What are the 4 types of middlemen in selling your product?

What Is Middleman?

The term middleman is an informal word for an intermediary in a transaction or process chain.

Key Takeaways

• A middleman is a broker, go-between, or intermediary to a process or transaction.
• An intermediary will earn a fee or commission in return for services rendered in matching buyers and sellers.
• Many industries and business sectors utilize middlemen, from trade and commerce to wholesalers to stockbrokers.

Understanding Middleman

A middleman, or intermediary, will facilitate interaction between parties, typically for a commission or fee. Some critics say that businesses and customers should try to "cut out the middleman" by dealing directly with each other, avoiding any increased costs or commissions.

Intermediaries also make money by selling the product for more than its purchase price. This difference is called the "markup" or cost the buyer ends up paying. Intermediaries can be small companies or large corporations with an international presence.

In the supply chain, an intermediary may represent a distributor who purchases goods from the manufacturer and sells them to a retailer, often at an increased price. Salespeople are often considered middle-people, such as real estate agents who match homebuyers with sellers.

Certain industries, either by policy, infrastructure, or mandate, include an intermediate layer of business. For example, automobile makers typically do not sell vehicles directly to consumers. Instead, their products are sold through auto dealers, which may include various accessories, options, and upgrades to upsell cars at a higher premium. Auto dealerships try to sell pricier versions of cars in order to turn a greater profit for themselves, as a large portion of the sales revenue goes back to the manufacturer.

The same is true for electronics, appliances, and other retail products. Sellers of electronics and appliances may attempt to steer customers to higher-end products in order to secure a greater profit margin than low-priced items. Such intermediaries may be constrained by the manufacturer in the ways they can sell a product, including how it is marketed or if the product can be packaged with other items to create special offers.

The rise of e-commerce has changed the dynamics of where an intermediary fits in some types of industries, and legislation continues to evolve in response.

Middleman Example

In certain states, the sale of alcoholic beverages may be structured to require retailers, bars, and restaurants to purchase products through a liquor distributor. Under such policies, a winery cannot sell its products directly to retailers, thus making a middleman essential. This can limit the availability of their products as they are beholden to the intermediate distributors who control the channels they can pass their wine through.

Such constraints may also extend to the sale and shipment of their products from one state to another. Some states allow the sale and shipment of products such as wine directly to the consumer through online purchases, thus eliminating the layers of middlemen while other states prohibit this practice. This has proven to be a contentious challenge to the distribution segment of the industry, which relied on wine and spirits makers being required to ship their wares through them.

Unless the company that makes a product sells it directly to the customer, they will need middlemen to get the product from the manufacturer to the customer's hands. In business, these middlemen are called marketing intermediaries, and they are an integral part of the supply chain. Functions of intermediaries include providing logistical support for manufacturers that can't afford to outsource those roles, or simply do not have the infrastructure in place to perform them efficiently.

Whether a company should use a marketing intermediary or not depends on the scale of its operations and the cost factor of performing those tasks in-house. There are four types of intermediaries: wholesalers, distributors, retailers and brokers or agents.

The Wholesaler's Role

Wholesalers are independent businesses that buy goods in bulk from manufacturers and then resell them to retailers and other businesses. These types of intermediaries do not sell to the customer; they instead focus on satisfying the demands of retailers and other businesses where the customer will shop.

Retailers use wholesalers for easy access to products at a relatively low price. They also benefit from the time saved by going through wholesalers instead of directly through manufacturers – where the time it takes to receive a good can significantly increase. Retailers that use wholesalers typically do not purchase their own products; they are instead buying other brands' products to sell.

Distributing for Manufacturers

Distributors work much like wholesalers in the sense that they play middleman between manufacturers and retailers, but there are two fundamental differences between them as these examples of intermediaries illustrate: distributors provide more in-depth services and do not purchase the products from manufacturers. Whereas a wholesaler's key customer is retailers, distributors essentially work for manufacturers.

Distributors are actively involved in promoting a manufacturer's products, as well as selling them to retailers and wholesalers. Their job is more than just getting products from manufacturer to retailer; they actively search for market opportunities and ways to expand the brands of the products they sell.

Traditional and E-Commerce Retailers

Retailers interact directly with the customer and are the most common example of a marketing intermediary. Examples can include convenience stores, shopping malls, grocery stores and e-commerce stores online. These types of intermediaries do business with wholesalers and distributors in order to receive their inventory, which usually consists of products from multiple manufacturers.

The customers have the benefit of being able to compare different brands of the same product, and the manufacturer benefits by having a location that gets their products directly into the customer's hands.

With the rise of e-commerce, some marketing intermediaries are starting to become multifaceted. While it has become easier than ever for small businesses to sell products online, it has also given many companies a platform to work as both manufacturer and retailer. Take Amazon, for example. Although the initial products they sold were all made by different manufacturers, they have begun to produce their own products to sell on their platform.

Brokers and Agents

Brokers and agents sell products and services, but do not make any purchases; they instead connect a seller with a buyer and take a commission or percentage of the sale. Common examples are stockbrokers and real estate agents. Neither one of those parties owns the products they sell, they just actively work to find a fit for each client. Brokers typically work as marketing intermediaries on a one-time or short-term basis, while agents tend to have longer-term relationships with the parties involved.

References

Writer Bio

Stefon Walters earned a bachelor's degree in Economics from the University of North Carolina at Chapel Hill. After college, he went on to work sales and finance roles for a Fortune 200 company before founding two tech companies. He is also the author of Finessin' Finances, a full-length book on personal finances.

Image Credit

Jupiterimages/Photos.com/Getty Images

What are the 4 types of intermediaries?

What are the types of middlemen?

What are the 4 product distribution channels?

What are the 4 types of distribution?