Small companies often rely on middlemen for their business operations. For decades, the middleman has been responsible for connecting manufacturers and service providers to customers. With the advent of digital technology, it's easier than ever to reach consumers directly. As a small-business owner, you can choose to bypass intermediaries to increase your profits and cut costs.

What Is a Middleman?

Traditionally, a middleman is a person or business that negotiates with manufacturers and other companies on behalf of the end user. Think of those who buy goods directly from producers and then sell them to retail stores, for example. However, this category also includes salespeople, brokers, travel agencies, delivery agents and more. Recruitment agencies, for instance, act as the middlemen between employers and job seekers.

Middlemen are an important component of the supply chain. Depending on the industry, they may negotiate contracts or help businesses purchase goods on credit. Automobile manufacturers, for example, promote and sell their products through auto dealerships. Real estate agents connect homebuyers with sellers, while travel agencies negotiate better rates on flights and accommodations on behalf of their customers.

The role of a middleman is to facilitate interaction between two or more parties in exchange for a fee or commission. In some industries, consumers may choose to buy directly from producers and cut out the middleman. Local grocery stores, for example, may purchase fresh produce directly from farmers and use their own vehicles for transportation. However, some products can only be purchased through distributors.

How to Identify the Middleman

Cutting out the middleman may help lower your costs, leading to higher profits. As a small business, you can pass on the savings to your customers or invest the money in new products or services. The first step is to identify the intermediaries with whom you're dealing. Beware, though, because middlemen can provide you with goods to which you may not otherwise have access.

So, how do you identify the middleman? This depends largely on your industry and type of business. A fashion boutique, for example, may rely on clothing manufacturers, distributors, delivery companies, drop shippers and other intermediaries. In this case, cutting out the middlemen could mean renting or buying a factory to manufacture clothing and accessories, using your company's vehicles to deliver the goods and so on.

As a small-business owner, you may want to grow your team or outsource projects. To cut out the middleman, create and post job ads on your website and social media pages or on free classified-ad platforms like Craigslist. Guru, Fiverr, Upwork and other freelancing platforms connect businesses with independent contractors in exchange for a commission. Therefore, they are the "middlemen."

Should You Skip the Middleman?

Bypassing intermediaries may reduce your business expenses, but it's not always the best thing to do. In fact, it's not even legal to do so in some industries. For example, certain states require bars and other venues selling alcohol to purchase beverages through liquor distributors.

Furthermore, intermediaries may help you get better prices. Corporate travel agents, for instance, can secure lower rates on flights and accommodations for your employees. Additionally, intermediaries often buy products in bulk, so they can sell them cheaper to retail stores. They also provide feedback to manufacturers about products, helping them improve their offerings.

Whole Foods, Walmart, Macy's and other big companies sell many goods under their own brand names, cutting out the middleman. However, as a small business, you don't have their budget or their reach. Instead, try to see where you can cut out the middleman and where it makes sense to use intermediaries. For example, if you specialize in handmade cosmetics, you can set up an online store rather than using eBay, Amazon or local distributors to market and sell your products.