Most companies rely on agents or distributors to represent them overseas. So, you need to understand the differences in how the two operate in each country before having any serious discussions with them.
(Click here to learn more about trading partner agreements.)
Agent vs. distributor
Agents generally do not take ownership of the goods but act as your sales representative in overseas markets. Distributors generally purchase and resell your export products and mark them up for a profit.
Agents are generally paid a commission on the sales they generate. They take orders on your behalf, but you deliver, invoice, and collect payments from the customers. You are also responsible for setting the sales price, although the agent will probably advise you on local market conditions that may affect your pricing.
Agents are generally based in the export market, and often represent several complementary product lines. If they represent a directly competitive line, this can reduce their interest to sell yours. Agents may operate on an “exclusive” basis as your sole agent in their territory, or on a non-exclusive basis.
Advantages of agents
• You retain control of your branding, marketing and pricing.
• Commission-only agents have an incentive to generate higher sales volume.
• Agents tend to have smaller product ranges than distributors, which means they can more focused on your products.
Disadvantages if agents
• They may have fewer resources than a distributor.
• Working on a commission basis can reduce their commitment to your line.
• They may require significant overseas marketing/ management effort to support the agent/client relationship.
• It will be more work for you to deliver orders directly to the end customer and to collect payment.
• You must closely monitor the effectiveness of the agent.
• Bad agents can ruin your opportunities and reputation in a market.
• Working through agents (and not distributors) gives you less protection from non-payment, currency fluctuations, product rejection, warranty claims, etc.
• You risk losing market share if your agent is stolen by a competitor.
Distributors buy your goods (take title) and then resell them the end customer. In some cases, they may also sell to other wholesalers. Distributors may carry complementary and competing lines, and usually offer after-sales service.
Distributors make their money by adding a profit margin to your goods. These margins are typically higher than the commissions paid to agents because they do a lot more. They buy and maintain inventory, extend credit to their customers, and do the local marketing.
These larger markups may increase the product’s end price; in turn you may need to reduce your pricing to remain competitive in the market. Some exporters find they can’t afford a distributor because their profit margin would be too small.
Advantages of distributors
• You have one large customer overseas who supplies many smaller end customers.
• You maintain some control over distribution.
• The distributor typically handles more of the work, saving you time and money:
• manages customer warranties, parts, and service.
• holds stock in the market to reduce order lead time for customers.
• helps pay for and manages marketing and promotion in the market.
• develops a customer base for your product.
• carries most of the in-market risks.
• may provide warranty and product services.
Disadvantages of distributors
• You have no control over the selling process.
• The costs of selling through a distributor can force your product out of market competition: for example, distributors may add up to a 50 per cent mark-up, or more, on your product before it reaches a retailer.
• The distributors sales staff will be less knowledgeable about your products than your own people.
• You are less aware of market conditions, without direct customer contact.
• You may not know who your customers are.
• You don’t retain total branding control, since the distributor shares responsibility for marketing and promotion,
• If the distributor is a wholesaler rather than a specialized master distributor, they may not sell as effectively as other wholesalers.
• They may not have the sales force needed for new product introductions in larger markets.
• They may represent many other lines, so their full attention is not on yours.
• Sales-rights to your product are valuable, and should not be given up without a full analysis of your options.
• Distributors may be hard to fire if they don’t perform well.
Exclusivity or not?
Appointing an agent or distributor on an exclusive basis – where they are the only ones allowed to sell in their territory – lets them to develop sales free of competition.
They may want exclusivity since they must invest time and money to build brand awareness and create a market for your product. The stronger your brand’s reputation, the more valuable an exclusive arrangement becomes.
Carefully consider the issue of exclusivity vs non-exclusivity before negotiating with potential partners. If you offer an exclusive arrangement, establish performance measures, and add a termination clause to the agreement in case of poor performance.
Choosing an agent or distributor
It is vital that you establish a close working relationship with your overseas business partner. You need to build trust and must communicate regularly. It is much easier to conduct business if your enjoy working together.
Before choosing an overseas partner you should carefully research and interview several agents or distributors – maybe four or five. Ask them for trade references, and check their credit rating.
You should meet them in their own market rather than in the US. They should show you the market firsthand, to demonstrate their competence, so you can get to know them.
Exporters who rely only on email communication with overseas partners often have misunderstandings and difficult relationships. Email is useful to confirm discussions, but meeting in person, or even by phone or Skype in the early stages, helps reducing misunderstandings.
Remember, you must rely their local knowledge and contacts to develop business. It may require several trips to build the relationship, see how well you work together, and learn what to include in the contract.
Before drafting the agreement clearly define who does what. Written contracts may be legally unenforceable in many countries, but they at least clearly define everyone’s duties and responsibilities. Reach agreement on the core issues, and make sure you are both on the same page before spending time drafting a detailed agreement.
Knowledge of the market
Your representative must have a thorough understanding of competitive products and prices in order to advise you on necessary product modifications, and on advertising.
• Do they have a good network of contacts?
• How much experience do they have in your industry? You might choose an established company with a good network of contacts that is not particularly open to change. Or you might prefer a young, energetic company that is out to prove itself and is flexible and innovative, without much experience.
• Do they have good knowledge of the local market? Good representatives should be able to help with your marketing program based on their market knowledge.
Tips for working with an agent
• Schedule regular market visits.
• Give them training in your product line.
• Schedule regular performance reviews.
• Set realistic performance goals and revise them when market conditions change.
• Have a clear termination procedure.
• Don’t rely too heavily on them for market feedback and information. Check local conditions yourself.
To clarify your thoughts when choosing an agent or a distributor, develop an ideal partner profile and compare candidates against it. Look carefully at their customers, contacts, networks, and check their:
• stability and history of working with other suppliers: Ask about their financial resources and check their credit rating?
• product or service knowledge: Do they have experience with similar (product) lines? What are their marketing and service strengths?
• management capability: How long have they been an agent or a distributor? What about their record of successes with other clients? For distributors, ask about their marketing and service capability?
• To check their compatibility with your company – ask: What is the size of their business? How much staff do they have? How do they choose the staff? What are their qualifications? Have they worked with any other American companies? If so, who and for how long? What languages do they speak?
• To check an agent’s product / service mix – ask: What they like about your product line? Do they represent directly competitive lines? What are their sales projections for your line – and why? (Are their sales projections realistic)
• To check whether their distribution network is what you need – ask: What is their geographical coverage? How often do they personally visit the territory(s)? Do they have staff in each market? Have they ever faced political trouble in these markets? If so, what was the result? Were they ever forced out of a market? If so, why?
• To check their sales capability – ask: Can they give examples of their sales capability? What are their sales policies? What incentives do they give their sales staff? How are their staff trained and supervised?
• To check their promotional expertise – ask: What is their marketing budget and how do they manage it? What is their experience in dealing with the media?
• To check their facilities – ask: Where are their facilities, including warehouses, and do they provide good customer access? How large they? Do they have good security?
Things to consider in drafting an agency or distributor agreement
The agreement is a legal document, even if it is a verbal agreement. It should should list all the terms and conditions of the agent/supplier relationship, with no ambiguities. In markets where written agreements are enforceable, seek the advice of a legal professional with international contract experience before signing anything.
At the very least, you should clearly spell out everyone’s responsibilities in concise bullet points. Before drafting an agreement, you should agree on exactly who does what in the agent/supplier relationship.
It is a complete waste of time trying to drafting agreements if the two parties disagree on core issues. You should agree on these big issues first, before working on the smaller ones.
Some key issues include:
• The product range.
• What you will provide: for example, printed brochures, price list, new product briefings, product training, and so forth.
• Supply of samples: at what price, who pays the freight, when samples will be available, payment terms for returned goods.
• The territory covered: the geographical area and market segment.
• How the goods will be supplied.
• How online sales in the territory will be managed.
• Commission: the amount, conditions, and timing.
• Reporting: monthly or quarterly, and the report contents.
• Communications and their timing, especially for big issues like delivery delays or major customer problems.
• Brand management: Your control over the use of your brand.
• Ownership of trademarks and intellectual property.
Here are some important points to remember in dealing with distributor:
• Select your distributors – don’t let them select you.
• Look for distributors capable of developing the market for you, not just selling your products.
• Make sure you clearly discuss your expectations with overseas partners.
• Never just assume they will do something without discussing it first.
• Define clear performance criteria in your agreement and performance.
• Get to know the distributor well before signing an agreement.