Marketing Aptitude: Middlemen in distribution channels

A channel of distribution includes the original producer, the final buyer and middlemen (or business intermediaries) – either wholesalers or retailers. The middlemen refer to those institutions or individuals which take the title to the goods to negotiate or sell in the capacity of agent or broker. These are those persons who provide link between the manufacturer and the consumer. They facilitate the purchase and sale of goods and services and also perform the marketing functions. They charge for their services and to that extent they are responsible for the increase in the cost of the product to the ultimate consumers. Despite this, the middlemen constitute an important link of the channel of distribution. They help the manufacturers in selling their products and help the consumers in getting the want satisfying products. The term “Middlemen” has been defined by many eminent scholars as under:

• American Marketing Association defined the term “middlemen” as “one who specialize in performing operations of rendering services that are directly involved in the purchase a sale of goods in process of their flow from the producers to the users.”
• Cundiff and Still: – “All middlemen fall into two broad classifications -merchants and agents. A merchant middleman takes title to (buys) and resells merchandise, an agent middleman negotiates purchase or sales or both, but does not take title to the goods in which he deals.”

Classification of Middlemen

Middlemen are broadly classified into two categories namely, mercantile agent and merchant middlemen.

1. Mercantile agents (also known as functional middlemen or agent middlemen): They are those channel components who help in the transfer of goods from the hands of producers to the hands of ultimate users without acquiring the ownership of these goods.  In other words, they do not take title to goods which they handle. Since, they do not do not buy or sell goods on their own account, they do not earn profits. They take their remuneration for the services rendered in the form of commission or brokerage. Some of the types of mercantile agents are as under:

• Brokers: – These are those agents who have no direct and physical control of the goods in which they deal. They only arrange transactions between a buyer and a seller for a commission when the deal is executed. Their rate of compensation (called brokerage or commission) is determined according to custom of the particular trade or by law, and is computed commonly either as a fixed percentage of the value of the transaction or on a sliding scale (higher the value, lower the percentage).

• Commission Agents: – These are those agents who act on behalf of some other person known as principal for all agreed commission. He undertakes to sell the goods in the name and on the sole risk of the principal. Such as, agent may also be employed for the purchase of goods on behalf of the principal. A selling commission agent takes possession of the goods, makes necessary storage arrangements and passes title to the goods to the buyers and gets commission at a fixed percentage on sales. When an agent is authorized to sell the goods on credit and he assumes the risk of collecting the bad debts he is known as a dell-ceredere agent. He gets some additional commission for bearing the risk of bad debts.

• Selling Agents: – The selling agent is an independent middleman, who operates on a contractual basis. He has given an exclusive franchise only for a limited market segment. He performs the functions of independent middlemen taking overall selling activities of a producer. He negotiates sales of merchandise produced by his principal and has full authority and control over the prices and the terms and conditions of the sale. In short, he is the sole selling agent for the line, he represents.

• Auctioneers: – An auctioneer sells the goods on behalf of his principal by undertaking auction of goods. The goods like jewellery, art pieces, land, buildings etc. are most commonly sold on auctions. Auctioneer is the legal agent of the seller till the goods are knocked down to the highest bidder. He is the intermediary between the buyers and the sellers. His dealings are mostly on cash terms. He takes the possession of goods and remits the sale proceedings to the seller by deducting his expenses and agreed commission. Auction sale is open to the public and therefore auctioneer is to widely give publicity from time to time regarding the place of auction and the time of auction.

• Factors: – A factor is a mercantile agent who keeps the goods of others for sale. He can sell goods in his own name, pledge goods in his possession and do all such acts as can be done by the principal. He receives commission at a fixed percentage on sales from his principal. He has a general lien on the goods of the principal for the amount due to him as an agent.

Merchant middlemen

The merchant middlemen are those channels of components that purchase and sell goods and services in their own name for a margin of profit. They assume title of ownership to the goods in all cases though physical possession of the goods may not take place in all cases. They undertake marketing risk and perform many marketing functions. These may classify as follows:

• Wholesalers: – The term ‘wholesalers” applies to all merchant middlemen who purchase and sell the goods in bulk. They take title of goods and they resale the goods at a profit with commission. Wholesalers are very important in the channel of distribution. The term “Wholesalers” has been defined by many eminent scholars as under:
• American Marketing Association: – “Wholesalers buy and resell merchandise to retailers and other merchants and to industrial institutions, and commercial users, but do not sell in significant amounts to ultimate consumers.”
• W. Cundiff and R.R. Still: – “Wholesalers buy and sell merchandise to the retailers and other merchants and not to the consumers.”
• Evelyn Thomas: – “A true wholesaler is himself neither a manufacturer nor a retailer but acts as a link between the two.”
• B. Giles: – “Wholesalers may be said to provide the economic utilities of time, place and possession which may lead to economy in distribution of adequate stock to be available at the right time in a convenient location.”
• William J. Stanton: – “Wholesaling and wholesaler includes the sale, and all activities directly incident to the sale of products or services to those who buy for the purpose of resale for business use.

• Retailers: A retailer is one whose business is to sell to consumers a wide variety of goods which are assembled at his premises as per the needs and wants of final consumers. Retailers sell goods directly to ultimate consumer. In simple words, a retailer is a final middleman in the channel of distribution as he is going to sell products to houses holds consumers for non- business use. The retailers are classified as institutional and non- institutional retailers. The institutional retailers are consumer co- operative stores, fair price shops, departmental stores, chain / multiple stores, mail order houses, etc. And the non-institutional buyers are stress sellers, peddlers and hawkers. The term “Retailers” has been defined by many eminent scholars as under:

• American Marketing Association: – “Retailing consists of the activities involved in selling directly to the ultimate consumer for personal, non-business use. It embraces the direct-to-consumer sales activities of the producer, whether through his own stores by house to house canvassing or by mail order business.”
• Larson, Card, Mandell are of the view that: if we think of production and consumption as the two poles of the distribution process, wholesaling would be nearer to the production pole and retailing would be nearer to the consumption pole.
• E W. Cundiff and R. R.Still: – “A retailer is a merchant or occasionally an agent, whose main business is selling directly to the ultimate consumers.”

Function of Channels of Distribution (COD)

Some of the important functions which are usually performed by different channels of distribution or by middlemen are as follows:

• Pricing: – A firm set the prices of its goods and services keeping in view the competitive situation, ability of customers to pay, market condition. Thus, pricing is used as a tactical decision in response to comparing market situation.

• Price Stability: – The middlemen help in stabilizing the prices by stocking goods, by assuring constant flow of goods in the market, etc. They also help in making goods available at right place, at right time and at reasonable rate. Hence, middle men create place, time and possession utilities to the products and maintain the prices of goods and services.

• Promotional Activities: – To attract consumers, many promotional activities like advertising, personal selling and sales promotion are performed by middlemen, wholesalers or retailers. These activities are performed by creating message content, appeals, sculpting the messages, etc. With this, the profit maximization of an organization takes place and the demand of the product increases.

• Financing the producer: – For day-to-day business, financing is necessary to purchase, store and transport the goods and services and to sell these on credit. The financing problem of producer can be solved by the channels of distribution. Here, the middlemen collect huge orders and purchase products in bulk from the manufacturers in cash. This enables the producers to undertake large-scale production and to adopt better techniques of production because they have no problem for finance.

• Helpful in communication: – The middlemen are connecting link between the producers and the buyers. They have complete knowledge of consumers’ behavior and the market and they communicate the necessary information to the producer so that they may produce products according to the needs and wants of the consumers.

• Matching Demand and Supply: – The chief function of intermediaries is to assemble the goods from many producers in such a manner that a customer could affect purchases with ease. According to Wrote Alderson, “the goal of marketing is the matching of segments of supply and demand.”

• Helpful in Production Function: – The producer can concentrate on the production function leaving the marketing problem to middlemen who specialize in the profession. Their services can be utilized best for selling the product. The finance required for organization marketing could profitably be used in production where the rate of return would be greater.