Shopatron redefines Vendor Relationships

Ed Stevens of Shopatron is re-intermediating retailers into the online sales process.

Re-intermediation? It seems to go against the grain of what the Internet means to markets. Distributors. Retailers. Middlemen. All these folks were supposed to be disintermediated, returning the customer and manufacturer to a mythical original state of grace: direct sales unfettered by intermediaries.

But for many—perhaps most—small to medium manufacturers, the retail distribution channel is the lifeblood of their business. Without access to shelves and salespeople, most manufacturers simply can’t cost-effectively reach as many customers. Retailers fill this niche, providing real value to both customers and the manufacturers. Everyone wins. Although the manufacturer gives up some profit to the retailer, they gain access to customers, a sales force in the real-world marketplace, and front-line customer support near to their customers. The increases in scale and market presence more than offset the per-unit loss of margin.

The Internet seemed to change all that. Dell, Amazon, and eBay don’t need any retailers. Hmm… actually, Amazon is a retailer and eBay isn’t a manufacturer either. And Dell was already a poster-child of the direct-to-customer, build-to-order paradigm well before the Internet. In fact, I believe that far more manufacturers have avoided or shut down their direct online sales efforts because of issues with channel conflict, than those who have succeeded.

I distinctly remember when Levi’s shut down their online store. It was horrible. I know exactly what type of Levi’s I want to buy. Why go to a store when I can just select the size & style online and have it shipped direct? But apparently Levi’s distribution channel proved more valuable and more effective than the online store. (Although today we find a store on Levi’s website, so they’ve overcome that blip.)
The consensus for a long time has been that these examples of yielding to channel conflict concerns were just momentary aberrations in an otherwise inexorable march to completely disintermediated markets.

Shopatron proves this perspective was wrong. Call it being blinded by the sheen from our rose colored glasses. The evangelist’s dilemma. The hubris of the “Long Boom.” Shopatron not only provides a solution to channel conflict, they do it while creating new value across the entire distribution chain.

Their system is remarkably simple. They host an online store for a manufacturer, such as Callaway or Brooks. The store is branded 100% as the manufacturer’s and visitors to the manufacturer’s website are seemlessly directed to the store as a way to purchase products. Customer orders are placed on a retailers-only bulletin board, with a fixed price for retailers to “bid” on the right to fulfill that order. Retailers who bid essentially say “Yes, I have that product in inventory and I’ll ship it at that fixed price.”

Once each day, Shopatron resolves all of these bids, sending them to the nearest retailer. That retailer boxes up the product and send it to the customer. The customer gets the product with local support, quickly, and with minimal shipping costs. The retailer gets a new customer and the profit from the sale.

In cases where no retailers want the bid, the manufacturer ships the product themselves. And because nobody wanted it, there is no channel conflict, just higher margins.

It’s incredibly elegant. In particular, it uses human involvement in the retailer selection/availability check to avoid the apparent need to have a real-time feed of all retailers’ inventories. The truth is that most retailers have poor inventory management systems, especially smaller and more specialized stores. But if you tell a retailer that you’ll be posting actual sales orders every day, with no price pressure, and all they have to do is accept the responsibility for delivery, you’ll find a lot of retailers are interested. All they need is a phone and Internet access, and suddenly they get more orders and new customers. It’s a no brainer.

It also turns out that it is equally powerful for the manufacturer. The types of people who buy from a manufacturer’s website are essentially convenience-driven shoppers. Those who are willing to put up with the hassle can always enter the product name or number into Froogle, BizRate, or Shopzilla to find the lowest price. But that’s a hassle. If you trust the brand, why not buy it directly from them? That means higher margin and lower returns. Also, the way Shopatron works, retailers have visibility into all manufacturers in the system. So, a new manufacturer joining the service today is immediately exposed to a ready and willing army of retailers. It’s a great way to acquire new distribution. In addition, the system itself increases manufacturers’ sales to the retailers in two ways. First, because the retailers must have the inventory in stock in order to bid, retailers carry more inventory. More inventory means they are able to sell more products, rather than losing sales when the warehouse runs empty.

Second, retailers get to see what’s hot in the marketplace on a daily basis. Rather than working in relative isolation, even small boutiques now have access to effectively real-time market trends. So when a new product starts to pick up sales, retailers quickly find out and can move to stock up and provide the hottest movers to their own customers. Again, more orders on what might otherwise be an inventory constrained product.

Finally, customers win too. They now have a way to buy on a brand basis, “direct” from the manufacturer, where before they would often be forced to find a reputable retailer on their own. And yes, the Shopatron system assure reputable retailers, giving manufacturers explicit control over which retailers do—or do not—meet their standards. Customers also have an introduction to their local retailer, who can then help with support issues or even provide additional, related services. They don’t need to interact with the retailer, but they can. As one jeweler likes to advertise, “Now you have a friend in the diamond business.” Now the customer has a local retailer who can help.

One of the more interesting ways that retailer can help is local pickup. Order from the manufacturer, pick it up locally. Cut out the shipping fees and perhaps save some time. Ed reports that according to Forrester Research, 31% of online sales are picked up locally. Wow. That’s huge. Shopatron offers a way for manufacturers to empower that directly, all with volunteer retailers and without real-time data feeds.

What strikes me particularly about Shopatron’s approach is how uniquely it re-frames the issues of Vendor Relationship Management. VRM is the reciprocal of CRM, Customer Relationship Management. It puts the customer in control of the Vendors, empowering people with information technology in the inverse of how CRM helps companies maximize their customer relationships.

The initial focus in VRM has been in two main areas. The first area is open marketspace vendor selection systems. Users specify what they want, using a personal digital RFP, and vendors bid on it in an open, secure, distributed marketspace.

The second area is the dissolution of vendor-centric data silos that prevent user control and choice. Because only NetFlix or Amazon have my transaction history, only they can offer customized recommendations. Because each doctor stores medical information independently, providers can’t offer customized services that leverage a patient’s entire medical situation… for example, by offering a single daily blister pack that combines all required medicines in one convenient place. VRM would open those data silos and give individuals a way to maintain their own silo for use and application anywhere.

Shopatron takes this in a new direction, revitalizing and creating new value in the retailer relationship. It’s a sort of three-way love triangle between the customer, the retailer, and the manufacturer. And unlike soap opera tragedies, this love affair works. Customers get simpler, ready access to manufacturer’s goods, retailers get more sales and customers, and manufacturers increase their sales and brand presence in both the retail and online worlds. It is an entirely new way to think about Vendor Relationship Management, particularly what relationship means in this context.

So, how are they doing? Amazingly well. In December 2006, they closed their 1 millionth order and as of this week in January 2007, they have 287 manufacturers and over 5,000 retailers. All without venture capital funding. Just a great idea, briliant execution, and tenacious, hard work.

Ed outlined his company’s approach this week at the Central Coast MIT Enterprise Forum. Always a great event. Props and thanks go out to them for introducing me to an amazing new company and an innovative leader in online vendor relationship management.

Thanks also to Ed for a great presentation and a great innovation. Best of luck with your ongoing success.