reintermediation

What Is Reintermediation? Reintermediation In A Nutshell

Reintermediation consists of the process of introducing again an intermediary that had previously been cut out from the supply chain. Or perhaps by creating a new intermediary that once didn’t exist. Usually, as a market is redefined, old players get cut out, and new players within the supply chain are born as a result.

Reintermediation as a business strategy

Almost any company that wants to sell direct-to-consumer (D2C) can now do so thanks to the near-total prevalence of the internet.

direct-to-consumer
Direct-to-consumer (D2C) is a business model where companies sell their products directly to the consumer without the assistance of a third-party wholesaler or retailer. In this way, the company can cut through intermediaries and increase its margins. However, to be successful the direct-to-consumers company needs to build its own distribution, which in the short term can be more expensive. Yet in the long-term creates a competitive advantage.

The D2C model is attractive to many companies since removing the intermediary increases profits and provides greater consumer data access. 

However, this scenario does not always play out in practice.

Cutting out the middleman is often associated with a whole new set of problems for the business.

Some find the fulfillment of minimal orders problematic, while others must take on customer service duties that were once the purview of the retailer.

Reintermediation describes the reintroduction of a supply chain intermediary between producers and consumers.

It is mainly used by companies that, for whatever reason, decide that the D2C approach is not for them.

Other businesses use reintermediation to reassemble buyers, sellers, and intermediaries in new and profitable ways.

The rest of this article will be devoted to discussing some specific reintermediation examples.

Case study: Amazon’s last-mile delivery

last-mile-delivery
Last-mile delivery consists of the set of activities in a supply chain that will bring the service and product to the final customer. The name “last mile” derives from the fact that this usually refers to the final part of the supply chain journey, yet this is extremely important, as it’s the most exposed, consumer-facing part.

As Amazon tried to figure out last-mile delivery, the company might also, over time, disintermediate the old delivery industry, which suddenly might be cut out from the supply chain.

disintermediation
Disintermediation is the process in which intermediaries are removed from the supply chain, so that the middlemen who get cut out, make the market overall more accessible and transparent to the final customers. Therefore, in theory, the supply chain gets more efficient and, all in all can produce products that customers want.

As this process happens and Amazon defines the new market, new intermediaries that have learned to play according to Amazon rules will form.

Creating a whole new intermediary

For instance, as Amazon has been figuring out the last-mile problem, it also approached it with a new program, launched in 2018, called Delivery Service Partner.

Or simply put, a startup that gets helped by Amazon to become an independent contractor (under the rules of Amazon) that delivers packages for the company.

Thus, Amazon disintermediates the old carriers and builds up a new system, which is comprised of new intermediaries.

Yet those will follow Amazon’s rules and policies.

The tension between intermediation and disintermediation

The evolution of the Internet moves from phases of disintermediation, which is extremely helpful to remove old logic that does not work anymore in current market conditions, to establish new systems.

As those new systems are established, reintermediation might occur for several reasons.

First, it might be the critical player, once disintermediating, now incentivizing reintermediation, to gain more control over the market.

Second, as the market adjusts to this new reality, new intermediaries learn the logic of this new market and try to capture some value within the supply chain.

Other Case Studies

Deliveroo

deliveroo-business-model
Deliveroo is a British online food delivery company founded by Greg Orlowski and Will Shu in 2013. Shu developed the platform in response to a lack of high-quality food delivery in London. Deliveroo makes money by collecting 25-45% of every order it facilitates. It also charges delivery fees and onboarding fees for restaurants that wish to be featured on the platform. Deliveroo for Business is a service designed for corporate clients needing to order food in bulk. The company also charges a higher commission to businesses that utilize a network of digital kitchens to process orders.

Online food delivery company Deliveroo partners with restaurants across thousands of cities around the world.

In so doing, it manages the entire process from pickup at the restaurant to delivery at the customer’s door.

Deliveroo created a more efficient supply chain for restaurants that were previously handling their own food deliveries.

Reintermediation has created a new market for eateries that found the cost of delivering food themselves prohibitive.

Without Deliveroo, in other words, the restaurant would be required to invest in vehicles, drivers, insurance, and logistics planning, among many other things. 

Deliveroo and many similar companies have made the supply chain more efficient through intermediation.

From the point of view of the restaurant, food delivery is now no different to a customer picking up an order from their premises.

Autobytel.com 

Some intermediaries provide general information about various product categories and how they meet different consumer needs.

Web-based car sales intermediary Autobytel started with searchable information about vehicles based on several criteria and also allowed consumers to locate dealerships that sold the car they wanted.

The company has now transitioned into selling ancillary services such as servicing, insurance, and finance to build long-term relationships with customers.

In the D2C model, these are services once exclusively offered by the dealership or car manufacturer.

Amazon

amazon-business-model
Amazon has a diversified business model. In 2021 Amazon posted over $469 billion in revenues and over $33 billion in net profits. Online stores contributed to over 47% of Amazon revenues, Third-party Seller Services,  Amazon AWS, Subscription Services, Advertising revenues and Physical Stores.

Amazon is also a significant proponent of intermediation.

The Amazon.com homepage features an intuitive user interface that provides customized product recommendations.

This is paired with similarly tailored email marketing and proprietary product fulfillment systems.

Amazon understands that consumers purchase many of the products it sells directly from the manufacturer and in fewer steps.

To maximize its success as an intermediary, the intuitive user interface and personalized product recommendations shorten the time consumers spend finding the correct item. 

In essence, Amazon is creating a cohort of users dependent on its product recommendations to streamline the purchase process and discover new products they may be interested in.

Traditional manufacturers in the D2C model have been slow to replicate this level of detail.

amazon-revenue-model
Amazon has a business model with many moving parts. The e-commerce platform generated over $222 billion in 2021, followed by third-party stores services which generated over $103 billion, Amazon AWS, which generated over $62 billion, Amazon advertising which generated over $31 billion and Amazon Prime, which also generated over $31 billion, and physical stores which generated over $17 billion.

Key takeaways

  • Reintermediation describes the reintroduction of a supply chain intermediary between producers and consumers.
  • Deliveroo created a more efficient supply chain for restaurants that were previously handling their own food deliveries. Reintermediation in the food delivery context has created a new market for eateries that found the cost of food delivery prohibitive.
  • Companies such as Autobytel started by providing general information about product categories and then moved into offering ancillary services that a manufacturer would normally handle. Amazon also uses tailored product recommendations to make the process of purchasing through an intermediary more attractive to consumers.

Connected Business Frameworks

AI Supply Chains

data-supply-chain
A classic supply chain moves from upstream to downstream, where the raw material is transformed into products, moved through logistics and distributed to final customers. A data supply chain moves in the opposite direction. The raw data is “sourced” from the customer/user. As it moves downstream, it gets processed and refined by proprietary algorithms and stored in data centers.

Bullwhip Effect

bullwhip-effect
The bullwhip effect describes the increasing fluctuations in inventory in response to changing consumer demand as one moves up the supply chain. Observing, analyzing, and understanding how the bullwhip effect influences the whole supply chain can unlock important insights into various parts of it.

Supply Chain

supply-chain
The supply chain is the set of steps between the sourcing, manufacturing, distribution of a product up to the steps it takes to reach the final customer. It’s the set of step it takes to bring a product from raw material (for physical products) to final customers and how companies manage those processes.

Data Supply Chains

data-supply-chain
In a data supply chain the closer the data to the customer the more we’re moving downstream. For instance, when Google produced its own physical devices. While it moved upstream the physical supply chain (it became a manufacturer) it moved downstream the data supply chain as it got closer to consumers using those devices, so it could gather data directly from the market, without intermediaries.

Last Mile Delivery

last-mile-delivery
Last-mile delivery consists of the set of activities in a supply chain that will bring the service and product to the final customer. The name “last mile” derives from the fact that indeed this usually refers to the final part of the supply chain journey, and yet this is extremely important, as it’s the most exposed, consumer-facing part.

Backward Chaining

backward-chaining
Backward chaining, also called backward integration, describes a process where a company expands to fulfill roles previously held by other businesses further up the supply chain. It is a form of vertical integration where a company owns or controls its suppliers, distributors, or retail locations.

Revenue Modeling

revenue-model-patterns
Revenue model patterns are a way for companies to monetize their business models. A revenue model pattern is a crucial building block of a business model because it informs how the company will generate short-term financial resources to invest back into the business. Thus, the way a company makes money will also influence its overall business model.

Pricing Strategies

pricing-strategies
A pricing strategy or model helps companies find the pricing formula in fit with their business models. Thus aligning the customer needs with the product type while trying to enable profitability for the company. A good pricing strategy aligns the customer with the company’s long term financial sustainability to build a solid business model.

Dynamic Pricing

static-vs-dynamic-pricing

Price Sensitivity

price-sensitivity
Price sensitivity can be explained using the price elasticity of demand, a concept in economics that measures the variation in product demand as the price of the product itself varies. In consumer behavior, price sensitivity describes and measures fluctuations in product demand as the price of that product changes.

Price Ceiling

price-ceiling
A price ceiling is a price control or limit on how high a price can be charged for a product, service, or commodity. Price ceilings are limits imposed on the price of a product, service, or commodity to protect consumers from prohibitively expensive items. These limits are usually imposed by the government but can also be set in the resale price maintenance (RPM) agreement between a product manufacturer and its distributors. 

Price Elasticity

price-elasticity
Price elasticity measures the responsiveness of the quantity demanded or supplied of a good to a change in its price. It can be described as elastic, where consumers are responsive to price changes, or inelastic, where consumers are less responsive to price changes. Price elasticity, therefore, is a measure of how consumers react to the price of products and services.

Economies of Scale

economies-of-scale
In Economics, Economies of Scale is a theory for which, as companies grow, they gain cost advantages. More precisely, companies manage to benefit from these cost advantages as they grow, due to increased efficiency in production. Thus, as companies scale and increase production, a subsequent decrease in the costs associated with it will help the organization scale further.

Diseconomies of Scale

diseconomies-of-scale
In Economics, a Diseconomy of Scale happens when a company has grown so large that its costs per unit will start to increase. Thus, losing the benefits of scale. That can happen due to several factors arising as a company scales. From coordination issues to management inefficiencies and lack of proper communication flows.

Network Effects

network-effects
network effect is a phenomenon in which as more people or users join a platform, the more the value of the service offered by the platform improves for those joining afterward.

Negative Network Effects

negative-network-effects
In a negative network effect as the network grows in usage or scale, the value of the platform might shrink. In platform business models network effects help the platform become more valuable for the next user joining. In negative network effects (congestion or pollution) reduce the value of the platform for the next user joining. 

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