Middleman or Intermediary

Intermediary or Middleman. Business chess match

Intermediation, or letting other businesses get in the way of customers, can build a brand but put it in a poor strategic position.

Executive Summary | Abstract | TL;DR

A middleman or intermediary is an individual or company with a business interest in staying between one company and its customer.

Good intermediaries can provide access to customers that a company would not otherwise have the opportunity to serve. Bad intermediaries can use their position as rent-seeking, adding no value to the process. Types of supply chain intermediaries include wholesalers, retailers, agents, dealerships, and white Label Buyers. Types of communication intermediaries include attention brokers, directories, influencers, ad networks, marketing agencies, and hosts.

Companies dependent on any one channel are in a poor strategic position. Their business might be damaged or destroyed by a sudden loss of access to their customer, negotiating from a position of weakness and not have the feedback from customers to improve their offering. Use middleman, but try to distribute your business over many of them and develop direct to customer channels in parallel.

6 minute read | 1500 words.


PROMOTION


A middleman or an intermediary is someone with a business interest in taking a product, service or message from another business and delivering it to a customer.

At best, these businesses add value by developing distribution networks to customers the company would not have access to. For example, a retailer takes mass qualities of products, divides them up, sends them to stores, and places them with other products so that customers can come and fulfill all their needs in one shop. This is something a manufacturer could never do directly because a store of only one type of product may not attract any customers.

Rent Seeking

At worst, middlemen act as rent-seeking. Rent-seeking is an economics term referring to players who increase their share of the wealth without increasing value. Rent-seeking is corrosive to the economy because they take resources away from value-adding players, increase financial friction, reducing government income, and rising wealth inequality.

A new kind of brand is emerging that have a direct relationship with their customers. Brands like Dollar Shave Club, Casper, and 4Ocean communicate, sell and ship directly to their customer. The one to one nature of the relationships between these companies and their customers deepens the connection to the brand, increases brand equity, and gives them a competitive advantage.

Examples of Middlemen / Intermediaries

Below is a list of middlemen or intermediaries.

Please note, I am not casting any judgment towards the value these companies add to the supply chain or communication chain. It is just crucial that business owners and executives appreciate that these are companies between you and your customer. It is just reality.

Supply Chain Intermediaries

Merchant Wholesalers
Companies that purchase large quantities of product to sell them in smaller quantities to a network of customers.

  • Labatt Food Services
  • Cardinal Health
  • Ingram Content Group

Retailers
Companies that attract customers by selling a variety of products.

  • Walmart
  • Amazon
  • Costco

Agents or Brokers
People or companies that customers trust more than themselves to get the best price or value from a product. Agents never take ownership of the product.

  • ReMax (real estate broker)
  • Aon (insurance broker)
  • eBay

Franchisees or Dealerships or Brokers
Businesses that are committed to a specific brand but deal with the operations and relations of selling products.

  • McDonald’s franchisee
  • Chevrolet dealership
  • Edward Jones agent

White Label Buyers
Brands that purchase a product and sell it under their own brand.

  • Great Value
  • Amazon Essentials
  • Kirkland

Communication Intermediaries

Attention Brokers
Places that have the attention of people and will place messages in their content for a fee. Includes media companies and social media sites.

  • Facebook
  • Kim Kardashian
  • New York Times

Directories
Places people turn to when they do not know where to find a product or solution.

  • Google (Search and Maps)
  • YellowPages
  • AutoTrader

Influencers
Individuals or companies that customers trust to evaluate products and make recommendations.

  • MKBHD
  • Kylie Jenner
  • Consumer Reports

Ad Networks, Brokers or Marketing Agencies
A company that distributes a message to many attention brokers.

  • Google AdWorks
  • Omnicom
  • BBDO

Hosts
A company that carries and distributes your message on their servers or location.

  • YouTube
  • MailChimp
  • WordPress.com

Middlemen aren’t a problem, but being overly reliant on any single one is.

People that help you distribute your messages or products to an audience that you would not otherwise have access to is an essential part of doing business. There is nothing wrong with that.

What is a problem is when a business has a significant portion of sales dependant on any one player.

Being in a weak strategic position means that you are vulnerable changes in the future, and a business that can have a significant portion of their revenue go away at any given time is in a dangerous position. A large company in this position is actually worse off than a small company because they have more substantial operating and capital expenses that may make a sudden loss of business harder to recover from (eg. a large office with a $100,000+ lease).

Jeff Bezos just became the wealthiest man on modern history. Amazon has some of its own products, but mostly sells other people’s products. Beyond retailing products, their Amazon Marketplace is a service where they give access to Amazon’s customers and infrastructure for an even more significant portion of the selling price. Some companies only sell on Amazon or have 95% of their sales through this channel.

Companies dependent on any one channel may get knocked out by either:

  1. A sudden loss of access to their customer
  2. Negotiate from a position of weakness
  3. Not have the feedback from customers to improve their offering

PROMOTION


Issue 1 | Sudden Loss of Access to the Customer

Having another business in between you and your customers puts you in a strategically vulnerable position. If that business decides not to distribute your message or product, your business may not be able to weather the sudden loss in revenue.

You might be thinking: “Nah, that cannot happen to my business; my partners value my product, and I have great relationships with them.” But you would be surprised how quickly these relationships can change.

Entertain these examples:

  • A retailer can give away your shelf space to a competing product that has a higher profit margin.
  • A bill or a charge you dispute could put a “stop services” order on your account.
  • A search engine can decide that another piece of content is a better answer to a search query than yours.
  • Your top affiliate could start pushing a different service because of a better commission percentage offered by a competitor.
  • A publication you consistently advertise with because they attention of your market could go out of business.
  • Your gorgeous influencer / spokes model could drop you because of an allegation of animal testing from a fringe blog.
  • Your top salesperson could leave and take their contact list with them.
  • A regional distributor could declare bankruptcy.

Real world example:

This can happen to the best of us. Mahalo was a human-curated search engine started by legendary entrepreneur and now angel investor Jason Calacanis after WebLogsInc. Mahalo received the vast majority of traffic from Google searches; they provided searchers the top resources for a topic. Jason had developed a relationship with the Google search spokesperson believing Google and Mahalo were partners exchanging value.

Mahalo’s traffic got wiped out overnight in the Google search algorithm update called Panda. The update was designed to penalize content farms with poor quality content such as eHow, WikiHow and WebMD.

“Matt Cutts killing the business really pissed me off,” Jason told ProductHut, “he just smiled and told me ‘you don’t have a penalty’ with a shit-eating grin.”

Jason was forced to use that rage, and pivot his business into Inside.com and the Twist Podcast Network. Inside distributes vertical specific news through email and text message specifically because there is no intermediary.

Issue 2 | Weak Bargaining Power

Being overly reliant on one channel puts you in a poor bargaining position with that channel and all other channels. A dependency on a channel can force you into a bad deal, slowly eroding your profit margins.

Alternatively, if your sales and communications is distributed, or you have direct access to your customers, than you can fight for better deals knowing that this business partner is not indispensable for your business.

Real world example:

I worked for a decade marketing in the retail industry for clients that were overly dependant on a single retailer: Walmart. Some companies would do anything Walmart asked at any cost because almost all their business went through the retailer. They would give sweetheart deals on loss or stolen merchandise, give six-month payment terms, and pay for the refurbishments entire sections of the store. Many sellers to Walmart looked at the store as a channel to build brand awareness, not make money.

Walmart cash registers checkout

Issue 3 | Lack of customer feedback.

The most damaging thing a business misses out on when there is another business in between them and their customers is feedback.

The ability to solicit customer feedback and make timely adjustments is the difference between brands and hall of fame brands, so the middlemen in your business may be keeping you from excellence. Assuming you are not white-labeling, you can use your packaging to encourage customers to give you feedback.

Real world example:

Apple had an issue with the keyboard in it’s MacBook Pro that was introduced in mid 2015. The new “butterfly” keyboard design had a tendency to be rendered useless by crumbs or dust (iFixit on YouTube).

Apple had direct to customer communication channels set up: the Apple Store, The Genius Bar, and Apple Care. They were able to see the more than expected service requests regarding for the keyboard.

They reacted to the feedback. Apple offered to wave the replacement cost of keyboards (WIRED) in June of 2018, and winked and nodded that the keyboard design had changed in their press release for the new MacBook Pro, and was confirmed during iFixit’s teardown (YouTube).

iFixit's teardown of the MacBook 2018 with the fix to the butterfly keyboard.

Conclusion: Use middlemen but be smart about it.

If a person comes to you with an opportunity to sell more product through them, I am not recommending to turn them down. If the business opportunity is profitable, then you must increase revenue for your stakeholders. I understand this, and have experienced it myself.

My recommendation is that you try to develop channels that are direct to your customers, and spread your opportunities over many middlemen so that you are not reliant on any one of them. This will put you in a better bargaining position, give you feedback from your end customers, and make sure your business is there for the long haul.

Brands like Apple, Casper, Dollar Shave Club (now Gilette) and 4Ocean are getting success by valuing direct to customer channels. Because of these direct connections, they have higher brand equity and market cap.


PROMOTION


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Colin Finkle

Colin Finkle is a brand marketer and designer with ten years of experience helping Fortune 500 companies tell their story at retail. You can see his work at ColinFinkle.com

11 thoughts on “Middleman or Intermediary”

  1. Very interesting. I’m looking to become an intermediary myself – from a point of connecting small, foreign brands to the american market and I am looking for some type of blueprint on how to proceed. Would appreciate any info you have on the subject.

    1. Hey Chris. I have worked for two companies that import and distribute food products in Canada that are from Europe. It is a great thing to enable people to buy products from countries they would never have been able to, and expanding the market for foreign brands makes it a win-win.

      My advice: 1) Make sure the packaging and products comply with local laws. There are different legal requirements for labeling and ingredients in different countries, particularly with food. Almost all imports have to print special packaging for the new country.

      2) Understand that a foreign brand means nothing to the people of the import country, other than the immigrants from that country. Serve those immigrant communities first, and then expand out to the broader market with their advocacy.

  2. Thanks for the tips. I need your advice on intermediation on Farm products. From setting up of the company to effectively running it. I want to deal on a large number of farm products( cereals, legumes, nuts, roots and tubers, livestocks, etc). The idea is being middleman between the farmers and the end-users.

    1. Hi Nelson. I love to hear the entrepreneurial spirit! I don’t know where you live, but here in Canada, people are looking for more transparency about where their food comes from. Such information helps them choose local goods and ensure produce is non-GMO or organic. I could see an opportunity to build a new style of distribution company.

      I would need more context to help you. Are you looking to be a distributor? Or a retailer? Or both?

  3. Very interesting. I live in London. I am looking to start a company as intermediary for Honey and Olive Oil from Greece and other EU countries. The idea is to put buyers and sellers together without taking ownership of the product. Paid on a percentage of the total transaction. Actually selling services, because i don’t have any storage to be retailer. I will make sure the transaction will be safe. The buyers will pay me and i will pay the sellers and hold a percentage. The shipment will shipped directly from sellers packaging country ( fro example Greece). Could i do that ? What low said about that ? any info will be very helpful.

    1. Hi Andrew. What you are talking about is drop-shipping. When an English customer orders from you, you immediately (hopefully, this is automated) place an order with your supplier, process all the import paperwork, and ship directly to the customer. This is done very frequently. Just make sure you are making the process seamless for your customer, and that the shipment is as prompt as possible. Who knows, you may grow and want to keep some stock of certain hot sellers in England, but that will be way down the line.

  4. Hi Colin
    Wanting to develop a national intermediary site connecting prospective clients looking to undertake an intensive course in driving tuition. The national network of instructors would be carefully pre selected to deliver a wide range of varying courses to encompass all needs.
    My question to you as someone who knows the business, having spent 40 years as a driving school proprietor is quiet simply, where do I start my journey.
    Many thanks.
    Carl

    1. Hi Carl. What you are talking about is a two sided market place. On one side, you have people who need to take driving courses. On the other, you have instructors. It is a chicken and egg situation, because the students will not come if the instructors are not there and vice versa. The only solution is to start in a targeting local, like a city or county, and build out from there. Even Facebook was started local by local at first. You can call and pitch instructors, but you will probably have to spend on Google and Facebook ads to get the prospective students. Good luck!

  5. Hi Colin!
    Thanks for the article! Great insights.
    I’m planning to start service intermediary business by collecting businesses that need certain services and connecting them with certain service providers for ex. IT infrastructure or project management service.
    Any advice here?

    1. Hi Tony,

      It sounds like you are starting a business that is somewhere between a two-sided marketplace and a staffing company. One side is people who do not have the background or time to become savvy enough to make a decision about who would be the best infrastructure / PM people. On the other side is IT firms / project managers who don’t know how or want to source new business. I don’t know anything about the industry, but I can imagine both sides have a real pain point. Not to mention Accenture and IBM are huge business doing the same thing but with a consulting model.

      The trick will be balancing both sides of the market. You need both buyers and providers. I would focus on the infrastructure first; working two verticals will spread yourself thin. I would also limit yourself to one locale: a major metropolitan area and then expand from there. I am assuming IT infrastructure required boots on the ground, so these are local businesses you will be connecting. Focusing on a locale will mean you don’t get a mis-match of locations; there is no point in having buyers in LA, and providers in NY. You will have to get on the phone and sell providers on the idea of joining your marketplace… this is not a “build it and they will come” business. I am guessing this will be on a commission structure, so you are also going to have to be reasonable about your commission in the early days. You can renegotiate when you are sending a higher volume of business their way.

      There is one major challenge I see though. If you connect a buyer and a provider and they have a good experience, are they going to associate that positive experience with you, or the provider? Or both? If the buyer is to refer someone who needs IT infrastructure, are they going to refer you or the company they hired? To overcome this, you will need to make your brand very present in the transaction: brochures, invoicing from you, follow up calls, etc. Also, provide an extraordinary amount of value.

      I hope that helps.

      Cheers,
      Colin

  6. Hi Colin,

    Great article! I’m planning to be an intermediary for international electrical equipment to be distributed in local power utilities and cooperatives. I don’t want to keep their products as in a warehouse, I just wanted to be the middle man of the seller and to the customer and earn by commission or markup. I am an electrical engineer and somehow can perform technical sales demo if the seller opts to. Any tips and advice on this? Thank you.

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