What Is Disintermediation? (How It Works and Examples)
By Indeed Editorial Team
Published 27 April 2022
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
When a company creates a product, there are several steps to take before consumers can purchase the item. Disintermediation can reduce the number of elements within the supply chain, which allows the product to get to the consumers quicker and at a lower cost. Understanding how disintermediation works can help you improve a company's supply chain and make it more cost-effective. In this article, we discuss what disintermediation is, explain its benefits and give examples of this process.
What is disintermediation?
Disintermediation is a marketing term that describes the process of removing the financial intermediary, or the middleman, in a transaction. A common example of this is when a consumer buys a product from a wholesaler rather than going to a store to buy it. This usually allows the consumer to purchase the item at a lower price. Disintermediation also lets you shorten the supply chain, which allows customers to get the product quicker. This can also involve removing an intermediary from the decision-making process of the supply chain.
For a company to use disintermediation, it may use more resources, such as money or employees, to do the work of the intermediary. If the company has enough resources, it can successfully replace the intermediary. Some industries may implement disintermediation more easily than others. This may relate to consumer habits specific to an industry or customer service requirements. A few specific industries that have had some notable success with disintermediation include:
How does disintermediation work?
The disintermediation process works by removing all intermediary individuals between the manufacturer and the buyer from the sale process. This means that the product moves through the following steps instead:
1. Product creation
The process begins with the supplier, who manufactures and prepares the product for sale. After creating the product, the supplier may proceed with a series of other preparatory steps, like quality control and packaging. Depending on the scale of the operation, this may happen in one location or require the manufacturer to transport the product between departments.
2. Means of selling
Once the manufacturer has finished preparing the product, they may send it directly to the buyer. Without disintermediation, they may send it to a retailer or wholesaler. Online selling is a popular medium to aid in disintermediation for this purpose. Manufacturers can list their products or services online and facilitate sales directly through their website without the aid of a third-party retailer.
The final step entails delivering the product to the consumer. Some companies may require that the customer come to the office or warehouse to pick the product up, while others offer delivery options. If there's any problem with the delivery or the product itself, the consumer may reach out directly to the manufacturer for assistance.
What does modern disintermediation look like?
Modern disintermediation often involves the use of computer systems to form a direct connection between consumer and supplier. In some cases, the manufacturer may require customers to come to their location in person to pick up their product. This often works best for larger items like furniture. Another option is for manufacturers to deliver the product to the individual. If the company has the ability to make deliveries themselves, they may choose to do this by employing delivery drivers or shipping items through the post.
Some companies choose to deliver their product by employing a third-party delivery company, instead of working to create an internal infrastructure for delivery. Working with a third-party delivery company may help to ease the workload for the manufacturer.
Benefits of disintermediation
Here are some benefits of disintermediation:
Lowers prices of products
Financial intermediaries, like a retailer, might increase the cost of their goods to make a profit. When a company removes a step of the supply chain through disintermediation, the consumer can get items for a lower price. In turn, this can increase customer satisfaction. If consumers can enjoy cost savings and benefit from disintermediation, the company may experience more successful customer satisfaction metrics.
Reduces costs for companies
Disintermediation also reduces the cost for companies to sell a product. For example, if a company doesn't collaborate with the intermediary, such as a retailer, wholesaler or broker, then it's not necessary for it to pay them. The company can just sell directly to the consumer. This lowers the cost of the product and can result in increased profit margins for companies.
Simplifies the supply chain
The process of disintermediation simplifies the supply chain by removing unnecessary steps. This reduces the time it takes for the product to get to the consumer. Technology also contributes to the disintermediation process, making the supply chain even shorter. It can eliminate the need for some intermediaries, allowing organisations to replace the mediator easily. For example, consumers can purchase products from the company's website or mobile application directly. This allows companies to simplify the supply chain without losing as many resources.
Risks of disintermediation
While there are many great benefits of disintermediation, there are also some risks involved, such as:
Increases management responsibilities
Although removing an element from the supply chain simplifies the supply process, it also causes some complications. If a company eliminated its retailers, it wouldn't have a way to display and promote its products. Therefore, a company may take on more responsibilities to ensure that disintermediation doesn't disrupt the whole supply process.
A possible solution would be to hire more employees to fill the role that the intermediary played.
Decreases brand awareness
If you remove the intermediary, you can also lose brand awareness. For example, if a food manufacturer removes its products from a grocery store, consumers won't be able to purchase the item while shopping. Instead, they might select a competitor's item. So if you decide to use disintermediation, it's important to make an additional effort to strengthen brand awareness. For example, a technology company can invest more in its online marketing efforts by hiring more professionals to target both the established and emerging customer bases. This lets customers know that the company's products are still on the market.
Another relevant consideration is making sure the company has strong customer loyalty before initiating disintermediation. Companies can quantify their existing brand awareness at several points in the disintermediation process and create strategies to increase brand awareness during the transition.
Incurs additional costs
Disintermediation usually involves other costs. While a company saves money by removing steps from the supply chain, it might not save as much as it expects. For example, the cost to ship goods typically increases when companies use disintermediation. You can resolve this by partnering with specialised shipping companies that have lower rates. If you notice any other extra costs, you can try to find innovative ways to reduce them.
Examples of disintermediation
There are many industries that use disintermediation to lower operational costs and increase profits. Consider these examples of disintermediation:
Technology companies are excellent examples of successful disintermediation. A number of these organisations don't have physical locations. Instead, they sell both hardware and software directly to consumers over their website, then ship the item if it's a physical product. These companies may employ customer service representatives or outsource customer service to a vendor to answer calls from consumers to help create a smooth customer experience in the absence of a physical retailer.
The music industry is another example of successful disintermediation. Individual musical artists may work to attract an audience, then communicate with them online. They can sell their music, merchandise and concert tickets directly through their websites. Previously, artists may have used a music label or other third-party intermediary to help make these sales possible. At present, many use disintermediation to connect to their customers directly.
Disintermediation originated in the financial industry. It meant that an investor could buy stocks directly as opposed to buying them through a broker. Today, this is still a relevant example of disintermediation. In this case, the intermediary would be banks, brokers and other financial institutions. Removing these elements allows people to make transactions or invest directly. This helps investors avoid accruing interest.
Explore more articles
- What Is the Importance of Leadership? (Plus Purpose)
- What Is Field Marketing? A Definitive Guide and Benefits
- Business Administration: Definition, Duties and FAQs
- A Parent's Guide to Working From Home With Kids
- Key Factors for a Successful Leadership Development Programme
- A Guide to Non-Controlling Interest (With Examples)
- What Is Absenteeism? (And Its Impact at the Workplace)
- 60 Quotes on Opportunities to Inspire and Motivate You
- Integrated Development Environment: Benefits and Types
- What Is Employee Training and Development? (Plus Benefits and Types)
- What Is Annual Turnover? (Differences, Types and Calculation)
- Relationship-Building Skills: Definitions and Examples