Disintermediation removes intermediaries from a supply chain or industry. This term is often used in sectors such as finance, retail and technology. Disintermediation enables producers or manufacturers to sell directly to customers, bypassing traditional distribution channels, such as wholesalers, retailers and brokers. This process can lead to savings for producers and customers by reducing the amount that businesses typically pay to intermediaries.

In the finance industry, disintermediation could refer to investors directly investing in securities without using banks or brokerage firms. In retail, disintermediation could refer to manufacturers selling their products directly to customers through online platforms rather than through physical shops or third-party vendors.

Technology has facilitated disintermediation by making it easier for producers and customers to connect and do business directly. As a result, the affected industries have implemented major changes in how they market, sell and distribute their products, and total direct-to-consumer (D2C) e-commerce sales in the United States are expected to reach US$213 billion in 2024.

Below, we'll explain the benefits, drawbacks and implications of disintermediation and related emerging trends.

What's in this article?

• The business impact of disintermediation
  
• The business benefits of disintermediation
  
• How to deal with common disintermediation challenges
  
• Emerging trends in direct customer engagement
  

The business impact of disintermediation

The proliferation of e-commerce platforms, social media and digital marketing tools has made it easier and more cost effective for businesses to reach customers directly. Customer expectations have evolved in response: many customers often seek direct relationships with brands because they value the authenticity, transparency and personalised experiences that these interactions provide.

Businesses that engage in disintermediation often overhaul the way they market and sell their products or services – and, sometimes, their entire business operations. The impact of disintermediation varies across industries and market segments, and some businesses will see more benefits than others. Although businesses that offer digital services or niche consumer goods might see their business expand with disintermediation, other business types might benefit more from a hybrid model that maintains some intermediary relationships alongside direct channels.

Disintermediation affects traditional business models in these ways:

• Sales process: Traditional models often rely on a series of distributors, wholesalers and retailers to move products from manufacturers to customers. Disintermediation shortens this chain.

• Value proposition: Businesses must redefine their value propositions to differentiate themselves in a market without intermediaries, shifting their focus to direct relationships, personalised services and enhanced customer experiences.

• Pricing: With fewer intermediaries, businesses can offer more competitive pricing, which puts pressure on competitors to adjust their pricing strategies. Disintermediation also makes it easier for customers to compare prices directly from producers, leading to greater pricing transparency from brands.

• Customer communication: Businesses gain direct access to their customers, allowing them to create more targeted and personalised marketing strategies but requiring up-front investment in digital marketing capabilities.

• Customer data: Direct interactions provide businesses with valuable customer data, which they can use for product development and to improve customer service. However, businesses must also take on new data protection and storage responsibilities.

• Logistics: Businesses that bypass intermediaries must develop or outsource their logistics and fulfilment capabilities. This can be a major operational shift for businesses that have relied on distributors for these functions.

• Global reach: Disintermediation can make it easier for businesses to reach global markets without a local physical presence or local intermediaries. For businesses, this can mean new responsibilities regarding international shipping, customs and local market preferences.

• Barrier removal: Freed from the need to establish intermediary relationships, newcomers can enter markets more easily, intensifying competition. Increased competition can drive innovation in products, services and business models, and create a further need for continuous adaptation to remain relevant.

Although businesses that engage in disintermediation must adjust their business models accordingly, the greatest impact is on the intermediaries. Disintermediation can force retailers, wholesalers and brokers to find new ways to add value or to reinvent their business models. As disintermediation grows in popularity, some intermediaries have found new niche roles in which they can add value, such as specialised knowledge, customised services or logistical capabilities that direct models cannot easily replicate.

The business benefits of disintermediation

Disintermediation can have these benefits for business costs, processes and relationships:

• Costs: By removing intermediaries, businesses can reduce the costs associated with distribution channels, such as commission, fees and markup. This can lead to lower prices for customers and higher margins for producers.

• Efficiency: Direct interaction with customers can reduce the time it takes for products to move from production to the customer, creating a competitive advantage.

• Customer relationships: Disintermediation enables businesses to build direct relationships with their customers and receive immediate feedback, gaining deeper insights into preferences, behaviours and needs. This feedback loop can drive improvements in product development, customer service and marketing strategies.

• Control: Without intermediaries, businesses maintain full control over their brand's image, customer interactions and the overall buying experience. This can enhance brand loyalty and ensure a consistent message and quality across all touchpoints.

• Agility: Without intermediaries, businesses can be more responsive to market changes and customer trends. They can quickly adjust their strategies, launch products or enter markets without having to coordinate with multiple parties.

• Data ownership and utilisation: Owning the customer relationship also means owning the customer data. This access can facilitate analytics, personalisation and targeted marketing, driving engagement and sales.

How to deal with common disintermediation challenges

Disintermediation presents benefits such as cost reduction and direct customer relationships, but it also creates challenges that require planning and investment in technology and infrastructure to overcome.

Challenge 1: Creating direct sales channels

Building a D2C channel often requires up-front investment in technology, logistics, marketing and customer support systems. The cost and complexity of establishing these capabilities can be prohibitive for some businesses.

Solutions

• E-commerce platforms: Develop or invest in user-friendly e-commerce platforms that can handle increased traffic and transactions.

• Marketplaces: Consider using existing online marketplaces to gain visibility and access to a broader customer base.

Challenge 2: Logistics and distribution

Handling distribution and fulfilment in-house or through new direct channels can introduce complications, especially for businesses that are unaccustomed to this work. This can include challenges related to inventory management, shipping, returns and international logistics.

Solutions

• Logistics providers: Collaborate with third-party logistics providers who have the expertise and infrastructure to manage complex distribution needs.

• Logistics technology: Implement advanced logistics technology for inventory management, order fulfilment and delivery tracking.

Challenge 3: Marketing and customer acquisition costs

Although disintermediation can reduce certain costs, it can also lead to increased customer acquisition costs. Reaching and converting customers directly, especially in a crowded digital space, often requires substantial marketing and advertising expenditure.

Solutions

• Content marketing: Develop engaging content that resonates with your target audience, using SEO and social media to enhance visibility and attract organic traffic.

• Data analytics: Boost conversion rates and reduce acquisition costs by using customer data analytics to tailor marketing efforts and target potential customers.

Challenge 4: Customer service and support

For businesses, taking on the roles traditionally filled by intermediaries means assuming responsibilities for customer service. This can be a substantial operational and financial burden, particularly for small to medium enterprises without the existing infrastructure.

Solutions

• CRM systems: Invest in customer relationship management (CRM) systems to manage customer interactions, support and feedback.

• Customer service training: Train and equip customer service teams thoroughly to handle enquiries, provide information and resolve issues promptly.

Challenge 5: Operational complexity

Businesses that move towards disintermediation risk overextending their capabilities, which can lead to compromises in product quality, customer service or operational efficiency. Balancing operations without diluting core competencies can be a major challenge.

Solutions

• Automation: Use automation to simplify operations, including order processing and customer service, reducing the manual workload and minimising errors.

• Expertise: Consider hiring experts or training staff in areas such as digital marketing, logistics and data analysis.

Challenge 6: Competing with established players

Intermediaries can provide valuable market exposure by reaching customers through established channels and networks that a business might struggle to access on its own. Losing this visibility can affect brand awareness and sales, particularly for new or niche products.

Solutions

• Differentiation: Focus on what makes your products or services unique, whether it's superior quality or stronger customer service.

• Brand identity: Develop a strong brand identity. Engage with customers through storytelling and community building.

Emerging trends in direct customer engagement

Evolving digital technology, customer expectations and marketing strategies have shaped new tactics and methods of direct customer engagement. Below are some popular emerging business practices for connecting with customers.

• Advanced data analytics and AI: Businesses are using sophisticated data analytics and artificial intelligence (AI) to personalise communications and individual offers. This can range from personalised email marketing campaigns to dynamic website content tailored to the preferences and behaviours of each visitor.

• Integration across channels: Customers have come to expect a unified brand experience across all touchpoints, whether online, in app or in store. Businesses are integrating their marketing, sales and customer service efforts across channels to deliver on this expectation.

• Augmented reality (AR) and virtual reality (VR): Businesses are creating immersive AR and VR shopping experiences, including virtual try-ons for clothing and accessories and 3D product visualisations in customers' homes, boosting engagement and reducing the barrier to purchase.

• D2C expansion: Brands are exploring new D2C channels, such as subscription services, branded apps and social commerce, to sell directly to their customers and maintain closer relationships.

• Influencer collaborations: Brands are increasingly partnering with influencers for authentic endorsements, using their followers for direct customer engagement.

• Social commerce: Businesses are taking advantage of Instagram, Facebook and TikTok's growing usage as shopping channels, enabling users to discover and purchase products without leaving the app.

• Value-driven shopping: Customers have indicated a preference for brands that share their values of social responsibility and environmental sustainability. Businesses have started communicating their values and practices directly to customers to influence purchasing decisions.

• Chatbots and AI-driven support: Businesses are increasingly providing immediate, 24/7 customer service through AI-driven chatbots and virtual assistants, and customers have begun to expect instant responses to their enquiries and support issues.

• Personalised customer journeys: Businesses are offering personalised customer service experiences, using data analytics to anticipate needs and solve problems proactively.

• Brand storytelling: Businesses are crafting compelling narratives about their brands, products and values to build emotional connections and brand loyalty.

• Educational content: Businesses are sharing educational and informative content, such as how-to guides, webinars and tutorials to help customers make informed decisions.

• Transparent data practices: Brands are emphasising transparent data practices and providing customers with control over their personal information amid growing concerns about data privacy.

• Quick testing and improvements: Brands are using technology to test, learn and deploy engagement strategies quickly, adopting a more agile approach to marketing and customer engagement.