Middlemen are independent businesses that act as a bridge or connection between producers and consumers, other intermediaries, or industrial users.
They are also commonly known as intermediaries. The ‘producers’ here means primary and secondary producers. Examples of middlemen include wholesalers, retailers, distributors, agents, brokers, and even online marketplaces.
The elimination of middlemen involves reducing or removing the role of intermediaries in the supply chain. Advances in technology and evolving business models have led to the argument that middlemen may no longer be essential or efficient.
Direct-to-consumer strategies, e-commerce platforms, and digital marketing enable producers to connect directly with consumers, bypassing traditional intermediaries. This approach allows producers to gain greater control over pricing, branding, and customer relationships while potentially lowering costs.
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Reasons for Middlemen Elimanation
The following are the reasons for middlemen elimination;
1. Cost reduction
By cutting out middlemen, businesses can avoid paying commissions or markups, which can reduce the overall cost of goods. This can lead to lower prices for consumers or higher profit margins for the company.
2. Direct relationship with customers
Eliminating middlemen allows businesses to engage directly with their customers, leading to better customer service, increased loyalty, and a more personalized experience.
3. Better control over distribution
When businesses remove middlemen, they have more control over how their products are marketed, distributed, and sold. This can help maintain brand integrity and ensure products reach customers in the desired manner.
4. Fast decision-making
Without middlemen, companies can make quicker decisions about product pricing, distribution strategies, and marketing, allowing them to be more responsive to market changes.
5. Improved profit margin
By eliminating the need to share profits with middlemen, businesses can keep a larger portion of the revenue from product sales, improving their profit margins.
6. Streamlined supply chain
Removing middlemen can simplify the supply chain, reduce delays, and improve efficiency in the movement of goods from the manufacturer to the end consumer.
7. Increased transparency
With no intermediaries involved, there is greater transparency in the pricing and flow of goods, which can build trust with customers.
Survival of middlemen
Middlemen also provide effective services and serve some particular market segments. The following are some reasons for the survival of middlemen:
1. Expanded market access
Middlemen offer producers the opportunity to reach a wider audience through their established connections with retailers, wholesalers, and other distribution channels, enabling market expansion without significant investment in marketing or distribution.
2. Expertise and Specialization
Middlemen bring valuable expertise in specific industries or markets. Their understanding of consumer preferences, market dynamics, and competition benefits both producers and consumers.
3. Local market expertise
Middlemen often have in-depth knowledge of local markets, cultural nuances, and consumer habits. This expertise is essential for adapting products or services to regional preferences and implementing effective marketing strategies.
4. Efficient distribution
With well-established networks and infrastructure, middlemen streamline the distribution process. They manage bulk orders, oversee logistics, and ensure products are delivered efficiently to retailers or end consumers.
5. Risk management
Middlemen play a key role in reducing risks linked to fluctuating demand, market unpredictability, and financial commitments. They take on some of these risks by handling inventory, overseeing sales, and offering producers valuable insights.
Types of Middlemen Wholesalers
1. Merchant wholesalers
Merchant wholesalers hold ownership of the goods they market at some point along the distribution channel. This ownership means they have the legal title to the goods until it is transferred to their customers. Consequently, merchant middlemen assume various risks associated with ownership, including:
- Loss: The goods may be stolen or misplaced, leading to financial loss.
- Obsolescence: Products may lose value due to changing consumer preferences, advancements in technology, or expiration.
- Damage: Physical harm to goods during storage or transportation could render them unsellable or decrease their value.
These risks are inherent to their role in the distribution process, as they act as intermediaries who purchase and resell goods.
Merchant middlemen are categorized into two main types: retailers and wholesalers.
I. Retailers
Retailers are businesses that sell primarily to the final consumers. Key points about retailers include:
- Their primary focus is on meeting the needs of end-users or consumers.
- Any sales made to industrial users or other middlemen are incidental to their retail business.
- In the Nigerian business context, the term “dealer” is often synonymous with “retailer.” However, due to the long distribution channels in Nigeria, a dealer may sometimes also be seen as a wholesaler.
II. Wholesalers
Wholesalers, on the other hand, are merchant middlemen who focus on selling to other buyers, such as:
- Retailers or other middlemen who then sell to the final consumers.
- Industrial users who use the goods in their production processes or operations.
- Sales to final consumers are incidental to their wholesaling business and not their primary focus.
In summary, while both types of merchant middlemen play vital roles in the distribution channel, retailers cater to final consumers, and wholesalers primarily serve intermediaries or industrial users. The terminology and roles may vary slightly based on local business practices, such as in Nigeria.
2. Agent wholesalers
Agent wholesalers are entities that do not take ownership of the goods they handle. Instead, they act as intermediaries, facilitating the transfer of ownership from sellers to buyers. While some agent wholesalers, like factors, may physically possess the goods, others, such as brokers, may never come into contact with them. It’s important to distinguish between possession and ownership.
Typically, agent wholesaler fall under the category of wholesaling middlemen, though they are not considered wholesalers. The term “wholesaling middlemen” is broader and includes both wholesalers and agent wholesalers, as both types of intermediaries sell to customers other than final consumers. In essence, they are all involved in wholesale trade. However, agent wholesalers perform a more limited set of functions compared to wholesalers, as they do not own the goods they help distribute.
Types of agent wholesalers
An agent is an individual engaged to facilitate the creation of a contractual relationship between a principal (the person who employs the agent) and a third party. In commercial terms, an agent is someone appointed to sell goods on behalf of the principal. The principal may be a producer, a foreign supplier, or a large-scale domestic wholesale trader.
I. Brokers
Brokers are agents tasked with connecting potential buyers and sellers. Unlike other agents, brokers neither take possession of goods nor sell them under their own name. When involved in a sale, brokers clearly indicate they are acting on behalf of the principal. They do not have the authority to set prices and do not maintain long-term contracts with any specific principal. This flexibility allows brokers to represent multiple principals simultaneously. Their role is limited to negotiating sales terms with buyers and relaying the details to the seller, who ultimately decides whether to accept or reject the deal.
II. Manufacturer Agents
Manufacturers are commercial agents authorized to sell goods and hold custody of them until they are sold. They sell goods under their own name and operate independently, meaning they are not employees of any manufacturer. Manufacturers play a crucial role in expanding the distribution of manufacturers’ goods, particularly in markets that the manufacturers’ sales force cannot reach. While they are often referred to as manufacturers’ agents or representatives, they can also act as agents for other wholesale traders.
Manufacturers typically follow the pricing policies and sales terms set by the manufacturer or producer and do not have control over these aspects. Unlike brokers, manufacturers maintain ongoing relationships with their principals and usually represent multiple manufacturers, provided they are not in direct competition.
III. Selling Agents
These agents handle the entire spectrum of marketing functions on behalf of manufacturers. In essence, selling agents take on the most comprehensive and extensive range of marketing responsibilities for manufacturers, often making the manufacturers’ marketing departments largely unnecessary.
IV. Auctioneers
These are agents who sell goods or property to the highest bidder at a public auction. They act on behalf of the owner (the principal) to facilitate the sale of items, ensuring that they achieve the best possible price. Auctioneers do not own the goods they sell; their role is to organize, conduct, and oversee the auction process. They earn a commission or fee for their services, usually based on the value of the items sold.
V. Del credere agents
These are agents appointed to sell goods with the added responsibility of guaranteeing payment for credit sales. They assure the principal that buyers will fulfill their payment obligations; if a buyer defaults, the del credere agent takes full financial responsibility and covers the payment themselves. This added risk is typically compensated by a higher commission.
Read more: Warehousing: Importance And Types
