What is the importance of middlemen in business?
What, indeed, is the importance of middlemen in the world of business? Middlemen, by definition, are an added layer within a commercial process that may or may not facilitate a transaction at the most cost-effective level. Brokers are middlemen in that they act to try and bring consumers of stocks together with the companies seeking to sell shares. For this service, which can be conducted for the benefit of the buyer, the seller, or both, the broker or middleman receives a commission, usually a percentage of the value of the transaction.
Brokers or middlemen exist in many areas of commerce. Food brokers, for example, seek to find buyers for a wholesaler's inventory of a certain category of food. Conversely, they help the buyer to identify the most cost-effective option within the wholesale community. Department or grocery stores are middlemen in that they buy food and other items from farmers and manufacturers, store and display these goods for the benefit of consumers, and manage the transaction, keeping a percentage of the value of the sale while compensating the manufacturer or supplier.
As this is the role of middlemen, one can understand why some wholesalers market their goods as being a better option for the consumer by promising to "eliminate the middleman." What this means is that wholesalers or manufacturers are communicating directly to the public that the latter can buy products for less money because there is no middleman involved to whom a commission must be paid for facilitating the transaction. No commission or costs associated with middlemen means lower prices for the consumers, at least in theory.
While consumers can avoid the cost of middlemen, nevertheless, most choose that option. Middlemen, especially those who posit themselves as guardians of the consumer procurement process, can help consumers to identify the best product for the consumers' personal needs. Honest brokers can steer consumers away from disreputable or unreliable suppliers or, conversely, can warn supplies away from potential consumers with records of delinquent payments to their suppliers. With reference, again, to the world of stocks, brokers walk a very fine line between ethical and unethical conduct on a daily basis. Stock brokers work off of a commission calculated on the basis of the value of stocks they transfer from the issuer to the buyer. The broker's incentive, therefore, is to facilitate the exchange of stocks for cash as often and in as great a volume as possible. The more such transactions, the greater the commissions accruing to the broker. Consequently, it is not unusual for consumers to be sold questionable stocks by persuasive brokers more interested in their commissions than in the welfare of their clients.
Middlemen are an integral part of many commercial transactions. Whether they are needed on any given transaction has to be determined on a case-by-case basis. They can serve a useful purpose in bringing together parties with a common interest in concluding a transaction. They can also, though, subvert the process by secretly conspiring with one of the parties to the transaction to finalize a deal disadvantageous to the other party in the equation. Caveat emptor.
Middlemen are important in business because they make products available to customers and assume the responsibility of collecting payments from the consumers, thereby relieving producers of this responsibility. In addition, as they interact with consumers, middlemen are often in the best position to collect data about the changing needs, demands, and demographics of consumers. They can then funnel this vital information back to the producer to allow the producer to change the product to fit the changing marketplace. Middlemen can also let the producer know about the competition. Middlemen often take title to the goods they are selling, thereby relieving the producer of the risk of holding onto goods. As middlemen are in possession of the goods, they can quickly and efficiently distribute them to consumers. As middlemen often pay for goods in advance, they furnish the producer with capital necessary to carry on operations. Finally, middlemen often absorb increases in the prices that producers place on goods and keep prices stable with consumers because middlemen face competition from other middlemen and want an advantageous position with producers and consumers.
Middlemen in business refer to independent businesses that form the distribution channels through which a product passes on its way from a manufacturer to end user. Middlemen are of different types like wholesalers and retailers. Middlemen play a very important role in business which benefits end users as well as manufacturers.
Generally goods are manufactured in large quantities at a few centralized locations, to reap the advantages of economy of scale. However the end users are widely dispersed over large geographical areas. The goods manufactured must be transported from the manufacturing locations, and delivered to each retail customers, when and where they want. Using the services of middlemen the manufacturers distribute their product economically and quickly.
Distribution channel provides many benefits to customers also by making goods available to then at locations near them. Also they are able to buy products of many different manufacturers at one place.
The retailers may also provide advice and add on service to customers to help them choose the right product. A salesman in a shoe shop may advice its customer on the right type of shoes for different purposes like jogging, mountain climbing, and very cold climates. They also help the customers to try out the fit of the shoes.
The Middlemen supplements the resources of the manufacturers in many ways. They invest substantial amount of money in stocks, credit extended to customers, warehouse, offices, shops and other facilities used for distribution of products.
Perhaps the most important of these resources is the widely dispersed geographical presence. As compared to manufacturers, the distribution intermediaries are much more widely distributed. Even the biggest auto companies in the world have don’t have more than dozen or so final assembly plants, but dealers selling their automobile numbering thousands have their presence in many different countries.