Should Manufacturers Sell Direct to End Users?

Author: John Honovich, Published on Nov 09, 2008

An insane idea today will become reality over the next 10 years. Driven by the Internet and accelerated by the recession, the role of the integrator as powerful intermediary will diminish greatly.  This will be a slow and gradual process but one that will start making waves over the next 2 years as the recession drives more manufacturers to sell direct to end users.

The World Today

The way the business usually works is that a manufacturer sells to intermediaries, like integrators, and those intermediaries sell to end users. Along the way, the intermediaries mark up the price. Indeed, integrators routinely mark up prices 40% to 100%. For instance, the $6000 USD DVR a security manager buys may have only cost the integrator $4,000 USD from the manufacturer. Plus, the integrator charges you a number of hours for the labor.

End users might wonder: why don't you just cut out the middleman? After all, that seems like a lot of money for the work involved. If the markups were eliminated, end user pricing could drop 10% or more.

Most manufacturers would (at least secretly) love to cut out the middlemen but the manufacturers need the integrators to sell their products. Historically, it's been too expensive and difficult for a manufacturer to reach end users all over the world. The integrators, therefore, became an extension of the manufacturer's sales force in exchange for a lucrative cut.

Integrators vigorously protect their local territories and end user connections. It is very common for an integrator to demand or threaten a manufacturer not even to talk to an end user without their permission. This is common with all integrators - big or small.  And it works. Manufacturers are generally very reluctant to cross the integrators because they need the integrators to sell for them. And when they do, as MDI recently disclosed, the reaction is generally quite negative (the MDI case study is fascinating and worth reading).

How the World is Changing

Three key factors are changing that make selling to end users increasingly viable for manufacturers.

  1. The cost of communication is becoming free.
  2. The ability for end users to research is getting easier.
  3. The recession will force all parties to eliminate inefficiencies.

Cost of Communication Becoming Free

With free long distance, webcasts and even videoconferencing becoming a reality, the cost and complexity of communicating richly across the world is drop dramatically.

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End Users Get Research on Their Own

The integrator has almost always all been the overwhelming, if not only, research and education resource for end users.  This provided the integrator with a lot of power and value.

End users are increasingly able to access very detailed information over the Internet on technology, product options, competitive offerings, reviews, etc.  You are seeing more and more end users say "I know what I want" I just need someone to install it. 

In the next 10 years, this trend will only get far more dominant.

Recession Forces Elimination of Inefficiencies

In good times, most people do not want or need to take big risks. However, when times are tough, everyone is forced to be more aggressive to cut costs.

In the next two years, many more integrators will lower their resistance to manufacturers selling direct. Indeed, efficient integrators will see this as a tactic to grow their business and punish their rivals. Of course, manufacturers and end users will welcome this as the lower markup means greater competitiveness for the manufacturer and cheaper prices for the end user.

This Will Take Many Years to Play Out

While we will see some risk takers expand direct selling in the first two years, this will absolutely remain a very small percentage of sales. However, people will start taking this as a real threat.  Just like the death of newspapers, the transition will take many years to come, with pundits debating how soon or if it ever will actually occur.

Nonetheless, the big long term trend (the Internet) makes this inevitable while the major short term trend (the recession) generates increased urgency for this move.

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