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A PAIR OF SNEAKERS (BASED ON $80 SELLING PRICE)
Assembly labor: $3
Price to retailer: $40 (manufacturer keeps $35 for sales and marketing)
Price to consumer: $80 (retailer keeps $40 for selling the shoes to you)
He uses this example to emphasize the importance of sales to business. Critics of SwooshCo. would use it to show how greedy they were. But the real issue here is how fucking inefficient the supply chain is! Essentially 50% of the money goes to the people who push it under the noses of customers. Another ~37% goes to for marketing and sales (persuading the retailers to stock it). And I suppose that 37% includes a bit of design too. Less than 5% of the price is actually needed for materials, labour and transport. If the actual supply chain ie. getting knowledge of the product and co-ordinating the buying of the product, were more efficient, then it would not consume nine and a half times the resources of the manufacture.
Why is it so inefficient? At worst because the retailers are essentially an oligopoly. Access to customers (retail space) is too limited for there to be a free market. They negotiate from a position of power and try to maximize their take of the EconomicRent. Secondly, competition between retailers pushes them into various pointless ZeroSum competitive games. There's a HandicapPrinciple which forces them to spend on competitive signalling. There's a land-grab where they try to take control of the most important spaces in the potential flow of shoppers.
SwooshCo are, of course, in an even stronger position viz-a-viz the suppliers of the actual work and raw materials. Hence, they also cream-off a large chunk of the rent.
Markets are really networks for the routing and allocating resources. Imagine if you had a network architecture which routed stuff from type-A nodes to type-B nodes, via intermediary node of types C, D and E. Now you discover that switching in the type-E nodes is 50% of the total time it takes to move the packets. On further investigation, it turns out that the bottle-neck is due to all the type-E nodes competing for the right to route the packets, all aiming to maximize the packet-flow through them. The winners of this game have long ago ceased to be the most efficient switches, they are spending so much of their time competing and dreaming up new competitive strategies (just as succesful retailers have long ago ceased to be either the cheapest or the most knowledgable about the products.)
How would you try to fix this architecture? The obvious answer is to try to route round the type-E nodes. To make connections between types A and B (or still including C, D if they are useful.) And to an extent, that's possible. We can start a factory shop, or sell over the internet. But while these solutions work, they aren't wholly able because the retailers really do have good access to the customer. They really are in the places where the customers go. Their brands really are known and trusted. They really are good at winning the customer's attention. The factory outlet isn't in Florida in BuenosAires, if it was, it would have to play the rules of the retailer and become a type-E node.
In our analogy, type-E nodes have certain natural advantages for connecting to type-B nodes which it will be hard for others to overcome.
- TheLongTail is what happens when physical space is no longer a constraint on retailers. (He he! BonusFreakyConnectionPoints for joining TheLongTail with SpaceVsInformationFlows via. SupplyChain )
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