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A middleman buys products from producers and sells them at retail or wholesale prices. Small farmers may sell directly to customers for higher prices, while others work with middlemen for wider distribution and potentially higher returns. Manufacturers may also work with middlemen for pre-orders and distribution. The middleman takes on risk and can make the most profit, but the producer is reimbursed at the lowest amount.
A middleman is a person who buys a product directly from the producer and then sells the product at retail prices to the public or sells the product at wholesale prices to a distributor. Often there may be more than one when the latter practice is adopted. One person can buy from the producer and then work with someone else who buys for the distributor. The producer generally sees the intermediary as the alternative to direct distribution.
A small farmer, for example, may not need an intermediary. Instead, she can take her produce directly to farmers’ markets or sell produce directly from her farm. By cutting the person between her and the customer, she receives a higher price for her products. The ultimate profit from being able to sell at higher prices may not make a significant financial difference, however, because not only does she have time to grow her fruits and vegetables, but to distribute and sell them.
Instead, some smallholders work with a middleman who immediately distributes products to local markets or supermarkets, or who assembles products from several smallholders to sell to middlemen who work in supermarkets. Using this person means that the price offered to the producer is lower, but often more of the producer’s product is sold, which can result in a higher return and less time spent than when the producer chooses direct distribution.
This same model applies to any manufacturer. The intermediary may be responsible for ordering the production of items or parts of items at a price negotiated with the manufacturer. He or she sells these items directly or to other companies who finally distribute and sell the items. For the manufacturer, it can be beneficial to know in advance the quantity of items needed. A pre-order can help make this clear, so that the manufacturer only does what is necessary and doesn’t spend money producing parts that never sell.
The middleman is essentially both buyer and seller. He may need to be a consummate salesperson because he often has to come up with the company’s own money in hopes of being able to sell the product at a profit to someone else. The element of risk involved in purchasing products is responsible for the margin value of products purchased from that person. In this model, the producer is almost always reimbursed at the lowest amount, the intermediary at a mid-level amount, and the retailer at the highest amount. When the person in the middle buys and sells directly, he can make the most profit, but he also has the most risk.
Asset Smart.
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