E-commerce Solutions: Vertical Integration
Riding the wave of recent e-commerce solutions such as flash-sale and daily deal sites comes the latest innovation: vertically integrated e-commerce. According to Wikipedia, vertical integration describes a “style of management control…” in which “…companies in a supply chain are united through a common owner.” This style of logistics organization offers companies greater control over each aspect of the retail chain – from fabrication, to assembly, through shipping – and, perhaps most important, pricing. And while vertical integration has long been a successful business tactic in commerce and industry it’s only now making an impact on the way retail is done online.
So why does it work as an e-commerce solution?
1. UNIQUE PRODUCT LINES
The biggest challenge facing any online retailer is competing with the big boys, namely Amazon. Now, with vertical integration e-tailers have the capability to create full product catalogues that are exclusive thereby avoiding any head-to-head competition with others online. In addition, offering a distinctive, unique line of products – in other words defining and filling a niche – allows e-tailers to craft a brand image and capitalize on the customer loyalty that follows.
2. STREAMLINED PROCESSES
The traditional retail supply chain, the horizontal model, involves separate ownership at each stage of the process and, as a rule, as each middleman becomes involved the end price gets raised, resulting in the inflated prices characteristic of brick-and-mortar retail. Under the vertical model each link in the chain is controlled by the same entity, alleviating this price bloat. That’s good news for consumers since it allows retailers to offer high quality products for a fraction of what they’d cost in the store.
OK, but what’s the catch?
Starting a vertically integrated company is extremely difficult, not to mention costly, for multiple reasons. One reason is the significantly increased internal coordination costs associated with the vertical integration model’s structure in which each component is controlled by the same entity; keeping everything in house requires a significant investment in intra-company communication. A second reason is the amplified importance of product design – without a “following” these companies won’t survive – and creating a unique and recognizable brand that consumers buy into is by no means an easy task.
The tip of the iceberg.
For now, vertically integrated companies are just a blip on the e-commerce landscape, but with the ability to offer high end merchandise at prices far lower than traditional vendors we’re sure to see more of these brands emerge, and soon. And as prospective e-tailers see how enthusiastically consumers take to these “niche” brands more and more will choose vertical integration business models for their businesses leading to a growth explosion and most likely a spread to fields beyond fashion. For now, the old the old e-commerce model employed by giant e-tailers like Amazon is king, for now…
