For the last ten years I have been working with Australian small businesses from high-tech sectors, from medical devices, biotechnologies, clean technologies, ICT to electronics and advance manufacturing. What always stroke me during these ten years, was always the difficulty for small businesses to generate a high level of sales from these distributors. Now is the time to stop the debacle! In this series I am going to cover a simple process to make your distributors work for you.
In this third episode, we will uncover a critical step when working with distributors. This step sets the basis for either success or failure. This is where small businesses often don’t know how to frame their approach to distributors or partners.
Trading terms – At a very basic level of engagement, your trading terms need to be right for you. Let’s assume your overseas distributor price list is ready. The things you need to check are that you have clearly stated the Incoterms® related to that price, as well as the city and country. Namely EX-Works (EXW Sydney Australia). Delivery At Place (DAP Munich Germany). If you are not familiar with Incoterms®, register for a training with ECA. You then need to make sure your price list has a validity date stated on it. The payment terms are another important information. See an example of a Pricelist Template on the download section of our website.
Exclusivity – Exporters are often asked for exclusivity by distributors. I have a very definitive position on this: no exclusivity is my general rule, when I negotiate with a distributor. Small businesses need to be able to keep control of their distribution, and giving exclusivity means the distributor does not really have to go the extra mile. If you ever happened to have to give exclusivity, it needs to be limited in time, and subject to sales performance. You really need to frame it, to be in a position to walk away if you distributor is not performing.
How many? – The number of distributors you appoint really depends on the size of the market and distributor. In Europe, for example, you could only appoint one in Belgium and a minimum of two in Germany. Make it manageable for you and appoint one distributor at a time anyway.
Negotiation
Where to start? – The way to negotiate it is to start from the best position for your business. For a new distributor, it is fair to require payment in advance. Then, for example for us when dealing in Europe we usually stick to thirty days’ end of month. As you may have seen on our Pricelist Template, I also like to add in there “We reserve the right to change trading terms, in case of late payments.” I urge it to use it. To make it easy for your overseas distributors, deal in their currency. Of course you may want to limit your transactions in a limited number of currencies to start with, ie. Euros and US$. It’s easier to manage. In terms of the Incoterms®, try to Impose EX-Works. It just makes your life easier. The distributors may have way better deals than you do with freight forwarders and may be in a better position to negotiates shipping costs. You don’t have to manage overseas customs, and local taxes.
How far to go? – When I start a negotiation, I observe very strict principles. First, I am not a big discounter, if I do it’s usually not massive. Second, when a distributor wants to negotiate a term, I usually like to trade it against something. It could be a new product positioning in a catalogue, a marketing campaign or something like that. Don’t always think about price only. Don’t be afraid to walk away if the distributor is pushing you to terms that don’t suit you. It just means that they are not right for you.
Margin – The recurring question of exporters that come to us is also how much margin do I give to a distributor. Again you should know your starting point, it should not be dramatically different from the margin of Australian distributors. In principle, a margin depends on the role undertaken by the distributor. You need to define what role they are going to play for you, are they going to do aftersales support for you? What marketing campaigns have they committed to run for you? How many sales representatives have been trained in your product? Then margin, depends on their volumes of sales. You need to think, for which what volume of sales would you be prepared to give them more margin.
Distributors Program – That is the ultimate! Once you have more experience with distributors, you can develop a program for them. You can articulate in that programme, the different types of distributors (tier 1, tier 2, tier 3…), their obligations (mini annual turnover) and their rewards (ie. % discount). You can use this channel program as a nice engagement and activation tool. I will uncover more of that in Episode 4.
I hope you enjoyed this Episode 3, the next one will be around Activation of a distributor. I personally really enjoy this part this is when you start to get some nice sales coming through! You can refer back to our tools and previous articles.