Instead, the marketplace makes the customer and the retailer use a communications and sales channel that the manufacturer can monitor and analyze. In this way he learns not only much more than ever before about his end customers but also about the retailers and their sales processes.
2. The manufacturer strengthens his dealer network and its motivation.
Incorporating the dealers in the platform and taking their specific needs into account does more than eliminate the risk of alienating a network that could be crucial for the manufacturer’s survival. In view of the efforts the manufacturer undertakes for the dealers’ benefit they are highly likely to continue to sell his products in other channels with renewed vigor.
3. The manufacturer also generates new sales revenues for himself.
A classical objective of manufacturers who set up a direct sales channel is to improve their profit margin by eliminating middlemen. That, however, is not the only way to boost the company’s profits. The half-closed marketplace concept concentrates on increasing company profits by selling more. So it is very much in the manufacturer’s interest to help his dealers to sell more products. Providing an additional and highly attractive sales channel is a step in the right direction.
Indirect direct selling via the marketplace thus offers manufacturers of complex products a practicable way to participate in the many and varied opportunities of digital transformation and offer a competitive digital sales channel without having to set up in competition with their dealers.
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