Why manufacturers use middlemen

Manufacturers today sell directly to consumers thanks to Internet expansion. Rather than paying sales representatives to promote products to resellers, companies can promote products on their own websites, take orders and send goods directly to the final customer. Eliminating the middleman usually creates a win-win for the seller and buyer from a money perspective. Each step in a traditional distribution process involves a trade buyer adding a markup to his costs.

This ultimately makes the final customer's price higher because he is paying for the original product costs, the costs of each buyer's acquisition as well as the profit expected by the retailer. By getting rid of the middleman's markups, you can offer the customer a lower price while getting higher gross profits for yourself.

Skipping steps in the distribution channel reduces the amount of logistics and transportation required in the movement of goods from manufacturer to consumer.

In some cases, manufacturers or retailers make an effort to eliminate the middle man. If a manufacturer sells directly to retailers or consumers, it can often generate greater profit.

Retailers can often get a better rate by buying directly from the manufacturer. When a company carries out more than one distribution activity, it is called vertical integration. The challenge in this endeavor is that your business must possess the expertise and resources to function as the wholesaler along with your other operations. Neil Kokemuller has been an active business, finance and education writer and content media website developer since He has been a college marketing professor since Buyers, on the other hand, gain from the services offered by intermediaries, such as promotion and delivery.

Buyers can get the right quantity they want, as intermediaries are able to sell in small units. Regardless of the important role they play, there are some disadvantages to having intermediaries in the distribution channel. As the goods are exchanged from one intermediary to the other, their prices inflate. The rationale behind higher prices is to cover expenditures on the goods such as warehousing, insurance and transportation costs.

Intermediaries are also out to make profits, hence they have to include some profit markup in the sales. 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. 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.