Middlemen

by Mr. Cheap

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Eliminating the middleman is never as simple as it sounds. ‘Bout 50% of the human race is middlemen, and they don’t take kindly to being eliminated.

-Malcolm Reynolds (Firefly)

The Internet removes middlemen.  In many ways, this is the core of the wealth it has created, by putting buyers and sellers directly in touch with one another (and removing intermediaries each wanting their cut), sellers can dramatically increase their volume and buyers can dramatically decrease their price.  Industries such as publishing, entertainment, the news media and real estate are undergoing a dramatic and fundamental change as they risk being sidelined.

As I see it there are two main types of middlemen, one of which will survive, and the other which will be (thankfully) made to work a little harder for a living.

1.  Middlemen Who Add Value

In a comment a while back, after I’d mentioned hiring a painter through Sears, commenter Adam responded:  “All Sears does is outsource the painting job to a private contractor, that you can hire privately, and charge you a premium for it. They are like Rona\Home Depot etc. They take a cut by being the middle man. Save yourself some money and find out who they hire locally to do the work, hire them privately and negotiate a better deal.

On the face of it, Adam makes an excellent point.  Sears is subcontracting, so instead of letting them earn 20% for putting me in touch with a local painter, go to him directly and get a better deal (which I could have done).  The assumption here is that the paint job will be equivalent in both situations.  With respect, I disagree.

First off, I had talked to other painters, and found the prices they were quoting were comparable to Sears (so the 20% seemed to be coming out of the painter’s profit margin rather than my cost).  Secondly, they weren’t equivalent jobs.  Sears guarantees their paint jobs for a set period afterwards (I forget how many years it was for, but at least for 1).  Even if “Billy Bob’s Discount Paint Emporium” offers a guarantee, it’s not as reputable as Sears’.  Thirdly, a painter working with me directly has a small vested interest in keeping me happy (for referrals and repeat business).  A painter who is getting 60% of his weekly business from Sears is less likely to want dissatisfied customers running to his primary referral source and complaining about him.

2.  Middlemen Who Don’t Add Value

In economics rent-seeking refers to individuals who manage to control something important to other people’s ability to do business or live their lives and charge them to do so (deriving income without contributing anything).  Examples include Ticketmaster (which controls many performance venues and earns money by being the only one who can issue tickets), real estate agents and the MLS system (they have a monopoly on, what has been, the primary method for advertising residential real estate), corrupt government officials and record labels.

It is perhaps human nature when you have something in your control to profit from it (and fight tooth-and-nail to keep control of it).  There’s a massive cost associated with having parasites attached to the chain of commerce.  Simply, it makes the transaction more expensive, so less activity occurs.  If I have a $500 budget for widgets, and a middleman doubles the price, I make do with the number I can get.  If I could actually buy them at the proper price, either I could free up that money to do something more valuable (good for me), buy more (good for the seller) or some combination (good for us both).

Transitions

The Internet (and the information economy) relentlessly makes things more efficient, which has been good at identify middlemen who aren’t adding value and squeezing them out of the deal.  Those being squeezed out can a) use their resources to futilely fight these forces and try to keep their position, b) go do something more useful with their time and energy, or c) become middlemen who add value.

To take real estate agents as an example, Mike and I have pointed out many valuable things we think they bring to the table, and I think there are a number of additional services they could offer which would keep them relevant.  The industry’s desperate attempt to hold on to 5, 6 or 7% commissions will be obvious and ridiculous to everyone in the next few years and it will disappear (I’ll go on the record as saying if anyone is still paying these kinds of commission in 2015 I’ll drink one of Mike’s beers!).

What experiences have you had with middlement who add value and those that don’t?  Have you seen, in your lifetime, middlemen that have been driven out of the marketplace?  Any new types you’ve seen appear?

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{ 6 comments… read them below or add one }

1 ctreit

The middle man is a sore subject for me especially when you mention Ticketmaster. I think Ticketmaster is one of the biggest scams ever. The internet should have made it so easy to book tickets these days. We don’t need one company who charges us a “convenience” fee of 8 dollars per ticket or something like that. It is only convenient for Ticketmaster to bill us extra fees since the system runs automatically. More often than not do I not go to an event if I have to pay Ticketmaster.Why do venues keep using them?

2 Mr. Cheap

ctreit: For what it’s worth, I’m convinced they’re (Ticketmaster) on their way down and will not exist in anything like the current form much longer.

3 Anonymous

Excuse me for using a fake name and email for this comment… :D

I work as a contractor for the government. The company that got me the contract takes over 50% of my cost – week after week.

As someone relatively new to the contracting world, I thought that $300/day was a good deal – until I found out that I was actually costing the Canadian taxpayer $635/day.

4 Financial Uproar

Great post Mr. Cheap.

I’ve been on pretty much a week long rant about the new real estate rules. I absolutely love your idea of making real estate agents get creative about how to make money. We’re in about the 8th inning of big fat commissions, and while I don’t think the full price guys are ever going away completely, they’re about to enter a world of pain.

5 Anonymous

Apologies for the anonymity, but I’d rather not risk some ad-hominem attacks here in case my viewpoint is deemd unfriendly – the wild-wild-web being what it is.

Disclosure: my wife is a Realtor out here in British Columbia.

Anyhow, I originally took offense to your slant about Realtors being useless middle men, particularly seeing as how you then mention that they can (and could further) offer value if you read onto the next section.

I mentioned your article to my wife, and she said, “Oh, he must be out East then”. She went on to say that the Realtors in Ontario *do* on average make larger percentages as their regular commissions. She’s had a few ex-Ontario Realtors comment to her that they switch professions when they move out West as it’s “not profitable enough” — which is remarkable given we’re in the Vancouver market with some of the highest prices around.

Anyhow, I haven’t read your list of value added services that you do believe Realtors offer, so I apologize if you mention this, but (out here at least) there’s a wide gamut of Realtors who offer varying levels of service and differing percentage points for that exact reason. As my wife is what they call a “Full Service” Realtor, she spends a lot of time chasing down little details such as coordinating contractors for out of town sellers/buyers, coordinating the legal paperwork, as well as doing the leg work in fine tuning searches, and your regular Realtor-esque stuff.

Anyhow, I realize that some Realtors give the whole system a bad name, and it sounds like you yourself would not benefit (or enjoy) the services of a full-service Realtor, but that doesn’t mean they’re not useful to the right client. Perhaps the problem is that out East you don’t have as much choice in Realtors?

6 Jambo411

I make salmon lures. They are hand tied and labour intensive. The lure business is largely controlled by three or so middleman who send salesmen out on routes bi weekly. These middlemen add an exta 30% cost to every lure. Most lures are manufactured by 1/2 dozen big companies and so these middlemen sell basically the same materials. Because I would not sell my product to one of these middlemaen they blackballed my company and none of their sources would sell me raw materials. Luckily this situation pisses off some of the of store owners and I hooked up with one who orders direct from the manufacturers and they sell me my materials, at mcuh better price than I was getting.
I don’t understand how the stranglehold of these middlemen deveolped with no discernable added benefit, but it makes the cost of all fishing supplies here in coastal BC too high.

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