As a small business, you may not know how to approach distributors or partners, so engaging your distributors is key to the success of your exporting efforts. There are different ways to approach them, and one of them is when you attend trade shows or digital congresses. Directly contacting your selection of potential distributors is also fine.
To avoid any wasted exporting efforts, here is a guide to help you on how to engage with your distributors:
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- The Right Trading Terms For You
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- To Give Exclusivity … or Not
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- Ways to Negotiate with Distributors
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- Know the Amount of Margin to Provide
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- Build a Distributors Program
The Right Trading Terms For You
It is always challenging to negotiate trading terms with your distributors. As a small business owner, you should not be afraid of this. I suggest you choose the terms that make sense to your business. Assuming your international distributor price list is complete, make sure that you have a good understanding of the Incoterms® associated with that pricing. It includes the city and country specifically, EX-Works (EXW Sydney Australia) and Delivery At Place (DAP Munich Germany).
In case you are not familiar with latest Incoterms®, there are various simple exporting training packages available that will guide you through the process, and you must get your employees on board with this. You can view one of our recent webinars on Incoterms here
People in your organisation who are in charge of invoicing and dealing with freight companies will need to understand the various systems to use the proper wording on the invoice. You must also make trading terms clear to speed shipment and ensure smooth transit.
Another thing to keep in mind when dealing with distributors is to set your pricing levels in line with volume breaks. Here are a few tips to help you out:
Set your Price Levels
I recommend that you offer volume discounts to your customers. Everyone likes to feel like they are getting a great deal. For example, if a customer orders twenty items, they will pay the unit price, but if they order fifty items, the rate is better, and so on. It is how things operate.
Giving your clients a reason to buy in higher numbers is beneficial to your organisation. They may only need to purchase 35 units. However, if they discover that ordering 50 units will get them a better bargain, they are more inclined to go with the higher amount. Quantities or sales numbers can drive these price schemes.
Establish your Payment Terms
It is alright to request payment in advance. However, in the long-term, it is detrimental for distributors. 30 days or 30 days until the end of the month is accepted; I would not generally recommend going over this timeframe. In a contract with one of my clients, I have added a clause that I believe is very effective. It states,
“Our terms for payment are thirty days. In case of delay in payment, we reserve the right to change payment terms.”
If you’re working with a distributor that you know is sluggish to pay, you can change the payment conditions back to payment in advance. While there may be minor variances across nations, these phrases are accepted throughout.
You need to make sure that your price list contains a validity date and your payment details. You can also revert to our Pricelist Template here.
To Give Exclusivity … or Not
Distributors frequently want exclusivity agreements from exporters. I have a firm stance on this. No exclusivity is my usual guideline when negotiating with a distributor. Small businesses must maintain control over their distribution, and offering exclusivity to a distributor implies they will not have to go above and beyond for you.
If you decide to offer a distributor exclusivity, it should be for a short period only and contingent on sales success. You should structure your agreement such that you may walk away if your distributor isn’t performing effectively for you.
Wondering how many distributors should you appoint?
The number of distributors you should designate is determined by the size of the target market and distributor. In Europe, for example, I recommend appointing only one distributor in a small market like Belgium and a minimum of two in major markets, like Germany. Make the issue easier on yourself by appointing one distributor at a time.
Ways to Negotiate with Distributors
A good way to negotiate with a distributor is to start from the position that is most helpful for your business.
Where should you start?
Have your starting position ready when you engage with a distributor. It means you must be prepared with your indicative recommended retail price or list price. You must also be clear on the Incoterm you will request, as well as your payment terms. Having a clear idea of the validity of your pricelist is also important. One year validity is a usual validity period for a B2B transaction.
How far can you go?
When I first begin the negotiation process, I adhere to extremely rigorous guidelines. To begin with, I am not a huge discounter, and when I provide a discount, it is typically not a significant one. Second, when a distributor wants to negotiate a term, I prefer to exchange it for something. It might be something as simple as targeting together a specific customer, a marketing campaign, or something more. Don’t always base your decision just on pricing.
If the distributor tries to force you into trade conditions that don’t suit you, don’t be scared to walk away. It simply signifies that they are not a good fit for your company.
Know the Amount of Margin to Provide
One of the most common questions we receive from exporters is, “How much margin should I offer to a distributor? “Once again, you must be conscious of your starting point. It should not differ much from the margins of your domestic market distributors. You’ll need to balance your costs and the profit margin you need to make.
- Would they give you after-sales support?
- What marketing efforts have they agreed to undertake for you?
- How many sales reps have received product training?
You must also know the margins required by your distributor. Distributors may sell to retailers sometimes. You will also need to ensure that they can have a margin that they are comfortable with. You must determine how everything balances out and how everyone can make a substantial profit to be driven to market your products.
Build a Distributors Program
You may create a programme for distributors once you have more experience interacting with them. You can define the various distributors (Tier 1, Tier 2, Tier 3, and so on), their duties, and their benefits in that programme (i.e. percentage discount). We may use this channel programme as an engagement and activation tool.
Although, it still depends on every need and goal of your business. These guidelines helped a lot of my clients to have a more successful expansion in the European market. It allows them to avoid mistakes and waste their exporting efforts.
Download our tool at https://www.exportia.com.au/downloads/ this has been designed to help you choose the right distributor for your business when exporting to the European market.