The End of Customer Power

Business is a power struggle. Say I've got $100 in discretionary spending money. The first struggle is about what: I can spend that money on food, wine, clothes, books, theatre tickets, whatever. The next struggle is about which: peas or leeks? Bordeaux or Malbec? Levis or Diesel? The last struggle, usually invisible to me, is about who: who gets how much of the $100 when it's divvied up, for example among the retailer, distributor, and manufacturer, or between worker, manager, and investor?

For the last quarter century, the last struggle has generally favored buyers over sellers, so that power has mostly flowed downstream-away from the producer, toward the consumer. But that trend is about to go the other way; indeed you can see the early signs of a shift. And that shift is going to make a tremendous difference to strategists.

It's not hard to track the downstream flow of economic power. Start way upstream, with commodity producers--miners and farmers. The famous Paul Ehrlich - Julian Simon wager is just one of many examples of the fact that, over the long term, inflation-adjusted commodity prices mostly move down, though they jump around in response to wars or other events. The farmer's share of the food dollar is between 12 and 16 cents, depending on how you slice it--less than half of what it was 50 years ago. In the last quarter century, big manufacturers have also lost power to downstream retailers, as mom-and-pop stores have given way to chains with the might to demand concessions even from brand powerhouses. But the retailers themselves have ceded power to consumers. Calculations made five years ago by strategy professor Pankaj Ghemawat show that consumers pocketed 4 to 7 times more benefit from Wal-Mart's pricing power than the company itself did.

There are many reasons for this downstream flow of control, but the biggest is information. Knowledge is power, and in the last half century consumers have steadily learned more. In its first 15 years, the commercial Internet has fundamentally increased buyers' knowledge and undercut sellers' ability (as a Fortune 500 CEO once put it to me) "to arbitrage the ignorance of customers." Other factors as different as the Interstate Highway System, the rise of the category-killer retailer, and consumer-protection laws have made comparison shopping easier, too. (It's no wonder that bankers, whose reliance on fee income has doubled in the last 30 years so that fees now produce half the operating income of commercial banks--and are likely to go higher--hate the Consumer Financial Protection Bureau and its proposed leader Elizabeth Warren.)

But sellers are starting to regain ground in the information arms race. Some aspects of this are well known. You leave tracks all over the net. Computing is so fast and cheap that every step you take, someone's watching you, keeping tabs of your interests and your buying behavior and drawing inferences about you from the behavior of other people. When it comes to the ads that show up in the margins of Google and Facebook, there are no accidents.

But players upstream are amassing information in less visible ways. Take marketing. Back when, only big companies could afford advertising on prime-time TV--one reason economies of scale used to favor big companies in consumer goods industries: the manufacturer owned the brand, but the store owned the customer. Now the manufacturer can own both: "private-label media," like Johnson & Johnson's babycenter.com website, give manufacturers direct access to their customers and data beyond the dreams of avarice. More and more, sellers are replacing media advertising with shopper-marketing; in these campaigns, the cash register may ring in the store, but the manufacturer is enriching his knowledge bank. Authors--poor, benighted authors--can know and communicate with readers by name, for the first time since the invention of moveable type; some of them are exploiting their new information arsenal to chuck their publishers and most retailers, and self-publish via Amazon. Even the iTunes Store has been forced to cede some control to upstream content producers.

It's ironic that, at a time when demand is flat to flaccid in developed economies, suppliers seem to have the whip hand. Indeed, the continuing recession is disguising the degree to which the underlying fundamentals have changed. To be sure, consumers aren't powerless. Shopping apps allow you to search for bargains as you walk down the street, and I don't know any sellers who are gloating these days (bar those who sell commodities that feed the voracious maws of Chinese growth and global energy demand). But there's enough evidence that it is time to call a turn in the trend.

After half a century in which customer power grew stronger, has the tide turned in favor of sellers? And if it has, what should you do to go with the flow?

Illustration courtesy flickr user Mike McCaffrey