---
title: "Do You Also Think: Reducing Intermediate Links Reduces Costs?"
description: "In recent years, some business models in the baijiu industry have been based on the idea of reducing intermediate links to cut costs. However, Mr. Zeng Xiangwen argues that this notion is flawed, and that in a competitive market, no existing channel link is redundant. Removing intermediaries often raises, not lowers, channel costs due to loss of specialization and scale."
author: "曾祥文"
publisher: "New Distribution"
email: "zhaobo258@gmail.com"
telephone: "+8615854817671"
published: "2016-07-19"
language: "en"
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---

# Do You Also Think: Reducing Intermediate Links Reduces Costs?

> In recent years, some business models in the baijiu industry have been based on the idea of reducing intermediate links to cut costs. However, Mr. Zeng Xiangwen argues that this notion is flawed, and that in a competitive market, no existing channel link is redundant. Removing intermediaries often raises, not lowers, channel costs due to loss of specialization and scale.

Introduction
In the past two years, during explorations of channel reform, the baijiu industry has seen many business models based on "reducing intermediate links to lower costs." They act with high profile and have considerable say.
Mr. Zeng Xiangwen says that "reducing channel links to lower costs" is actually not valid. If anyone claims this as a business opportunity and starts a company, they are lying.
**◆ Where are the redundant links for you to cut?**
Under market competition, no existing channel link is redundant. The reason is simple: a company's instinct is to maximize its own interests and pursue high profits. No company would tolerate employees with high pay but low contribution; similarly, how could it tolerate channel members with low value but high demands? Every company has the motive to "burn the bridge after crossing it," and channel members without value will be quickly squeezed out.
In fact, except for government-monopolized exclusive sales areas, redundant channel members cannot exist.
**◆ Does reducing intermediaries lower or raise channel costs?**
Taking stock, the assertion that "reducing channel links lowers costs" is not reliable.
Hypermarkets are considered models of low price and direct supply. However, their low prices come from supply chain management + cash flow investments outside the industry + policy subsidies + marketing management. They do not rely on reducing intermediate links to cut costs.
Direct selling models claim to reduce intermediaries. But why are the retail prices of products sold by direct selling companies much higher than peers, and the average income of practitioners extremely low? Clearly, the costs of the direct selling model are higher than those of hypermarkets.
E-commerce and O2O also claim to reduce intermediate links and benefit consumers, but their real costs are not low. Most of their low prices depend on "counterfeit products with low costs + fake rankings and transaction volumes + burning money on subsidies for illegal below-cost dumping + tax benefits + reducing promotional expenses regardless of consequences." Their costs are also higher than traditional commerce.
Why doesn't removing intermediate links lower channel costs?
First, the number of channel members is inversely proportional to total channel costs.
Intermediate links emerged precisely to lower channel costs. Removing them may actually raise costs.
Second, the specialization and scale of intermediate links ensure that total channel costs are reduced.
Companies prefer to recruit distributors rather than sell directly from the factory. A manufacturer's flagship store mainly serves brand purposes. Its actual operating costs are certainly higher than those of distributors—retail terminals.
When consumers travel far to seek medical advice, they implicitly bear all costs such as identifying doctors, transportation, and accommodation. Although they do not share the hospital director's salary, pharmacy manager's salary, or pharmacy rent, their expenses are certainly higher. Adding a hospital link makes doctors' functions specialized and scaled. Although an extra link is added between patients and doctors, patients actually reduce costs.
Farmers would rather sell vegetables at the field for 1 yuan than deliver them to the supermarket themselves, because the cost of self-delivery could be 50 yuan per jin. Only by selling to intermediaries at 1 yuan can city residents buy vegetables at 3 yuan.
Each removed link may lose professionalism, such as pharmacies selling drugs directly to patients being less professional than hospitals; it may also lose scale advantages: express delivery costs are certainly higher than the costs of a national hypermarket distributing to terminal stores.
It is surprising that intermediate links seem removable, but usually, channel costs become higher instead!
**◆ The problem lies with "consumers + swindlers"**
However, why does the lie of "reducing channel links to lower costs" have a market? The problem lies with consumers—consumers' cognitive misconceptions + swindlers exploiting these misconceptions, and the two go hand in hand. It must be exploited, and producers and operators have no choice but to exploit it.
First, consumers.
Consumers love to take advantage, hoping channel costs are free, but channel costs objectively occur and must be passed on to consumers.
Product costs include both production costs and channel costs. But the problem is that most consumers are only willing to pay production costs, not channel costs. Patients are willing to pay for "useful" physical medicines and instrument checks, but not for "just talking" doctors. Diners are willing to pay for "useful" dishes, but not for minimum consumption—actually sharing rent and utilities.
Thus, hospitals have to keep registration fees low and drug prices high, incorporating doctor compensation into drug and examination fees. Many doctor-patient conflicts arise from this, harming both doctors and patients.
Restaurants have to raise dish prices and drive away customers who sit for half a day over a beer, causing countless disputes.
Second, swindlers.
Facing such consumers, the right way is to build a brand, winning consumers with product quality, service image, and corporate reputation.
However, some operators find the right way expensive and want to take shortcuts. They pretend to be low-priced while actually charging high prices. They lower quality to achieve low prices, but fabricate lies to attribute the low prices to other reasons.
Thus, they think of the excuse of "reducing channel links."
Unable to compete on brand, they can only compete on price; unable to achieve low prices based on cost, they can only weave low prices based on lies.
**◆ Channel costs do have unreasonable aspects**
However, if we carefully study channel costs, you will find that behind consumers' irrational behavior, there seem to be some demands.
Channel costs include two parts: marketing and selling. Marketing refers to all investments that "make consumers willing to buy," including advertising, celebrity endorsements, promotional gifts, giveaways, and venue rentals.
In fact, if these expenses were itemized, consumers might be unwilling to pay for them. But consumers can only choose products, not remove specific contents included in the product.
Channel selling refers to all investments that "make consumers able to buy," including logistics, warehousing, fees charged by police checkpoints, fines for overloading, refined oil from PetroChina, terminal store rents, labor, fire safety fees paid to public security, the cut paid to Ma Yun by Taobao shop owners, and meals that salespeople buy for hypermarket buyers. All these expenses, reasonable or not, are included in the price and ultimately paid by consumers.
To some extent, the lack of social security is a major factor raising channel costs. The lack of credible evaluation institutions forces companies to "run a society" themselves, which has a particularly large impact on costs. But as a company, the only way is to reduce channel transaction costs and management costs, and to evolve as a company.
Well, let's stop here.
Source: Jiushishan 679 Viewpoint Club (ID: new-food)
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