The movement of a product from creation to consumption is known as the distribution channel. This path involves a network of independent organizations that bridge the gap between the producer and the end buyer. These entities, often referred to as middlemen, ensure that goods and services are available in the right place, at the right time, and in the desired quantities.
Defining Marketing Intermediaries
A marketing intermediary is an independent firm or individual that operates between a producer and a final user to facilitate the flow of a product. These organizations are collectively known as channel members, forming the marketing channel or channel of distribution that a product follows to reach the market.
Channel members take on tasks a manufacturer would otherwise perform, allowing the producer to focus on production. Using intermediaries creates an indirect channel, distinct from a direct channel where the producer sells straight to the consumer. Specializing in distribution allows these firms to offer efficiencies and market reach that most producers cannot achieve alone.
Key Functions Intermediaries Perform
The economic justification for intermediaries is the specialized work they perform, categorized into three areas.
Transactional functions involve the actual transfer of goods and ownership, including buying, selling, and taking on inventory risks. This risk absorption covers potential losses from damage, theft, or product obsolescence while the goods are held.
Logistical functions center on the physical movement and storage of products throughout the channel. This includes assorting, storing, and transporting goods to the final point of sale. A key logistical function is breaking bulk, where intermediaries purchase large quantities from manufacturers and divide them into smaller units for consumers or retailers.
The third category, facilitating functions, supports the entire marketing flow without directly involving the buying or physical movement of the product. These tasks include financing, such as providing credit to customers or carrying inventory costs for the producer. Intermediaries also gather and share market information, providing producers with valuable data on consumer feedback and sales trends.
Major Types of Intermediaries
Retailers
Retailers are channel members that sell products directly to the final consumer for personal and non-business use. They represent the final link in the distribution chain, operating as physical stores, online shops, or mobile vendors. Retailers purchase goods from wholesalers or distributors, take legal title to those goods, and provide the assortment and convenience consumers desire.
Wholesalers
Wholesalers purchase large volumes of goods from manufacturers and resell them to other businesses, such as retailers, institutional users, or industrial buyers. They take title to the goods, meaning they own the inventory and assume the risks of ownership. Unlike retailers, wholesalers do not typically sell to the ultimate consumer, focusing instead on distributing bulk quantities to maintain the supply chain flow.
Agents and Brokers
Agents and brokers facilitate sales between a buyer and a seller but do not take title to the goods. They earn a commission or fee based on the sales they negotiate and act as representatives for one or both parties. Agents typically maintain a permanent relationship with a manufacturer, often representing them in a specific territory. Brokers are generally hired temporarily to bring buyers and sellers together for a specific transaction, such as in real estate or the food industry.
Distributors and Dealers
Distributors and dealers often operate under a contractual agreement, granting them the right to sell a manufacturer’s product within a specific geographical area. Like wholesalers, they take title to the goods, but distributors generally specialize in a limited, non-competing line of products. This specialized focus allows them to maintain a closer relationship with the supplier and often provides greater product support and promotion than a general wholesaler.
The Role of Facilitating Intermediaries
Facilitating intermediaries provide specialized support services necessary for the distribution channel to function, but they do not take part in the transaction or assume ownership of the product. These organizations make the physical and financial flow of goods possible.
Transportation companies, such as trucking firms, railways, and air freight carriers, ensure the physical movement of products across vast distances. Financial institutions, including banks and credit card companies, handle payment transactions and provide credit to channel members. Marketing research firms provide informational support, gathering data on consumer preferences and market trends used for strategic decision-making.
Benefits of Using Intermediaries
Producers use intermediaries because they significantly increase the efficiency of the distribution process. The presence of a middleman drastically reduces the number of contacts a manufacturer must manage, a concept known as contact efficiency. For example, selling to ten wholesalers who serve one hundred retailers reduces the manufacturer’s contacts from one hundred to ten.
Intermediaries also allow for the specialization of labor. The manufacturer concentrates on production while the channel partner focuses on distribution and sales. This specialization allows each party to operate at a higher level of competence and lower cost. By leveraging the established infrastructure and networks of intermediaries, producers achieve broader market coverage and ensure product availability.
Choosing the Right Distribution Channel Strategy
A producer’s choice of intermediary and channel structure is a strategic decision dictated by the nature of the product and the target market. This choice involves determining the desired intensity of distribution:
Intensive distribution: The product is stocked in as many outlets as possible, typically used for convenience goods like soft drinks and snacks to maximize market saturation.
Selective distribution: Uses a limited number of intermediaries in a specific geographic area, suitable for shopping goods like appliances that require customer comparison.
Exclusive distribution: The most restrictive approach, granting a single intermediary the sole right to sell the product in a given territory, often employed for luxury items or specialty goods to maintain brand image and control.