Distribution of goods is often enabled through collaboration with partners and intermediaries. While this is generally a mutually advantageous situation, where margins are captured by all parties, it is still worth briefly exploring how a given business is impacted by the cost of collaboration.
Common Costs of Intermediaries
While the intermediaries required will differ based on the product or service being discussed, there are a few common costs which most business can anticipate incurring when it comes to product distribution:
Financial Intermediaries - Transactions are the core function of exchange in the modern economy, where a good or service is transferred for a capital payment. This capital exchange is largely governed by banks. Costs are usually incurred to one or both parties during these exchanges, often as a percentage of the overall capital exchanged.
Shipping Intermediaries - Getting an item from the business to the user often requires shipping and warehousing. This service can be expensive due to the costs of transportation, and the necessity for holding inventory at various supply centers. As a result, either or both parties will likely incur costs for this service.
Marketing Intermediaries - Storefronts, be they online or physical locations, are convenient and comfortable contact points for products and consumers. As a result of the physical location, staffing, and inventory costs incurred by the storefronts themselves, either or both parties in the exchange are likely to incur costs.
There are various other intermediaries (legal, customer support, etc.), but this provides a general framework for common areas of collaboration when bringing a product or service from the business to the consumer.
Intermediaries in Context
Let's consider an example. A consumer goes online to purchase a new tablet. For the sake of discussion, let's say it is a Microsoft tablet being purchased from Amazon. From the perspective of the firm which created the product (Microsoft), there are quite a few intermediaries between the consumer and themselves as a producer:
- First is the storefront the consumer purchases it from, in this case Amazon. Naturally, Amazon will have marked up the price of the product in order to maintain profitability (with some exceptions).
- Next comes the payment provider. Amazon will link you with a bank or other financial provider (i.e. PayPal, bitcoin, etc.) to process the payment. This will also incur some cost.
- Following this, we still need to get the product from Amazon to the consumer's doorstep. Shipping and handling fees will be applied.
As is demonstrated in this example, Microsoft's product will incur various costs, some of which will be shouldered by Microsoft, and some which will be handled by the end consumer. During this process an ecosystem emerges where mutual value is gained by all parties throughout the transaction. While these costs are relevant strategically, so too are the benefits organizations derive from the process.
Intermediaries
This image shows a simple supply chain, including the various distribution intermediaries a company may work through in order to provide a customer with a product.