We will cover:
– the key differences of an agent and distributor;
– why you would choose to use a middleman;
– possible pitfalls;
– key considerations in choosing the right distribution option;
– how to locate an agent or distributor;
– how to structure the deal; and
– how to effectively manage the relationship
Clearly, the topic is broad; and professional advice is recommended to help you work through what can be a daunting path. Our aim here is to provide some practical and essential pointers.
So let’s look at the key differences between an agent and a distributor.
- An agent works on your behalf on a commission base to promote, market and deliver sales in an agreed overseas territory. The Contract of Sale is direct between you and the customer, not the agent; and it is important for you to recognise that you as the exporter will retain the majority of risk.
- In comparison, the distributor buys and on sells your product/service in the agreed overseas market. You sell your product/service to the distributor at an agreed “buy price”. While you will often agree recommended end prices, the distributor on sells at a price that he or she determines. The Contract of Sale is between you and your distributor, with the distributor taking the majority of risk on sales to end customers.
Why would you choose to use such a middleman, when there are other distribution models available to you?
The key advantages in having an agent as part of your team are:
- The agent serves as your local expert, your “eyes and ears” in what may be a challenging market. A good agent will have a thorough market knowledge; effective networks; and an understanding on how to guide you through the cultural environment.
- Armed with effective networks, an agent should be able to open up and influence a new market relatively quickly – compared to trying to do it yourself – and secure all-important cash flow.
- As the agent contractually works on your behalf, you have greater control on market pricing and brand image compared to using a distributor.
- You face a less fixed costs when working with an agent compared to selling direct or through a distributor, and often you may tailor a commission structure to motivate your agent.
- Should everything turn ‘to custard’ you are likely to have a less painful exit strategy when working with an agent, compared to de-camping from your own local branch or subsidiary, or working through a distributor.
Now let’s look at the comparative advantages of working with a distributor.
- As your Contract of Sale is with the distributor, rather than with end customers, it is often a simpler and cleaner arrangement – with the distributor handling the end customer risk. This should not be ignored.
- A good distributor – just like a good agent – will be your local expert with established networks, which you should be able to leverage for early sales and income.
- The distributor buys and on sells your product/services. Accordingly, the distributor is expected to hold stock and thereby reduce delivery lead times.
- Your distributor will have a clear interest in moving stock, and you would expect the distributor to invest in a progressive sales and marketing program.
- A distributor often takes responsibility for freight and logistics, and currency risk is potentially more manageable.
- A good distributor can enhance the after sales service, often a key consideration for the end customer.
… and the pitfalls?
- An agent may be ‘over eager’, and you may have less control on marketing strategies, activities and resulting brand standing compared to’ going on your own’
- As the Contract of Sale is with the customer and not the agent, you will be carrying the risk, and you are likely to be responsible for freight and logistics
- By selling ‘at arm’s length’ your after salesservice may be difficult to manage, compared to dealing direct through your own operation or using a distributor; which in turn may damage your brand reputation and opportunity for repeat business
- To cover overheads and stock, a distributor usually requires a significant product price discount from you; resulting in a lower margin for you compared to selling direct or through an agent.
- A distributor will often seek exclusivity from the outset, with limited commitment to a minimum stock-holding level.
- You face the risk of losing brand identity and control on market pricing.
- Potentially you may face owner’s payment terms, with a distributor pushing for “as and when” payment arrangements.
- While a good distributor will provide after sales service, you may well still face significant challenges in keeping end customers satisfied and your brand reputation intact.
So, to sum up, there are a number of considerations to weigh up when deciding upon the best distribution model for your business; a topic which will be explored in the next article in this series.
Last modified: September 23, 2014