Testing the waters
Can distributors embrace digital-age tools like crowdfunding to float new service innovations and get paid for them?
Distributors are innovating, leading the supply chain forward, but face significant headwinds—of their own making! Distributors hope to create game-changing value for customers and earn economic returns for doing so. But there’s a problem. Traditional distributor services are considered “value added to products” and distributor compensation is buried in product costs, invisible to customers. So, as distributors attempt to take new services to market, creating value based on their knowledge and capabilities, independent of products—customers are not ready (or willing) to pay for them. Distributors must win customers over, convince them to buy services, set fair prices for value, and create a market for distributor services—a huge undertaking with no clear way forward. Or maybe there is. A recent Wall Street Journal article offers distributors a way out of this mess; by using crowdfunding as a research tool for new services, distributors may test the viability of innovations and, at the same time, show customers how to pay directly for distributor services.
Finding common ground
When it comes to innovating new products, manufacturers have it easy. Or at least, they have it easier than distributors. Customers expect manufacturers to improve their products continually, and are open to new products that deliver unique benefits and experiences. And in the digital age, manufacturer inventions can leverage the power of data and artificial intelligence to design game-changing products. All that matters is that manufacturers align their new product innovations with actual customer needs and aspirations, differentiated from competitor products and at a price that customers are willing to pay. Success is not a slam dunk, but customers expect innovations, making it possible for intelligent manufacturers to thrive by nurturing effective innovation practices.
None of this is true for distributors. As supply chain intermediaries, distributors are known as a source for manufacturers’ products, not their own. Distributors create value by making products available when and where needed, with a modicum of education, installation, integration, and warranty administration added to help customers find, source, buy, and use products.
But everything is changing in the digital age. Customers are doing work differently, and innovative distributors see their emerging mission as helping customers improve every aspect of business performance, starting with operational efficiencies, expanding to marketing and sales effectiveness, and ultimately, transforming customer business models to compete as digitally connected, data-driven organizations. In times of epic change, extraordinary possibilities are emerging, even for distributors. Or they should be.
Here's the problem: Long-established business practices and value propositions stand in the way of distributor innovations designed to offer new solutions and experiences founded on distributor knowledge and capabilities. Yes, customers demand that distributors improve services over time, but they won’t pay for it. Why would they? They never have. It’s a catch-22. It's like being told work experience is required for a job, but that experience can’t be gained without having the job in the first place. Distributors want to offer game-changing services and be rewarded financially, but there is no precedent because customers don’t pay for the services they receive today. Ugh.
With all this in mind, I was excited to read the recent Wall Street Journal article, “Please Support This Ice Maker: Big Manufacturers Try Crowdfunding to Market-Test Products.” I learned that manufacturers like Whirlpool, Sony, Lenovo, Cannon, and Hasbro use crowdfunding platforms, including Kickstarter, to gauge consumer interest in potential new products. Often, new products are offered at a discounted price. Customer willingness to buy predicts market success, and buyer feedback can help shape advertising messages and packaging.
GE Appliances used crowdfunding to help test and launch Opal, a device that makes chewable ice nuggets, selling hundreds of thousands of units since its 2016 debut. Oculus “raised $2.4 million on Kickstarter to make virtual-reality headsets. In 2014, two years after the campaign began, Facebook bought Oculus for $2 billion.” The article lists many more examples, teaching one crucial lesson—crowdfunding is a powerful tool for gauging customer purchase intent. If enough customers are unwilling to buy a potential new product at a profitable price, the innovation is sent back to the drawing board or killed.
Crowdfunding is an essential tool for manufacturers, but for distribution’s innovators, this passage caught my eye:
Crowdfunding took off in the 1990s as a way for filmmakers, bands and other artists to raise money needed to complete their projects. Donors acted as patrons, their contributions repaid with tickets, CDs or their names in the credits. Entrepreneurs picked up on the technique, offering customers discounted prices on a product if they paid in advance to fund its development and manufacture.
Here's the lesson I see for distributors, or any entrepreneur attempting to offer new supply chain services and get paid for doing so: You are not alone! Just as crowdfunding helped artists directly fund their work, independent of the producers and record labels controlling the creative value chain, distributors might go straight to customers for funding. By doing so, distributors can test their service concepts for the value they create and, simultaneously, teach customers that they can (and should) pay for value that goes beyond the intrinsic value of a manufacturer’s product. Moreover, distributors can build relationships with entrepreneurs, whatever their business model, to understand the stories of success and failure, and to model the values and behaviors of founders and startups.
Crowdfunding for innovations can help distributors break free of incumbent constraints, creating new opportunities and helping them build a supply chain worthy of our times. For more on distributors as supply chain leaders, read my Supply Chain Quarterly article, “Distribution, supply chain innovation, and a brighter future,” here. I argue that collaboration among distribution and supply chain professionals could be the key to creating genuinely transformative changes that will result in more robust supply chains, happier customers, and wealth for all, and introduce three North Stars for building a supply chain that is not just resilient, but also responsive and regenerative. My article offers a bold vision. Crowdfunding might pay for it.
Leaning in
Sensing an opportunity, I asked Matt Hansen, an innovation pro with in-the-trenches experience in distribution and manufacturing, for his objective view of the article. Hansen offered:
I love fast learning, so there are some great takeaways, but one potential pitfall that jumps out is how, and when, this channel is being used in the development cycle. Crowdfunding for business is generally intended for early-stage startups to build minimal capital for new ideas. These entrepreneurs are more likely to be in the early development stages (for example, discovery, minimally viable prototypes, and so forth). Not only does it allow them to receive some funding but it also helps generate some awareness. Major companies, however, may be using this type of channel as more of a late-stage testing ground for product-market fit, which is fine, but I think you need to be careful. It could be giving them false or incomplete feedback if they are not positioning their product appropriately in this space—or worse, they could be missing their target market altogether.
For distributors, there is a strong play here from a learning perspective. However, distributors must find a venue specifically targeting their customer base. For example, trade communities in Facebook Groups, podcast communities, or service-based marketplaces might be reasonable test grounds. Note that we are only talking about one point of validation in this example, which is a willingness to pay, so it is vital that what is being measured is clearly defined and that the overall business case takes into consideration other types of tests that may be a better indication of value, demand or customer experience.
The other thing to remember is that customers are the most significant asset wholesalers have. They already have direct access to a large population of customers to learn from. They can run all sorts of different service tests simply through their own marketing, website, and one-to-one interactions. This is a huge advantage and why many third-party tech companies want to partner with a wholesaler because they typically have a large base of customers who trust them. This is where I spent most of my time trying to validate service ideas by learning from the customers we already support and through multiple feedback loops to help validate the desirability, feasibility, and viability, of a new service.
Your thoughts? Can we start a conversation? Do you have examples of crowdfunding as a tool for supply chain innovation? At distributors or other supply chain companies? In the U.S. and other developed economies or emerging nations? Let’s talk or consider making an introduction. Please share your comments below, or reach out to me at mark.dancer@n4bi.com