Vertical Impact: Cutting Out the Middleman

Author: 
Michael Scholl

Dealer, agent, reseller or intermediary – these are all names for indirect channels that arise when third parties take over sales and logistics from other suppliers. Moving down the channel, consumers prefer these middlemen, as dealer competition results in lower prices. Moving up the channel, suppliers are typically not fond of such indirect sales methods. From requesting lower prices to recommending competitor products, dealers do what they want, even if they do not admit it. Indirect channels require ample attention, thus the power balance between a supplier and its retailers can be very exhausting.

In the late 1990s, keeping pace with the upcoming dealer power meant big changes for consumer goods companies. Marketing powerhouses such as Procter & Gamble strongly shifted their efforts and budgets to key account management, which held responsibility for dealer management.

The current struggles in the modern consumer goods industry even happen in classic business-to-business environments. Many suppliers witness huge retailers such as Amazon take away their power, leaving the supplier with no idea how to react. Why are top brands taken aback when negotiating with huge dealers? Well, when the middleman has the power, suppliers will follow what the middleman says. And typically, companies will do everything to keep the middleman calm.

Many middlemen are a nightmare for even the top brand suppliers, who effectively manage their indirect sales. Consequently, the supplier is downgraded to a pure product supply role. And with eroding prices, premium product services are also eliminated - to keep products comparable.

So why are consumers and suppliers still using middlemen? The classic reasons for using indirect sales channels become obsolete when classic retailers become obsolete. And this is the chance for suppliers to gain their power back! Hence, it is also a risk because cutting out the middleman typically arouses power reactions, resulting in more harm than necessary to the supplier.

Vertical Impact® is the Homburg & Partner way of checking if, when, and how you can escape from the middleman nightmare. It is not about just creating an online store. It is about understanding that direct sales to consumers is the future and finding ways to keep on breathing this way. Vertical Impact is a topic we can discuss with the CEO in complete confidentiality, since we know that the first opponents to direct sales may be found in the organization itself.

Michael Scholl is the managing director of Homburg & Proctor, an internationally operating management consultancy focusing on market strategy, sales and pricing.