Not all startups are based on the cloud, an app or digital media. Some startups still sell good old products that you can hold in your hands. Unfortunately, selling an actual product that needs to be shipped to your customer can complicates things quite a lot. Do you market through an agent, go down the direct sales route or do you use a sales distributor ?
In this article we will go over the key aspects that need to be considered before you make your decision.
Just to make sure we are all on the same page, let’s define what a distributor actually is, at least for the purposes of this article. A distributor purchases the products from you (or directly from your manufacturer) and usually keeps a stock of the products. The distributer then sells the products to local customers in their area. The distributor’s profit is based around the difference between the price they paid for the goods and the price at which the distributor then sells them onward to its customers.
Are you willing to grant your distributor exclusive rights ? Or will others be given similar distribution rights at the same time ? Granting exclusivity is your choice. It’s completely up to you. However if you do go down the exclusivity route there are a few key considerations to keep in mind.
▪The territory: Be sure to clearly define the boundaries of your disturber’s exclusivity. Do they apply to an entire country? A geographical region? Or just to a specific group of customers? Make sure that both sides are clear on this to avoid potential conflict.
▪The product: Does your supplier enjoy exclusive rights to your entire product range? Or are they limited to a specific model within your line up? What happens if your distributor has exclusive rights to product X and next year product X gets updated to X+ ? Do the rights for the new product automatically fall into the hands of your exclusive distributor? Or do the terms need to be renegotiated ?
▪Other things to consider: Granting exclusivity to a distributor for a particular market entails an element of economic risk. You need to make sure you don’t end up with a distributor that can’t or won’t keep up with market demand. Since you’ve given them exclusive rights no one will be able to join the party and make up the difference. So either add in a clause that will force the distributor to keep up with demand or make it possible to breach the contract without excessive consequences.
2. Minimum purchases
Usually you should demand a minimum purchase as condition for retaining the distribution rights (be they exclusive or not). There isn’t much more to this point than that. Just make sure your potential disturber has adequate finances and a proper facility. You don’t want to deal with a teenager working out of his parents’ garage. Forcing your distributor to buy minimum amounts of your product will help eliminate the time wasters.
3. Some background checks
As noted above, you want a reputable distributor with financial robustness and the necessary capabilities to successfully work within whatever field your product falls under. The number of years the distributor has been in business is also a key consideration. The longer they’ve been in business, the better their reputation (most likely). You can capitalize of your distributor’s reputation so seeking an established player is worth while.
How much freedom are you willing to give your distributors? How freely can they make changes in pricing? Give discounts? etc’. Low prices might be needed in order to penetrate a new market. Some distributors might even consider losing on each product sold just to take over a larger market share. Will you allow this? Lowering prices too much on a premium product gives off the wrong message and image. So decide what your policy is going to be and make sure your distributors are on board.
No one can hit 100% quality. Even the likes of Apple have had many manufacturing troubles over the years and customers ended up with defected products or products that simply gave up the ghost after a few weeks of light use. This is where the warranty comes in. The warranty issue can involve huge financial exposure so make sure you think this through properly. Has your manufacturer slipped up? Or did your distributor receive pristine products only to have been careless while storing/shipping them? Who pays the warranty bill and when? How much proof will each side need to come up with? And what about the customer? Do defective products get sent off and repaired? Or does the customer simply get a new replacement on the spot? These are all key questions that need to be answered before warranty claims start rolling in.
6. Product liability
So a happy customer buys your new product from the distributor, heads home uses your product and ends up with two broken arms. Now what? Who’s liable? Who’s picking up the costs of the inevitable law suit? You? Or your distributor? Or will these costs be split evenly between you and your distributor? Tort law varies from one country to another so make sure you consider these questions. Also, since your customer ended up with broken arms you may need to issue a recall. How is this going to be handled?
7. Period of engagement
You would be wise to determine a clear period for your engagement with the distributer. Don’t stop there though, be sure you also clearly define a mechanism for the renewal of the agreement. You can have either a passive mechanism, as in things go on as normal unless said otherwise. Alternatively, you could use an active mechanism (which is usually better) that demands both sides to actively agree to continue working together.
Sometimes things don’t work out and the agreement might need to be terminated. Therefore it is vital to make sure in advance to contractually provide for the ability to terminate the agreement with relatively short notice following its breach. It is also very important that the agreement will define what is to happen when the relationship between the parties comes to an end. No one wants to think about termination when they’re cracking open a bottle of champagne upon signing a new contract, but it’s necessary or you’ll be sorry in the long run.
9. Jurisdiction and governing law
Since your distributer is likely to be in a foreign country it is vital (and customary) to define a clear dispute resolution mechanism. Where shall disputes be settled? For example, you could agree upon neutral arbitration in a country that is “foreign” for both you and your distributor. You may however prefer to define your country and its laws as the exclusive forum for dispute resolution. Each option has its pros and cons. Just be sure to consider them in advance.
Feature image: Gwan Kho