I'm involved in an OEM business. OEM, which means original equipment manufacturer, designates a company that makes a part or subsystem used in another company's end product. In our case, we develop wholesale electronic products, such as Internet of Things (IoT) gadgets and home-automation devices for various brands and retailers.
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We also sell some of our products direct to consumers. And, since we design, manufacture, market and ship our products ourselves, we offer remarkably low price points. Consequently, some of my OEM clients have complained that we're killing their market and that we need to lower our wholesale prices or else raise our consumer direct prices. The reason? Simply put: They can't compete.
It's a tough situation, and I understand why they're upset. But, "direct to consumer" will eventually be the brave new economy that will shape our IoT industry whether businesses like it or not. So, heed that, or step aside. Let’s break down how the new model works:
1. Why Go Consumer Direct?
It's more profitable. First off, you cut out middlemen. Costly distributors and retailers are made irrelevant and unnecessary when manufacturers control the supply chain from product conceptualization and R&D, to manufacturing, to ecommerce sites and into the hands of our consumers.
Retailers regularly require wholesale discount prices of 70 percent or more, from the final consumer price on products, and those costs are passed on to the consumer. Why would we decrease our margins, hurt our bottom line and be forced to overcharge our consumers by relying on distributors and retailers when it's considerably more profitable to handle logistics in-house?
Builds better relationships. Consumer-direct business gives us an opportunity to establish a relationship with every person who purchases our products. We become more than a faceless corporate entity with shelf space in major retail stores; and that can lead to longer relationships and brand loyalty from people who enjoy our products and what we offer. This relationship isn't possible through a traditional product distribution and retail track.
Facilitates more brand loyalty. Brand loyalty is a priceless commodity when you're taking the crucial business step of building a successful brand. Offering products direct to consumers is a great way to achieve that. When you obtain trust and brand loyalty from a consumer, you're essentially investing in your own company stock.
That consumer loyalty in turn can pay dividends outside of just the monetary benefits: An individual consumer will know you as a trusted source, will refer your company and products to friends and family and consider your company to be an established, legitimate and dependable brand. That translates to staying power, a vital quality to have in a changing marketplace.
2. How can old-school retailers and distributors step up their game?
Connect with end users. Try to understand your consumers in depth, beyond the numbers and statistics. This may require UX personnel, data analytics, surveys, questionnaires and considerable input from consumers, but it's worth it -- I promise.
According to a recent study by IBM, 80 percent of consumers surveyed said they felt that the average company didn't "understand them," or know them as individuals. So, tap into that disconnect and you’ll really have something!
A great example comes from LEGO, which executed a crowd-sourcing campaign called LEGO Ideas, where fans design and build a model of their own choosing and then share it on LEGO's website, along with photos and a description. Users can then vote on their favorite homemade designs, and the best-reviewed prototypes are gathered by LEGO's review board. Designs that satisfy the review board's requirements are put into production and subsequently sold around the world, with the original designer receiving full credit and a share of the royalties.
In this way, LEGO's consumers are directly deciding on future products based on what they like and don't like. Everybody wins: LEGO gets free designs; consumers get to participate, vote and feel that their opinions are considered; the original designer gets compensated; and LEGO gets to bask in friendly PR.
Form mutually beneficial partnerships with suppliers. The global product value chain has changed, and the supply chain must change with it. Building an alliance with suppliers requires more than agreeing to a long-term contract with stipulations that satisfy both sides. To be successful, a true alliance depends on (excuse the corporate speak) a synergistic business model.
An example? In 2009 Daimler AG partnered with Chinese truck manufacturer Foton to build Mercedes-Benz trucks in China, to meet increasing demand for affordable commercial vehicles in untapped and emerging markets. In return, Daimler AG offered Foton’s Auman brand trucks in emerging markets, such as Africa and the Middle East, to cut design and labor costs associated with building new vehicles specifically for those markets.
The result has been a beneficial partnership that goes beyond a traditional supplier agreement. Both companies get to expand their profits by tapping into new markets with the help of the other.
Throw away your business plan. Taxi companies now generally allow customers to book and pay for rides through an app. A few years ago, that feature was non-existent, and it's safe to say that taxi companies never would have innovated on their own without a helping (or forced) hand from competitive ride sharing companies like Uber and Lyft.
Likewise, CE retailers will need to innovate. Growth is crucial to shareholders, and since most major retailers have seen their growth stagnate in recent years, change is a must. Altering their business model will require CE retailers to weather a dip in profits and/or a slimming of their margins. But it's a necessary sacrifice if they want to survive long-term. Again, the LEGO Idea site provides a fantastic example of the kind of unconventional steps that retailers will need to take to survive, and hopefully thrive.
Another example. In 2012, Lay's debuted its annual "Do Us A Flavor" campaign, in which customers get to pitch their flavor ideas; the winning entries are eventually produced and shipped to shelves, nationwide. Lay's gets free promotion, consumers get to participate in the product development process and Lay's market offerings are diversified, complete with a stamp of approval from consumers.
Millions of votes later, Lay's now offers garlic-bread chips, wasabi ginger chips and this year's winner, Southern biscuits and gravy chips. These products never would have left the testing lab if not for its crowd-sourced campaign backed by millions of votes. Retailers will need to adopt such strategies in order to stay alive.
New business models, technological advancements, and optimized manufacturing capabilities have made it easier for manufacturers to sell direct to consumers, and retailers need to adapt and adjust if they're going to be able to stay relevant and compete. This will require a modernization of outdated business strategies, a change that will be sure to bring considerable growing pains for monolithic retailers. It's ultimately an absolute necessity for any retailer that wants to survive.