Establishing a Distribution Network
(Too many) founders of startups and CEOs of emerging companies have little or no understanding of what it takes to set up a distribution network.
Establishing a Distribution Network is an Art, a combination of building trust, being transparent, and enticing a potential distributor to become part of your Team. Distributors are to be treated as the extension of your company, the link between you and the ultimate end-user of your product, the client. If you think your distributor is your client that just buys your product for a premium price, and then the hell with him, stop reading right now, and consider closing shop. Unless you are affluent enough to set up your own subsidiary companies, then, of course, you don’t need distributors, and won’t be reading this anyway.
Before going through the steps of “How to Establish a Distribution Network”, it is imperative to realize that with just a product that seems to work, the chance of finding a distributor willing to be a guinea pig for your marketing efforts is remote. You, your company and your product have to be ready to entice a distributor, to interest them to invest in the launch of your product, to allocate time and people to assist you with a successful launch, and eventual sales of your product in his country. Distributors are not sitting by the sidelines waiting for you to come along with your formidable product you consider the biggest invention since sliced bread. Real successful distributors (the kind you want) are busy marketing, selling, supporting their clients, and making money. It is your task to convince them they can even be more successful if they take on your product.
If you don’t have one or more of the following essentials yet, it will be a tenuous endeavor to find and engage distributors for the launch of your product in their country. Expect that very few distributors are willing to stick out their necks, take financial risks and put their reputation on the line for an incomplete product offering, no matter how exciting and promising. Besides, the less you have of the following essentials, the more your launch will cost and the longer turning a profit will take. It is up to you to decide when the time is ripe to enter a (new) market, and where.
Essentials distributors will expect:
Needs research results
Proof of concept
Supporting publications by KOLs
Market & competitive intelligence data
Proof of market
Product positioning & pricing strategies
What dissuades most distributors are manufacturers that have no user references, no regulatory approval, no reimbursement, and no sales in their home country. An often heard excuse is “Our home market is too small”. Well, even the better: it should make it easier to align with the best KOLs in your backyard to get rapid and direct input during your product’s development, and ultimately product acceptance and sales.
If you think you are ready to explore the world and start searching for your ideal distributor, these are the steps it takes. And if this looks like “Mission Impossible” for you, engage an experienced expert to do this for you.
Where to start?
Based on your market & competitive intelligence, the O(pportunities) and T(hreats) of your SWOT analysis, your budget and your launch plan, decide on where to start. It may be tempting to venture into the world’s top countries in terms of market potentials, like the USA and China, but going big means spending big. Unless you are flush with cash and manpower, start in the smaller and more manageable countries. For example, in Europe start in the Netherlands or one of the Scandinavian countries, for Asia a good start is Singapore, and start in Canada before tackling the USA.
How to find potential distributors (in order of the most till least effective method).
1) Own network
The most effective way is contacting ex-colleagues, former clients, friends and your LinkedIn contacts, and ask for their suggestions and recommendations.
Pro: Saves time and money. Familiarity with referring companies/people.
Con: None really.
2) Medical conferences and exhibitions
Attend conferences in the countries you target.
Pro: Best venue for market & competitive intelligence and to find distributors. Attend presentations. Explore posters. Interview KOLs and potential customers. Visit the exhibits and attend conference events to find out from (competing and non-competing) companies about their own distribution network. Possibly, find and meet with the kind of distributor you are looking for. All in one location, usually taking 2-3 days.
Con: Could be costly – travel, accommodation and conference registration.
3) KOLs and (future) customers
Call on KOLs and potential customers. You have to visit them anyway for your needs research, market & competitive intelligence, clinical trials, user feedback, and so on.
Pro: Ask them whom they can recommend as distributor, who gives the best customer service, who has the best reputation.
Con: Time-consuming and costly, but worth every cent and minute.
Pro: Focused searches for the type of distributor you need. Look into their company page, their executives’ profiles, the posts they have published, their contact lists and group associations. Read their recommendations. Eventually, try to connect.
Con: Not all potential distributors may be found because of LinkedIn’s limitations to do focused searches, or simply because not all are on LinkedIn. No certainty that a connect request will be granted.
5) Your own website and social media
Post that you are in search of distributors in specific countries.
Pro: The word is out.
Con: Response rate can be quite low. Requires hiring online marketing expertise.
6) Commercial or trade attachés at your country’s foreign embassies.
Pro: Dedicated, supportive, driven by national interests for export from your home country.
Con: Can take time to get results.
7) Export Institutes and government branches in your country.
Pro: Databases of foreign companies that registered or visited on trade missions. Liaison with commercial or trade attachés abroad.
Con: Databases can be incomplete and not well-categorized.
8) Chambers of commerce
Pro: All registered companies are listed.
Con: Most charge for their services. Operate regionally, not nationally. Not all registered companies clearly indicate their capabilities and specialties.
9) Yellow Pages online
Pro: Generic lists of companies in broad categories.
Con: Only listed companies with paid ads provide information about what they do. Yellow Pages are out of fashion, so many companies are not listed. Time-consuming.
10) Web searches, e.g., Google
Pro: Convenient. Easy to use.
Con: Too many hits, running in the millions. Most results irrelevant due to inferior SEO, priority given to paid advertisers, and use of imprecise keywords. An enormous job to find what is needed. Time-consuming
11) Commercial database companies
Pro: More focused searches possible than with Google.
Con: Paid services. Purchased results can be too generic, not always relevant, and often not much better than an own, well-targeted Internet search.
12) Online matchmaking platforms
AngelList, Sunn4i, Novertur, and others
Pro: Database of companies (mostly startups) that are looking for something.
Con: Full use requires subscription/membership. Platforms are dedicated to companies looking for investors, partners, etc. Rarely used by distributors promoting themselves.
Start the selection process by visiting the websites of the obtained companies and exclude those that do not fit your needs and requirements. If your distributor list is based on web searches, yellow pages or obtained databases, this selection process could be an arduous undertaking.
Another manner to select your ideal distributor is to find out if they are active on social media. Companies that are active online use social media, like FaceBook, Google+ and Twitter, for 2 purposes: to promote themselves and to receive user/customer feedback. Other sources to check out a potential (online active) distributor is to read their blogs, listen to their podcasts, participate in their webinars, and watch their YouTube and Vimeo clips. But beware that companies can paint a rosy picture of their capabilities and products on their website and social media. Even customer posts on FaceBook and Twitter can, if negative, be removed by the company. Few distributors have an online presence in social media, with the exception of LinkedIn.
The aim is to obtain the names of the right person to contact, their email address and direct or mobile phone numbers. This should be a breeze if the company comes recommended or referred to you. On the other hand, if you have to rely on information from a company’s website, a central company phone number or an firstname.lastname@example.org email address, finding and reaching the right person can be difficult. Many companies don’t respond to emails sent to their info@ address, or they don’t see your email because it disappears in a spam folder. Definitely do not send out mass emailings; not only will it not give any useful results, it may damage your reputation when you eventually manage to contact the right people. Perseverance and repeating the steps under (A) Find may be the only way to get what you want.
What do you communicate to your prospects at this stage? Unless you already met the right person at a conference, you now need to introduce yourself and at the same time find out more about your potential distributor. Your introduction must be concise and to the point. Never attach lengthy company profiles or executive summaries, or overlong slide presentations. Your message should describe who you are, how long you are in business, what your product is, its stage of development, regulatory and reimbursement details, and where it sells already. Write what you need in the distributor’s country and what you expect from your distributor.
Prior to the next step both parties need to understand and be convinced what the benefits for each side will be in case a business relationship is established. You have to assess the details you received from the potential distributor, and your distributor needs to know the general terms of your distribution agreement, business model and marketing plan for his territory.
If there is mutual interest, it is time to meet face to face. But where? In the distributor’s office or yours? I usually use the following rule of thumb: if you contacted the distributor, you travel to him, but if the distributor contacted you, let him come to you.
Each alternative has its advantages. Traveling to the distributor enables you to see his premises, meet his team, and visit their customers. You can demonstrate your product and discuss business matters. It gives the chance to your distributor to sell himself as your best choice. Being in that country also gives you an opportunity to visit more than one potential distributor. This scenario I have experienced most commonly. Sometimes a potential distributor prefers to visit your company, especially if you have your own R&D and/or production facilities. No matter who visits whom first, the purpose is to get to know each other and work on building a business relationship.
At this stage both sides will have to evaluate whether a business relationship will be beneficial. You will have to decide if this is the right distributor, and the distributor will have to decide if you are the right company whose product he wants to distribute. Both sides have to asses if it is worth the investments and efforts needed to become successful and make a profit.
Once you are confident that this can be your right partner, as a last checkpoint, define your expectations, and see if your candidate distributor can agree. For example: sign distribution agreement in 2 months, launch product in 4 months, obtain 5 customers in 8 months and sell $2 million to 25 customers in 2 years which will be 10% of your company’s forecasted global sales in 2 years. Looks simple, but this is often overlooked.
(G) NEGOTIATE DISTRIBUTION TERMS AND CONDITIONS
Agree on who pays for what. Who is responsible for local regulatory and reimbursement matters, clinical trials, demonstrations. Details about payment terms, ordering procedures, deliveries, storage conditions, product installations, technical service and maintenance, sales training, customer training, samples, conferences and exhibitions, customer support, warranties, MarCom, and more.
Last but not least, the distribution agreement: short, to the point, relevant, and transparent so that there can be no misunderstandings. I have seen convoluted 75-page cutthroat agreements that were one-sided in favor of the manufacturer only, and subsequently killed months of preparatory work and negotiations.
A fresh partnership between distributor and manufacturer is born in a period of bright optimism. By aligning with a new distributor, a manufacturer should refrain from signing an alternative distributor, just like it is expected from the distributor not to represent a competing manufacturer or supplier.
No distributor will spend time, efforts and money on the launch of a new product, if he is not offered exclusivity from day one, knowing that others will be in competition. No one will visit KOLs and potential clients only to hear that another company already presented the same product from the same manufacturer. Unless it’s a me-too product that is sold by catalogue via the Internet, no distributor with a trained staff, a dedicated field force, and a reputation to live by, will accept anything less than exclusivity.
When aligning with a new distributor, it is important to assign a territory that is not too large initially. Start small, start local, start where the distributor has a proven track record. It is not prudent to assign a large territory (like several European countries at once, or the whole of the USA or China), and hope for the best. Expand the territory gradually, after results in the smaller territory suggest that an expanded geography is judicious.
Minimum order obligations.
No distributor will accept minimum purchase obligations right from the start. Launching a product in a new market and country is a team undertaking by the distributor and the manufacturer. Both parties should have the same goals: to have a positive impact on a patient’s wellbeing, to offer the user clear-cut benefits, to sell as much as possible for the most profit possible to as many clients possible, and to do so in an ethical manner. Sales forecasts are of course necessary for planning purposes by both parties, but stranglehold purchase obligations date back to yesteryear’s practices.
Termination for convenience
Setting the term of validity of the agreement to one or two years with automatic renewal is a routine procedure. This way either party can submit a notice of intention to not renew with (e.g.) 90 days prior to the end of the term. When the convenience clause is invoked, cause and responsibility for cause need not be argued. More important, the distributor agreement does not end in a legal skirmish, consuming management time, corporate focus and financial resources on attorneys, courts and arbitration. Performance, and not a wordy agreement, should be the binding force in a manufacturer-distributor partnership, where both sides are driven by successful results.
Termination for cause
This is the usual legalese that includes agreement breaches, bankruptcy, insolvency, fraud, etc. that need no deliberation here.
A reliable distribution agreement should clearly state the responsibilities and obligations of both parties during the life of the agreement, upon notice of termination, but also after the agreement is terminated. There are matters that need to be finalized, such as payments, return of product and company materials, taking over pending orders and deliveries, maintenance agreements with clients or end-users, etc.
What is often overlooked is compensation for the distributor in case of an acquisition or merger of your company, or when you see the time is ripe to start selling directly or setting up your own local subsidiary company in the country in question. Compensation can include continuing (and paying for) the use of some of the distributor’s staff that handled your product, or have the distributor continue with local product handling, like logistics, warehousing, technical service, etc. In case of a complete discontinuation of the working relationship, you should agree on a way to compensate a distributor for the investments he has made for the launch of your product, especially when a distributor has performed to your satisfaction and plan, it is only logical to compensate him as he will not see the returns on his investment.
In general, a distributor that is underperforming will be terminated for non-performance, yet a distributor that has been performing or even doing better than expected, risks of losing his distributorship because the manufacturer wants to go direct. Distributors always have to play a balancing act between being good or too good.
(H) SIGN & START
The moment of truth. Both your distributor and your company have taken the important step to launch your product based on mutually agreed sales objectives and marketing strategies. Now is the time and moment that both parties put in action what has been discussed and agreed upon.
Distributors are becoming scarce. First of all because more and more manufacturers prefer to set up their own subsidiary companies, even in the smaller countries. Secondly, because buyers prefer to deal with less suppliers for two main reasons: price discounts as a result of economies of scale, and the advantages of dealing with a single source.
Finding and working with distributors should be based on complete transparency and mutual trust. What is good for you is good for the distributor, and vice versa. I have established distribution networks on all continents, as CEO and VP International Business Development & Marketing of large corporations, mid-sized companies and startups, and have been a distributor myself for five years. I can humbly state that I know what it takes to work with a distributor and to be one.
Your company’s mission should be to sell benefits to ALL of your stakeholders, and the distributor should be one of them. If it is not, make it one.