John owns a chair factory. He makes beautiful chairs. He works continuously on innovating its design. The basic version of his chair costs $50 to manufacture. If you want to buy it, you would have to pay around $400.
Why is that the case?
This is because his chairs move around a lot of people before it reaches you. Each person in the chain takes a cut. This would add to its cost.
Why does it move around people? Can’t John directly sell the chair to his customers?
Easier said than done! Managing manufacturing and sales is a headache for John. Since he only wants to focus on product quality he has outsourced the sales to a distributor. John has to ship his chairs to a distributor. The shipping cost gets added to the chair’s price.
The distributor needs to work out a distributing strategy. They would analyse and find out which wholesalers would give a good price for John’s chairs. Distributor needs to be compensated for his work. This would further add to the chairs price. Yes, the cost of shipping chairs to the wholesaler needs to be considered.
Even a wholesaler wouldn’t sell the chair to the consumer directly. They need to find out which retail shops (like Walmart, Target, etc) are appropriate for placing John’s chairs. They also should be compensated for their work. Again the shipping costs of sending the chairs to the retailer should be considered. The retailer will sell the product to the consumer. He needs to be compensated for selling the product.
Let us list the costs
- Manufacturing cost - $50
- John’s shipping cost to the distributor - $20
2. Distributor’s compensation - $100
3. Distributor’s shipping cost to the wholesaler - $20
4. Wholesaler’s compensation - $100
5. Wholesaler’s shipping cost to the retailer - $20
6. Retailer’s compensation - $40
Total - $350
How should the costs be?
- Manufacturing cost — $50
- John’s Profit - $10
- Shipping cost to the customer - $20
Total - $80
That’s a big difference around 4x higher. Around $270 is eaten by the middleman. In some cases, the difference is 10x higher.
How do we bring down the cost?
For you to buy the chair at $80, we need to connect you with John directly. This alone won’t solve the issue. John would need a minimum number of orders. So that he can produce in bulk and be profitable. In other words, we need a platform that can connect buyers who are interested in the same product with a manufacturer. If the minimum number of buyers are reached, the platform would alert the manufacturer. The manufacturer would then build and ship products to the customers.
There is another problem. This would require the buyer and the manufacturer to trust the platform. This infrastructure cost of the platform increases product’s price. There are chances of fraud. The manufacturer can take the payment and not deliver or deliver poor products. We need a platform which is self-maintained so that it doesn’t add to the costs. The important thing is we need to solve the problem of trust.
How do we solve the problem of trust?
Have we solved this problem elsewhere? In this situation, we need to take care of the listed things.
- Protect buyer’s money (only if the product is delivered the money should be released to John).
- Give assurance to John (Once minimum amount of buyers are reached, they can’t cancel the order)
These are condition based triggers. Consider the last time you purchased an ebook from Amazon. Amazon will only deliver it once the payment is confirmed.
Computer programs execute such instructions consistently. It did when you clicked on this article, scrolled down, etc. In order to help John and you, we need to convert the agreements of the contract into code.
Pseudo code of the smart contract between buyers and John
If the customer placed an order then
Lock $80 on customer's account
If minimum amount of buyers reached and date is 30th June 2018 then
Alert John to start manufacturing chairs
Release customer's money
If the chair is delivered to the customer then
Transfer $80 from customer's account to John's account
But where do we deploy this code? If we follow the traditional method, we have to deploy this code on one centralised computer. This can’t be trusted because the person who owns the computer can alter it. Instead, we need to deploy this code on computers or phones of buyers and manufacturers. We can also deploy this code on a public blockchain like Ethereum. Basically, it would be on multiple computers so that one person can’t monopolise (Decentralisation). The important benefit being the platform is self-maintained and the infrastructure cost is drastically reduced. This is what blockchain is about.
Now, when the customer places an order, the order amount would be locked. He won’t be charged. The manufacturer can set a deadline to reach a minimum number of buyers. If the buyers are not reached until that time, then the money is released back. Once the buyers are reached, John can start manufacturing the chairs. Once he delivers the chair to the customer, the code will execute and the locked funds from customer’s account is sent to John.
John is happy because he has an assurance that he would be paid if he does a good job. The customer is happy because they can be assured they are only charged once they receive the product. Basically, both the parties don’t have to trust each other.
Cartel is building something similar. Take a look at this video.
Cartel connects buyers around the world with the manufacturer. Collectively pooling their individual orders into one large wholesale quantity price. They eliminate the middleman discussed earlier in this story like Distributor, Wholesaler, Retailer, etc. They even give protection to buyers using smart contracts. The cost they add to the transaction is as less as 3%. A range rover which costs around $150,000 would only cost around $80,000 on Cartel. This would disrupt the retail industry by reducing the product prices drastically. They are now open for an early bird ICO registration.
Claps Please 👏 , Thank You 😊. Please note this post was sponsored by an affiliate of Cartel. Follow us, HackerNoon and me (Febin John James) for more stories. I would like to introduce you to two amazing services. Earn pays you bitcoin for reading emails. Mentorbox summarises popular books and provides actionable insights.