March 23, 2021
6 min read
Seeing your relationship with a distributor like a dating relationship can be a useful way to gain clarity and avoid pitfalls.
Finding the right distributor to leverage your product or service in global markets is a common strategy for export sales success. The right match offers access to new audiences, established networks, and increased exposure. However, many businesses experience initial failure due to a lack of market research and customer understanding at the outset leading to a misalignment with their chosen distributor.
The following Q&A interview with Dan Hansen, Managing Director explains how to find the right distributor from the get-go and maintain a healthy ongoing relationship for future success.
Here’s a common scenario I see time and time again. A manufacturer develops a new product and takes it to a trade show. A would-be distributor approaches the manufacturer at the event and says “I love your product, can I be your exclusive distributor in a particular region?” Often talk of regions amounts to nothing more than a land grab on the basis that the widest region will deliver the greatest sales opportunity. However, in the heat of enthusiasm both manufacturer and would-be distributor enter into an agreement.
“...in the heat of enthusiasm both manufacturer and would-be distributor enter into an agreement"
At this stage, no market validation has taken place to understand if the distributor is the right fit for the manufacturer or their target market. Over the course of the next twelve months, the manufacturer becomes increasingly disillusioned with the distributor as sales fail to arrive while the distributor looks to the manufacturer to ‘create a product that will sell’. Eventually, the partnership dissolves. Both parties have wasted time and money and the manufacturer is back to square one. The key reason for the failure in most of the cases is because there is a misalignment between the manufacturer and the distributor, and the distributor and their own customers.
The key reason for the failure in most of the cases is because there is a misalignment between the manufacturer and the distributor, and the distributor and their own customers.
The most important first step is to complete market research to understand who your customer is and where the opportunity lies. You can then look for a distributor who allows you to access those customers through complementary products. Once you know who your consumer is, you need to work out who distributes the products that the consumer uses and then align with the distributor. It’s not rocket science - if you do the market research validation right and create the strategy to begin with, aligning the distributors is not so much of a challenge because you know what you are looking for.
Once you know who your consumer is, you need to work out who distributes the products that the consumer uses and then align with the distributor.
The next thing to consider is the size of the distributor. The downside of a larger distributor is if your product is singular or part of a small range, you are less likely to stay top of mind because you are competing with much larger portfolios. The advantage of an independent distributor is that they tend to specialise in a market, region or type of product so are more likely to resonate with your customers more closely.
I’ve often seen companies have a great relationship with a distributor in one region, however when they are asked to operate in another region, the relationships won’t carry across because they don’t understand the nuances. For example, if you look again at the food industry Australia shows marked differences in terms of climate and eating habits between regions such as Melbourne versus Queensland. Having the same distributor working in both areas can be quite difficult because they understand the dynamics of one region but not the other.
Having the same distributor working in both areas can be quite difficult because they understand the dynamics of one region but not the other.
It can be quite difficult to enforce sales targets on a distributor as you might a salesperson because you are one of the thousands of products. Some will accept a minimum quantity or order value per year or similar. The distributor's job is to move the product from A to B out to the consumer or to the retailer. Therefore, in many cases the onus is on the manufacturer to proactively help the distributor sell by creating pull-through at the consumer level. This is also about keeping your products front-of-mind for the distributor’s salespeople. Products that sell get sold because the distributor is talking about them more often. The question for the manufacturer is about creating initiatives that build this momentum.
...in many cases the onus is on the manufacturer to proactively help the distributor sell by creating pull-through at the consumer level.
We would always advise our clients to avoid any distributor that only wants to commit to a consignment agreement. This is where the distributor agrees to distribute your products but is not willing to buy it upfront so will only pay when the product sells, leaving all the risk with the manufacturer. This approach ties up working capital and there is little impetus for the seller to market the product. After all, if the product doesn't sell, the manufacturer can just take it back.
This often reflects the fact that the distributor doesn’t understand the value proposition of the product and the manufacturer hasn’t been able to define the target market and the value that product has to the consumer. At Apagie, we would always advise that a distributor buys minimum orders to ensure they share the responsibility of sales success.
At Apagie, we would always advise that a distributor buys minimum orders to ensure they share the responsibility of sales success.
This is their default position often to block out competitors and protect their potential revenue. However, being roped into a turf war doesn’t necessarily benefit the manufacturer. If there is a misalignment between the manufacture and the distributor and they do not have the experience to sell your product, the opportunity cost is significant because you are reliant on that one distributor. On the other hand, exclusivity can be useful if you have a specific route to market that can leverage the distributors' niche position.
It’s all about generating ‘pull through’ in the sales process. Promotions result in the consumer buying the product from the retailer, which means the retailer buys more product from the distributor, who then buys more from the manufacturer. The question the manufacturer needs to ask themselves is “what can I do to generate that pull through to help appeal to the consumer at the end of the value chain?’ Too often, the manufacturer assumes that once a distributor is secured, they can relax and let the orders roll in. However, successful distribution partnerships are not an ‘arm’s length’ affair. It’s important that the manufacturer has an ongoing dialogue with the distributor, in particular their sales people because they are the people out in the market and can provide market information to the manufacturer to gain a better understanding of what their customer needs. The manufacturer can then modify their sales initiatives on this basis.
Each case is different but generally speaking, distributors use margins between 25-35% and the retailers between 50- 100% mark up. Therefore, the complexity of the route to market is a critical factor because the manufacturer has to keep in mind that the consumer has a price point. If the route to market becomes too complex then the price becomes too high for the end consumer and pull through is impacted.
Again understanding your end customer will provide invaluable insight into the consumer price point and help shape the route to market options, and price to manufacture.
There are a wide variety of ways to simplify routes to market. Common methods Apagie has employed include selecting distributors who can provide storage and fulfilment capabilities therefore reducing the need for wholesalers. Using online sales platforms such as Amazon and eBay where distribution, retail and fulfilment are for all intense and purposes combined. You can also identify distributors with large reach so a balance of margin and volume can be acquired. That’s why that alignment in the market is so important to begin with, if you know where the customer is then you can work back to the distributor.