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Published on August 16, 1999

INTERNET POSES CHALLENGE FOR MIDDLEMEN: CAN MIDDLEMEN SURVIVE?

"I'll get it for you wholesale'' are words dear to the heart of every American. Bypassing the middleman long has been a buyer's goal. But with few alternatives available, consumers have had to use basic distribution channels to make their purchases. Much of the success of the ``big box'' merchandisers can be attributed to the way they have positioned themselves to look like ``wholesalers.'' That's the Wal-Mart, Home Depot, Best Buy and Staples story. Pricing, store environments and promotions are designed to create the impression that a costly link in the distribution chain as been eliminated.

The Internet provides the next step in the devolution of the middleman, as it gives customers what may be the ultimate step in ``going direct.'' Each day, the list gets longer for online buying of airline tickets, homes, clothing, cars, insurance and just about any other product or service. The long-established firewall between the customer and the manufacturer is quickly disappearing.

The drop in mutual fund sales appears to be a reflection of this developing trend. Sixty years ago, the mutual fund simplified stock ownership at a time when it was awkward for the individual to gather and evaluate information on individual stocks, and brokers only did business with ``persons of means.''

In effect, mutual funds are a classic illustration of the middleman at work. Now that all investors can research stocks online, determine what they want to buy or sell, and execute the transactions themselves at a low cost, the mutual fund may be something of an anachronism.

The Internet has changed the equation. Armed with research from the Internet, many individual investors no longer feel the need to depend on the services of a ``fund manager.'' As a result, mutual funds lack the appeal they once held. There's a trend away from placing one's financial fate in someone else's hand, an attitude change that can be traced to the rise of the Internet.

Given the opportunity, most Americans appear ready to circumvent the middleman and the Internet gives them that capability.

For business, the implications of this fundamental change are far-reaching:

1. Protected territories are a myth. They simply don't exist, even though manufacturers continue to act as if they are a reality and attempt to enforce geographical boundaries. The Internet has made a joke of territorial boundaries, dramatizing the inappropriateness of the antiquated reality.

Whether manufacturers understand it or not, geography no longer defines. There are no boundaries.

2. The customer is empowered. In the past, one of the primary functions of salespeople was to provide customers with product information, offering only what was absolutely necessary to make the sale. In this environment, it was ``buyer beware.''

With the Internet, the roles have changed; actually, they've reversed. It's now ``salesperson beware,'' because the customer has direct access to the information necessary to evaluate options and make appropriate comparisons.

In effect, buyers trust themselves more than they trust salespeople. A recent study indicates that 20 percent of industrial buyers looked to salespeople for information in 1997, while only 12% did just a year later.

Nowhere has customer empowerment had greater impact than on Wall Street. The long sacrosanct role of the stockbroker in making a trade came to a somewhat ignominious end almost overnight with online stock trading.

Even staid Merrill Lynch & Co.—with its corps of 14,000 commissioned brokers losing customers to online trading—went with discounting, fee-based accounts and online trading in one fast move. Provocatively, The Wall Street Journal labeled it ``a watershed on Wall Street.''

The message is clear: The middleman is in jeopardy. Whether it's the stockbroker or real estate broker, the empowered customer is eager to cut out the intermediary.

3. Seeing is no longer believing. For the past half-century, customers have wanted to see and touch what they were buying. They could walk into an appliance store and view eight or 10 refrigerators lined up and make comparisons.

Seeing the actual refrigerator before buying was essential, since this was the environment in which information was obtained. Getting you into the store was the key to making the sale.

However, it is no longer necessary to ``go and see'' in order to make an informed buying decision. Instead, the experience can be virtual.

Dell Computer was the first to understand the implications of ``seeing is no longer believing.'' Starting with a vision of going direct to the customer, it made sure its systems passed the ``plug 'n' play'' and customer support tests. While its products get high ratings, customers are confident they also will be easy to use.

Dell has been a major contributor to breaking down the belief: ``I've got to see it before I buy it.''

4. Convenience is the customer's top priority. As consumers, we're willing to pay more for convenience—sometimes a lot more. ``I want what I want when I want it'' is the customer's mantra.

What the Internet has done is demonstrate to buyers that this is possible. It's not necessary to go to a big box bookstore to get the book. It can be ordered at 5:03 a.m. or 11:17 p.m. any day of the week.

This fundamentally changes the customer's expectation level. It's not that you or I will necessarily place an order at 2:23 a.m., it's knowing that we can do it if we want to that makes that difference.

What do you hear when you call someone's business voice-mail? More than likely, the message sounds something like this: ``I'm away from my desk right now. I'll get back to you as soon as I can.'' That was good enough before the Internet impacted our expectations. But not today. The words sound almost arrogant.

Given this background, what is the future of the middleman? Is there one? The answer is ``yes, if...''—if distributors and retailers think creatively. Here are a few suggestions:

Add value that's valuable. Such phrases as ``personal attention'' and ``personal service'' fall far short today. A different approach is required.

For example, a promotional products distributor (a middleman) makes up free spec samples for customers, knowing that customers are more likely to place an order if they can see the actual product in advance. Of course, there's a cost, but this is a significant way that this distributor sets itself apart from the competition.

Charles Schwab understands what it means to add value. MySchwab.com isn't just a site for electronic stock trading. It's a financial services portal offering a vast array of information resources that can be customized to empower the individual investor. That's value.

Make it easy for the customer. ``Let me call you back'' is the killer phrase today. Even doctors are getting the message. Waiting until 4:35 p.m. for a 3:00 p.m. appointment isn't acceptable to many patients. One patient calls in advance and is put in line. When he walks in, his name is called.

A plumbing company in Pennsylvania stocks special trucks with parts and offers 8:00 a.m. to 8:00 p.m. service six days a week. The combination of having parts on hand and extended hours has high customer appeal.

Cultivate constantly. The Internet is making it clear that making the sale isn't enough today. Subscribers to the Wall Street Journal's online ``Interactive Edition'' receive regular e-mail messages regarding timely articles along with a URL link that takes the viewer directly to that particular page.

If the WSJ Interactive subscriber isn't using the site, it's time for an e-mail reminder. Microsoft and others do it, too.

The objective is to keep pulling the customer closer and closer, a process that requires consistent reinforcement. With intense competition and pressures on time, customers appreciate the reminders.

The strong customer appeal comes from being offered helpful information, not just something to buy.

The middle is shrinking. Whether it's a retailer or a distributor, the pressure is on the stockbroker, travel agent and bank teller.

In the life insurance business, a recent report by Conning & Co. on life insurance distribution strategies reinforces the decline of the middleman.

Twenty years ago, virtually all life insurance products were sold through agents. That has dropped to 82 percent, and the study projects the figure soon will drop to 68 percent as other channels of distribution drain off sales.

If the middleman is to find a secure place in the marketing chain, it will take an intense, concentrated effort. Like Charles Schwab and others, the power will be in serving as a valuable resource for the customer.

Mr. Graham is president of Graham Communications, a marketing services company in Quincy, Mass.

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