What do we call an intermediary who buys products from a distributor or the producer and sells to them to a consumer to make a profit?

Types of Middlemen

Middlemen can be classified into two categories, namely merchants and agents.

1. Merchants

Merchants, such as wholesalers and retailers, buy and re-sell their goods. They take ownership of inventory and bear the expense of storing and distributing the product. They make money by selling the goods at a higher price than its cost to them. The difference is called the “markup.”

Merchant middlemen range from a shopkeeper to a large multinational corporation with international operations. Larger middlemen may focus on a core competency, such as delivery, advertising, warehousing, or a particular market segment.

2. Agents

Agents, such as brokers or real estate agents, specialize in negotiations involved in transactions. They do not take ownership of what they are selling. Instead, they make money by charging a commission or a fee for facilitating a transaction.

For example, brokers act as intermediaries between investors and the securities exchange. They provide trading services, investment advice, and solutions to their clients and charge a brokerage fee in return.

Functions of Middlemen

Middlemen perform the following functions in a marketplace:

1. They provide valuable information and feedback to producers about consumer behavior, changing tastes and fashions, upcoming rival businesses, etc.
2. They enable manufacturers to concentrate on the primary function of production by handling the ancillary functions of warehousing, distribution, advertising, insurance, etc. They promote the goods to the consumers on behalf of the producers.
3. Middlemen like banks and other financial institutions render financial services to manufacturers.
4. They make the goods and services available to consumers at the right place, at the right time, and in the right quantity.
5. Buyers and sellers are often unwilling to assume the market risk for fear of a possible loss. It is the middlemen in the process chain who assume the risks of theft, perishability, and other potential hazards.

Importance of Middlemen

Intermediaries are important players in every market. Both consumers and producers stand to benefit from their services. In addition to constantly matching the supply and demand in the market, middlemen provide valuable feedback to the producers about their market offering. By specializing in functions such as banking, warehousing, transportation, underwriting, etc., they bring the economic benefits of specialization and division of labor to the market.

Buyers gain access to the right quantities of goods and services close to their homes through the intermediary channels. They benefit from other services of middlemen, such as advertising and delivery.

Disadvantages of Middlemen

Despite the many advantages that middlemen can offer, some people believe that middlemen do more harm than good and should be eliminated. As goods exchange hands from one middleman to the other, their prices inflate.

A higher price is charged at each junction to cover the cost of warehousing, insurance, transportation, advertising, etc. When a profit margin for each middleman is also factored in, consumers ultimately must bear the price of having intermediaries in the channel.

Additional Resources

Thank you for reading CFI’s guide to Middleman. To keep advancing your career, the additional CFI resources below will be useful:

A distribution channel is a chain of businesses or intermediaries (such as manufacturers, warehouses, shipping centers, retailers, and the internet) through which goods and services pass until they reach the end consumer. Channels are broken into direct and indirect forms.

A direct distribution channel allows consumers to buy and receive goods directly from the manufacturer. An indirect channel moves products from the manufacturer through various intermediaries for delivery to the consumer.

Both distribution channels have advantages and disadvantages for a business. Those involved in a company's management and corporate governance must determine the better option.

• Direct distribution is a direct-to-consumer approach where the manufacturer controls all aspects of distribution.
• Indirect distribution involves third parties, like warehouses, wholesalers, and retailers.
• Direct distribution gives companies more control over the whole process.
• Indirect distribution may allow companies to focus on their core business while outsourcing distribution to an expert.
• A manufacturer is responsible for different costs, depending on which channel it uses.

A direct distribution channel is organized and managed by a company that sells directly to consumers. In such a case, the company keeps all aspects of delivery in-house (instead of using vendors) and is solely responsible for ensuring that customers receive their purchases successfully.

Direct channels require more work and can be more expensive to set up. In fact, they may require significant capital investment. Warehouses, logistics systems, trucks, and delivery staff must be put into place. However, once that's done, the direct channel is likely to be shorter, less involved and less costly than an indirect channel.

By managing all aspects of the distribution channel, manufacturers retain more control over how goods are delivered. They can cut out inefficiencies, add new services, and set prices.

A direct channel between a company and its customers may be a smart way to build and secure customer relationships.

An indirect distribution channel involves intermediaries that perform a company's distribution functions. Indirect distribution frees the manufacturer from certain startup costs and responsibilities that can cut into the time it needs to spend on running the business.

Plus, with the right vendor relationships, an indirect distribution channel can be much simpler to manage than a direct distribution channel. It can give a company welcome support and distribution expertise that the company may not have.

However, indirect distribution can also add new layers of cost and bureaucracy which can increase costs to the consumer, slow down delivery, and take control out of the manufacturer's hands.

The costs of having vendors involved in an indirect distribution channel may translate to higher product costs for consumers.

As mentioned, a direct distribution channel moves a company's products directly to consumers from the company. An indirect channel outsources the distribution of those products to different intermediaries that are responsible for delivery.

One goal of any company with customers is to deliver products in the most efficient and effective way for the customer and the company. Keep in mind that the distribution channel ideally should add value for customers and support a company's goals for sales.

Amazon uses both distribution channels. It uses a direct distribution channel when it sells products to consumers directly. The indirect channel comes into play when consumers on Amazon's site buy products from independent retailers and those retailers must fulfill deliveries.

Some of the companies that use direct distribution include Amway, Apple, Avon, Bowflex, Charles Schwab, L.L. Bean, Mary Kay, Peloton, and Walmart. To lower costs and gain more exposure, L.L. Bean and Peloton also use indirect distribution.

You'll have to consider various factors to make the choice of direct distribution channel vs. indirect distribution channel. For instance, the costs of each distribution channel, costs you may have to pass on to customers, the channel that might encourage greater sales and repeat sales, the speed at which your products can be delivered, and how fast your competitors make their deliveries. You should also consider the amount of control over customer relationships that you feel you should keep or give up.