3 Companies That Cut Out the Middle Man to Save Money
In the yesteryear of sales, it was pretty common to decide you wanted to buy a suit, then travel to the nearest retailer and pick a selection that traveled from the designer’s mind to the manufacturer, to the distributor, eventually landing on the rack at the neighborhood Men’s Wearhouse or Macy’s. Each stop the suit made tacked on a few more dollars to your final price tag, until you’re left paying hundreds (or thousands) of dollars in supply chain fees for the suit to get to you. The same idea used to be true for movies as well – remember the many trips to Blockbuster to get the latest release?
Of course, the Internet changed many of the processes around sales, making it as simple as a few clicks to have anything you could ever want delivered to your door. In some cases, the old process simply adapted to new online techniques, meaning you can purchase the same thing you would have from Walmart or Target online instead of in their stores. But in some cases, companies are taking it a step further, driving up their profits while potentially saving you money, too.
If companies can sell to customers directly instead of relying on middle men to do it for them, they can get away with not paying big chains for carrying their products while also keeping prices lower for their customers. Though it’s still not a snap to do this, e-commerce makes the process much more realistic. Take a look at these three companies that are cutting out the middle man to keep more money in their pockets, and in yours.
If there’s ever been an e-commerce king, it’s Amazon. The online retailer that got its humble beginnings by offering used books for sale now has its tendrils in selling almost any good you can imagine. Need a virtual assistant? Alexa is one of the best. Need a refill on detergent or toilet paper? Amazon can deliver it to your door automatically. Want to purchase video games, home appliances, gardening tools, Kindle books, toiletries, or flowers for your mother – and get free shipping? Amazon does that, too.
Recently, Amazon has been quietly building up its wardrobe of private label fashion brands, now making it possible to order clothing directly from the company instead of ordering from third parties that sell their goods through the site. According to Reuters, Amazon already owns seven of these private brands, and could be making moves to own even more. This comes at the same time Amazon appears to be hiring additional members to its fashion team.
“When you think of buying new clothing, shoes, watches and jewelry, do you think of Amazon? Not yet? Well, we are going to change that,” one job posting for Amazon states.
So far, the company reportedly offers more than 1,800 items among the brands, including apparel for men, women, and children. A men’s suit costs about $300 and tend to be in more casual styles, a la H&M, Reuters reports. Of course, with private labels you won’t see “Amazon” on the tag. It’ll be more like Franklin Tailored (men’s suits and accessories), Franklin & Freeman (men’s shoes), or other labels.
According to KeyBanc Capital Markets analyst Ed Yruma, the clothing labels could earn a profit for Amazon by next year – perhaps up to 25 cents per share. “Apparel is a large category that remains highly fragmented,” Yruma wrote in a research note. “We think the low barriers to entry, size and significant competitive set make this an attractive category for Amazon.”
It started with House of Cards. Then came Orange is the New Black. Now, it’s impossible to escape Netflix’s lineup of original series and movies, including everything from making murderers to reboots of your favorite 90s sitcoms and canceled TV series.
If the reports are true, the company that made its name streaming outside movies and TV shows now has a goal to produce “about 20″ scripted series every year in house. Even that number might be growing, with the letter to shareholders at the end of 2015’s fourth quarter detailing plans for more than 600 hours of original programming in 2016, up from 450 hours last year. According to the letter that could mean new seasons for as many as 30 original series and eight original films.
Because Netflix doesn’t advertise during streaming, the best metric for measuring success comes in membership numbers. According to the Q4 report, Netflix’s gamble on original content is paying off in big ways. The company now boasts more than 75 million viewers worldwide, in every country except for China. The fourth quarter yielded a record 5.59 million new subscribers, which Netflix attributes at least in part to original series like Narcos and Marvel’s Jessica Jones.
By bringing content creation in house, Netflix can advertise its exclusive content while also forgoing expensive fees paid for licensing costs. “Increasingly, our goal is to own more of our original programming to allow for greater creative and business control and to ensure global access to content,” the Q4 report states.
Even in 2013 when Netflix first started its original content in a significant way, licensing costs had risen 700% compared to the two years prior. And if the company can prove that original content is drawing new customers, its end goal could ultimately be raising monthly subscription prices. “If they [Netflix] use their customer analytics to target the right customer segments with high-valued content that isn’t available anywhere else, they should be able to extract more than $7.99 per month – especially given their current discount relative to entertainment substitutes. This is especially true if their customers increased service usage is being driven by this original content,” wrote the Ivey Business Review.
That price hasn’t changed yet, unless you want to make the service available on more than two screens at a time. However, the bottom line is that Netflix continues to see price advantages to creating its own content instead of licensing from other content creators. (Being able to stream Lost cost Netflix $45 million alone, for example.) Current content liabilities on Netflix’s balance sheet for 2015’s Q4 report shows the company owes almost $2.8 billion over the next year in licensing rights, up 57% from 2013. If the company can keep up the demand for its original content, it can up its subscription price while also decreasing its dependence on costly outside programming, killing two birds with one stone.
3. Warby Parker
The maker of chic eyewear isn’t the first startup to find success in cutting out the middle man, but it’s certainly one that has used the Internet to its advantage in creating a brand for itself. Unlike Amazon and Netflix, this startup needed to build its business from the ground up without relying on partner retailers to provide the goods it was selling. Now, it’s a success story in creating a business model that ignores the middle men from the very beginning.
The founders of Warby Parker realized that designer glasses were incredibly expensive because designers, manufacturers, wholesalers, and retailers all took their share of the sales – driving up prices so everyone could balance their books. “I had been to the factories and knew what it costs to manufacture glasses and knew the cost didn’t warrant a $700 price tag,” Neil Blumenthal, a founder of the company, told The New York Times. Instead, Warby Parker designs the glasses and then works directly with the Chinese factories that create designer glasses, then selling the creations online starting at $95.
Of course, the Mount Everest for any company is creating loyalty and trust about in-house products instead of tried and true brands. “The challenge is, if you’ve never heard of the brand, you wonder, ‘Should I buy it when it’s 20 percent cheaper?’ ” Raj Kumar, a supply chain consultant at A. T. Kearney, told the Times. “Or should I buy a brand I trust?” Netflix and Amazon face this struggle, but they had other tested products to rely on while building their private, in-house offerings. Companies like Warby Parker need to earn that trust on day one.
Warby Parker found success in its marketing, targeting millennials who were price- and ethics-conscious. Their home try-on program also helps, which allows potential customers to select five pairs of eyeglasses to test out at home before selecting their chosen pair. Shipping is free both ways, which is also a bonus since it’s not a guarantee with any online company.
With Amazon and Netflix, the companies can selectively advertise their own programming within their sites, leading to greater profit margins when those brands sell and when subscribers stick around for the next season of binge-watching. With Warby Parker, those increased profit margins are already built in with every pair of glasses. In most cases that will also end up saving you money and entertaining you more – as long as you like what they’re selling.