Choosing a distributor - what to ask!

So what are the reasons for appointing a distributor in the first place?

Reasons usully include credit management, inventory and logistics skills, to leverage existing relationships, “attach” to an adjacent product or technology or a desire to maintain a vendor business that is as small and flexible as possible (by outsourcing everything except product development).

Other reasons are market driven; The speed of technology change, scale of margins and the ease in which software can be implemented and utilised (in most cases) means that WARMC (wide and rapid market coverage) is often the primary reason for appointing a distributor.

1. How is your business funded?

It is important, especially more recently, that distributors have the scale of “credit-worthiness” to take on a vendor and grow sales in line with expectations and commitments.

It is becoming more common for vendors to credit insure, and this sometimes limits the ability of a distributor to buy the quantities of products from the vendor that they might be capable of (or committed to) selling.

A plan needs to be in place then for what will happen as credit limits are exceeded, as nothing is more frustrating as a distributor, than outperforming your targets and then spending valuable management time finding what may prove to be expensive finance solutions to buying additional products from the vendor.

From a vendors point of view, their credit “risk” strategies need to be realistic, and their choice of the number of distribution partners and type of partners, in line with that strategy.

2. How is your business structured?

Is the distributor a privately-owned, stand-alone, pure-play, product-focussed distributor? Is it a publicly quoted, group company, selling products, services and training and also owning a reseller?

The different company motivations and ambitions can make a big difference to a vendors ability to motivate the channel.

For example…imagine appointing three specialists distributors to sell your software, who cover 90 percent of the addressable market between them.  After six months of investment developing skills within the channel, distributor A decides that they need more sales of training that quarter in order to meet services targets that their organisation has committed to so that their share price is maintained.

In order to do this they run a quarterly incentive to sell your product at cost for the quarter if training is purchased at the same time.  (You can imagine there are many variants of this type of incentive, structured to avoid any pricing commitments the distributor might have in place with you).

Distributors B and C continue to sell at standard rates and see their share and revenues plummet or their customers insist on a price reduction to match distributor A.  When the quarter is over the resellers all have an expectation of the price that they can achieve on your product (distributor cost), some have switched distribution partners, and the distributor that cares least about your products legitimate sales development has the largest share of the market.

It won’t take long for this kind of activity to permanently damage your relationships in the channel as well as your sales, as distributors B and C decide to sell your competitors products instead, or baulk at investing in developing sales in the future for fear of the same thing happening again .

Vendors can avoid this through a combination of choosing the distribution partners whose structure actually suits their product sales ambitions, and through tight controls and motivational tools.

For additional reading on the best practices for growing your channel in Europe download this free guide:  Destination Europe: A CEO’s Guide to Developing a Successful Channel Strategy