Manufacturers' Dilemma:
To Sell or Not to Sell Directly

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• If you don't sell our products directly over the Internet, people will go to your competitors who do.
• If you do sell our products directly, your distributors and dealers will desert you and only carry products from manufacturers who don't compete with them.

Nearly every manufacturer who can ship products which can be assembled easily by end users faces this temptation, and it won't go away. (This is part of the trend towards disintermediation that Lester Wunderman, the "father of direct marketing," talks about in a related article.)

Manufacturers are dealing with this issue in a variety of ways:

1. Display product information without prices and do not sell products directly over the Web. Rather help customers find a dealer's location nearby.
2. Sell products directly over the Web but not at any discount. Point customers to the nearest dealer.
3. Sell products directly over the Web and award commissions to salespeople or resellers for products sold in their territories.
4. Sell products directly over the Web for what the market will bear.

Though you'll need to make your decision based on the unique factors of your own particular business, here are some of the pros and cons of various approaches.

Product Information Only without Prices or Direct Sales

Less than 1% of retail sales presently occur over the Internet. Would you be willing to endanger relationships with your distributors and dealers for that volume? For many manufacturers, the answer is a firm "no, thank you." The risk is just too great. Many companies offer only product information on their website, since they already have an extensive distribution system set up both in their own country and abroad.

Fear plays a big factor, too. Many corporate executives of established companies are not computer-literate. They are distrustful and fearful of a computer solution, since they've become successful using traditional sales methods. In addition, they may have had complaints from their dealers about other dealers who are posting prices on the Web, lowering the street price, and undercutting the competition. To protect their dealers from price gouging they may prohibit all dealers from posting prices on the Web.

An example is Little Giant Ladders, which manufactures adjustable and configurable ladders. While their website (http://www.ladders.com) offers product information, they don't sell directly, but refer visitors to dealers throughout the US. Nor do they encourage dealers to give prices on the Web, though that hasn't stopped some Internet entrepreneurs. I found prices for a ladder which retails for $415 at $395 and $338 on the Web. However, Web dealers with the lowest prices (around $269 for that product) are actively discouraged from displaying their prices on the Web; customers have to call or e-mail an autoresponder to learn the lowest prices.

Sell Directly without a Discount

A second option is to sell products directly over the Web, but without any discount. This is an attractive option for many manufacturers. The Wizard's Cauldron (http://www.wizardscauldron.com), which manufactures sauces, condiments, and vinaigrettes, sells mainly to a scattering of health food stores across the US. But, in order to increase awareness of their product over a wider audience, they decided to sell directly on the Web, charging shipping to Internet customers. This keeps them from competing with their stores for price, but still gets the product out there. This approach is also used by many publishers. Both Simon & Schuster and John Wiley & Sons, for example, offer books for sale on their site, but at retail prices plus shipping and handling, offering competition to neither traditional full price retailers or online discount retailers.

Sell Directly while Paying Commissions

IBM is experimenting with a number of forms of direct sales. Currently, they pay their salesforce for all sales closed in their territories, whether or not the sale was made over the Web. They're also developing a TeamPlayer program where resellers register their customers with IBM who markets to them and then pays the resellers a fee whenever their customers make an online purchase. This form of direct sales is expensive, and may only be useful for high ticket/high mark-up items, but it does make for happy salespeople and resellers.

Sell Directly at Market Prices

A final alternative is to sell at discount in direct competition with distributors and dealers. While I haven't found any examples of this, I'm sure that many marketing vice presidents are sorely tempted to give it a try. No matter how attractive the margins, however, this option is currently attractive only to very small manufacturers with little or no distribution chain to risk.

But times are changing. In a recent article, Robert Kuttner cites mid-century economist Joseph Schumpeter to the effect that "every grocer, every filling station, every manufacturer of gloves or handsaws" creates a miniature monopoly which depends upon imperfect consumer information, limited time for comparison shopping, and a lot of brand loyalty (Robert Kuttner, "The Net: A Market Too Perfect for Profits," Business Week, May 11, 1998, p. 20). The vast reach of Internet is rapidly eroding this miniature monopoly and forcing products to find their true market value.

For now, manufacturers must balance the conflicting pressures of price competition, need for product awareness and accessibility, and maintenance of a traditional distribution network for the vast bulk of their sales. Many will choose to sell directly over the Web -- very carefully.