Intermediaries

Direct selling is when the producer sells directly to consumers. Any channel in between the two is called an intermediary. In the example below, the lumber mill, manufacturer, wholesaler, retailer, and the internet are intermediaries because they each are between the producer (the logging company) and the final consumer.

The logging company, lumber mill, manufacturer, wholesaler, retailer, and internet are each a channel of distribution.

Every time a product goes through another channel of distribution, the price increases.

  1. Let’s examine the channels of distribution for a wooden table.
  2. A logging company cuts down a tree. They sell the wood to a lumber mill for 80 cents a square foot. The lumber mill buys 10 square feet. How much did the lumber mill pay for the wood?
  1. The lumber mill takes the bark off the trees and cuts the wood into 5 boards. They sell the boards to a manufacturer for $3 each. How much did the manufacturer pay for the wood?
  1. The manufacturer makes 1 table out of the boards. The manufacturer adds $10 to the cost of the table and sells it to a wholesaler. What is the cost of the table now?
  1. It costs the wholesaler $5 to store and later transport the table to a store. The wholesaler also wants to make a $2 profit on the transaction. The wholesaler adds this $7 to the cost of the table and sells it to a retailer. How much did the retailer pay for the table?
  1. The retailer wants to make a 20% profit on the table. The retailer adds this markup (20% of the price of the table), puts the table in the store, and sells the table to the final customer. How much did the final customer pay for the table?
  1. The retailer decides to also offer the table for sale in its online store. The retailer charges the same price to buy the table online as it charges to buy it in store, but the retailer also adds a $20 shipping and handling charge.

SCROLL DOWN FOR QUESTION #2!

  1. Each intermediary added some value to the table. For example, the lumber mill stripped off the bark and cut the wood into boards.
  2. What value did the manufacturer add to the table?
  1. What did the wholesaler do to earn their $7?
  1. Which channel do you think is most responsible for advertising the table to customers?
  1. Do you think it cost the retailer more or less than $20 to ship the table?