A recurring topic in the circular economy and secondary space is how much buyers distrust sellers. We’ve all had the experience of a lot containing more low grade products than expected. As a result, wholesale buyers assume the worst, and discount the price they are willing to pay. Then, they retriage every product. This ties capital plus costs time and money. The problem compounds when the next person in the value chain repeats that same process again. Multiply this by 3 to 7 intermediaries, and up to half of the value has disappeared. Is there a better way?
Why is the situation so bad?
The secondary market suffers from a fundamental information asymmetry. This is the classic lemon model developed by Akerloff over 50 years ago and which won him the 2001 Nobel prize. Daniel Pink gives a great summary in the 3rd chapter of his excellent “To sell is human” by the way. Sellers know exactly what they sell. Buyers however only have a very limited description of the products they will buy. Often, they do not even have an opportunity (or the time) to inspect products. Rationally, buyers should therefore assume the worst. Then, good sellers start going elsewhere, adverse selection ensues and prices drop. There are a few mechanisms to limit this scenario, but with limited impact. For example:
- The generally accepted level of ‘misgrades’ is 5%. So if I buy 100 products, I will expect that 5 won’t match my criteria. I may also get lucky and find another 5 with a higher grade but people don’t tend to complain as much about these
- Short term, buyers can request an RMA (return) or credit (refund) after the transaction. This isn’t used very often though, since it takes time and requires a lot of documentation. Note: Some buyers will abuse this by purchasing large lots of B products, keep the good products and return anything that’s below grade. It is a profitable strategy while it lasts, but sellers can fight back. At Samsung, I actually blocked a couple of companies from my listings as a result. Here was the logic: my team and our suppliers tried hard to get the best grading quality possible. We targeted (and usually achieved) much less than 5% error rate, and always made our partners whole if we failed – but if I play fair and you don’t, we won’t be doing business very long.
- Longer term, sellers can work to establish a relationship of trust and help prices move back up. This is always a winning strategy anyway, but it takes time and effort. In a short-term-oriented world, this is definitely an uphill battle.
Bottom line: A bad experience can mean significant financial and opportunity costs so people tend to distrust one another. As a result, average wholesale prices remain lower than they should be. Then buyers take these products in-house and retriage them again, which takes time and money. The average product goes through at least 3 intermediaries before it gets resold to an end consumer, often more. Do the math. In the end, up to half of the product value disappears as a result of these inefficiencies.
Will this improve your economics?
Improving a process is nice, but it seems like a lot of work and can be expensive. Is it worth it? The answer is yes, definitely. Here are 4 reasons:
- By improving the quality of your triage, buyers are going to receive fewer bad products. This will reduce your RMAs, which cost labor, time and money. It will also improve your reputation so future sales will net a higher value
- New opportunities will pop up. Word travels fast in our industry. Large corporations do not want their name associated with questionable actors. It also works in reverse. At Samsung, I went out of my way to partner with companies who had a stellar reputation. Others do the same. It is good business. Reputation is more than just having a good triaging process, but every little bit helps
- Don’t force your business partners to expand their range of expertise. I know a few companies who got saddled with a bad lot of product and built a new business around it. It was painful at first, but they came out stronger. This in turn created more competition for the initial seller. Your business partners are smart and hustle, don’t give them even more reason to do so
- Instead, figure out your products. There is a near bottomless appetite for used and refurbished products in the world today. If you have bad products, own the situation and figure out how to monetize – see this article. You may find new business opportunities!
Automation can help but isn’t the silver bullet
What about automating the whole process instead? Wouldn’t that end human errors and speed up the process? Arguably, yes. Some vendors and a couple of large 3PL are beginning to have decent solutions. Right now though, this is more like the fabled “self-driving car”: it’s been “almost ready” for years. There are various reasons for this, including:
- New products come out all the time. Some products – laptops in particular – even have dozens of versions
- Each SKU (e.g., iPhoneX, Samsung S20 FE) has its own set of weaknesses and deficiencies that an automated solution must know to look for
- Equipment is still very expensive and there is no approved standard
Bottom line, an ‘automated’ solution would need frequent updates. When managers think of “automation”, this is not what they want to hear.
I have one other issue with automated solutions: they can become a crutch. Runners today still have the same injury frequency as in the ’70s in spite of much better shoes. Football players still get concussions in spite of their helmets. When technology changes, behavior changes. If I think my automated, expensive system will catch all the problems, do I still try to improve my processes?
Let’s be clear. I am not one to bet against progress. I was a software developer, working on distributed web applications over 20 years ago. Exciting new developments are coming, including true 5G and blockchain applications. I even believe there will be true automated triaging solutions as early as this year or next. Yet we also need to remember this won’t be a silver bullet. And once everyone has access to these, the company with the best operator will still get the best outcome. Technology is a tool, only as good as the people running it. Go ahead, invest in automation – but remember the best team with the right process will still win in the long term.
Sold on the benefits, but unsure how to proceed? Need some hand holding? Feel free to reach out and let’s see how I can help you navigate these key decisions.