Middlemen In the New Economy
Conventional wisdom used to be that the Internet would destroy middlemen. Middlemen, the thinking goes, don’t create any real value, only feeding off of the time or knowledge constraints of others. Once people had access to the wealth of knowledge and timesaving that the Internet provides, middlemen would cease to be valuable.
Marina Krakovsky argues in a compelling new book that conventional wisdom was wrong. The Middleman Economy argues that, while transaction costs have decreased for everyone, they have decreased at an even faster rate for professional middlemen, leading to have an even larger role in today’s economy. The book’s subtitle, “How Brokers, Agents, Dealers, and Everyday Matchmakers Create Value and Profit” suggests that middlemen are both more ubiquitous and necessary than even most professionals realize.
Krakovsky breaks middlemen into six different categories, which help to expand our understanding of what middlemen do and therefore how they actually contribute more value today than before:
These are the types of middlemen most commonly thought of, those that connect two groups that otherwise may not find each other. An example of a bridge is eBay, which unites buyers and sellers in disparate locations.
Certifiers help bring trust to the marketplace. They, through their expertise, can help guide others through the consideration and buying process. Think of Yelp, whose user ratings can make or break a restaurant.
Enforcers are similar to certifiers in that they help maintain compliance and shoulder risk for the consumer. Wedding planners have an enforcer aspect: their presence incentivizes service providers to do a good job even if they won’t see a particular bride and groom again.
Risk-bearers do just that: manage risk. Whereas self-publishing a book may sound great in theory, there is a lot of marketing uncertainty involved. Publishers, among other tasks, accept the risk that the book may fail (and in fact most do) and earn a considerable amount of the profits if it doesn’t.
A concierge has domain-specific knowledge and experience to help organize and execute better than a layperson. Travel agents fall into this category, and while the Internet has changed this industry, there is still a lot of value in saving people the time and hassle of self-organization.
Insulators, instead of bringing people together, keep them apart. While this seems counterintuitive, think of lawyers and agents who allow strategic interactions between two parties that would be harder to achieve otherwise.
These six types of middlemen play various important roles in the market. Once you break apart different types, it becomes easier to see how different types of middlemen add much more value to the market than it appears.
The same goes for many companies: they don’t fully recognize the value of their very own products and services.
We see this problem frequently. Companies have trouble articulating the value of their offerings, and even if they can put a number on that value, they tend to underestimate the added value of their surrounding services.
Amazon’s value comes not only from wide selection but fast and reliable shipping. How valuable are those services? It’s estimated that nearly half of US households have an Amazon Prime membership. That is tens of millions of consumers who choose to pay $100 up front for “free” shipping later. Properly monetizing this value has helped Amazon to surge past expectations the past year.
(Test yourself: how many types of middleman roles does Amazon fulfill in different situations? I think a case can be made for all six.)
In analyzing the proper price of a product or service, it is important to consider the entire ecosystem of benefits that accrue to the customer and assign, from the customer’s perspective, a dollar amount to those benefits. Constructing an Exchange Value Model forms the basis for further refinement with more information and adjustment as variables change over time.
Whether it’s shipping times, inventory size, customer service, dependability, access to leading technology, experiential shopping, or any number of other services, companies need to think carefully about what their customers value and how to deliver it to them. The Internet continues to change industries, but such core concepts become only more important for profitable differentiation in today’s economy.