By Jonas Baeuerle, Business Development Manager at Biozol
ReagentHub’s blog from September 15th introduced several Distribution Agreements and their advantages and disadvantages. In this follow up blog I would to take the opportunity to give insights about each type of agreement from a distributor’s point of view.
I often have the feeling that life science suppliers are not very familiar with the different types of distribution agreement available to them and how each can have a large impact on their relationship with their new distributor. It is also important to understand the country and culture of each distributor as this will give you insights in the type of distribution agreement you should be offering them.
In light of this, I thought it would be useful to review each type of agreement again and to offer insight in how a distributor might view them to help suppliers to understand the benefits and problems different distribution agreements can cause.
Exclusive Distribution Agreements
One distributor per territory, Supplier does not sell direct
Distributors that have signed an exclusive distribution agreement with a supplier will invest a significant amount of time and money to market and promote the supplier’s products in their territory.
The reason for this is that Distributors know that all the effort they expend will be rewarded as all orders are handled by them and all direct leads will be forwarded to them as well.
It is also possible to work very close with the supplier regarding marketing activities. The distributor can work with the supplier to create country specific brochures, they can recommend trade shows for the supplier to attend and can exhibit on their behalf too. Looking deeper, both companies can do Internet marketing together such as Search Engine Optimization, Google-Adwords campaigns and newsletters & promotions.
There is a big potential for both sides when entering into an exclusive distribution agreement but there are also risks. Both the Supplier and Distributor have to be realistic in their potential in the market. So before signing an agreement I recommend that both parties discuss what could be achieved in the 1st, 2nd and 3rd years and reassess the targets each year to see what could be improved if sales are lower than expected or how to continue the growth if they are higher.
Once you have signed an exclusive agreement with a distributor, it is important not to ask too much from them. We recommend not asking that your distributors do frequent sales reporting – every week or even every month. The most important thing for an Exclusive Agreement is trust: the supplier has to trust the distributor that they are investing time and effort over and above what they would do with a non-exclusive agreement, whilst the distributor has to trust the supplier, that their products has good quality and they can offer it with pure conscience. If both have the same strategy and you work really close together there is a big potential to increase your sale and make your brand well-known in the market. We recommend that meetings are held quarterly and that a face to face meeting is held once a year – either at each other’s offices or at an international conference or exhibition. Communication is the key to making an exclusive agreement successful.
Summary
An exclusive distribution agreement is one of the best agreements for both sides if both companies are willing to invest in each other – to be in close contact and to be open with each other at all times.
Territories where exclusive agreements work really well include most of Europe and some countries in Asia such as Japan, Taiwan and South Korea. Other territories where exclusivity should be discussed include countries in South America, Africa and the Middle East.
Non-Exclusive Distribution Agreements
More than one distributor per territory
Recently, the majority of distribution agreements that suppliers use are non-exclusive. At both Biozol and the distributors that we liaise with the feeling is that these types of agreements hold only small advantages for suppliers but no advantages whatsoever for distributors. Most suppliers think that by signing a number of distribution agreements in any given territory that they will increase the number of potential customers for their products, and that is true to an extent.
However, from a distributor’s viewpoint – if you have a non-exclusive agreement it is always hard to focus your sales & marketing efforts on these suppliers due to a number of reasons:
- Competition: Any investment of time and / or money could lead to your competitor getting the sale by offering a lower price at the last moment
- Margin: If a supplier lists three distributors in a country on his website the majority of customers in that country will request quotes from all the distributors to find the cheapest. This will lead to a race to the bottom – the supplier’s products will be priced cheaper and cheaper which isn’t good for distributors or suppliers. The reason this is not positive for the supplier is that in spite of a more competitive price for the end user, the distributor will make a lower margin and has even less reason to invest in sales & marketing of those products. Also if the strategy from supplier changes at any point and they decide to sell direct or only have a single distributor the damage is done and it will be hard to raise the product prices back to the point they were before.
- Focus: Distributors will focus their resources on those suppliers with highest margin and exclusive agreements
Summary
In spite of their popularity, in Biozol’s opinion non-exclusive agreements are the least effective contract for both distributors and suppliers.
Countries where non-exclusive agreements are more suitable include the USA, India and China due to the size of each country.
Sole Distribution Agreements (or Co-Exclusive Agreements)
Single Distributor in a territory – Supplier is allowed to sell direct
For a distributor, there are many similarities between a co-exclusive deal and an exclusive deal:
- Investment: The Distributor will invest to promote the supplier’s products as you know the sale will go to you or your supplier. Of course there is always the risk that customers order direct from the supplier but the risk is lower when the supplier is based in another country.
- Sales & Marketing: the distributor can work closely with the supplier to create marketing and promotions for their company and products
- Communication: this is particularly important as the customer should not get contacted twice from both the supplier and distributor as this will cause confusion and potential loss of sales. “One face to customer” is the most important thing in a co-exclusive agreement. This means that both parties have to coordinate their sales activity together and to avoid cannibalizing their existing sales. It may be clearer to agree to types of customers that will be dealt with by the supplier and types that will be dealt with by the distributor – for example bulk & services could be passed to the supplier, catalogue products to the distributor.
There are differences between co-exclusive & exclusive which may be viewed as positive or negative dependent on your viewpoint. These can include setting sales targets – this can be done with greater authority for exclusive deals. If both parties aren’t clear on the terms of the deal at the outset then one company could undercut the other to generate a sale or works with a customer type that they shouldn’t then there will be a big loss of trust. For smaller companies we would recommend an exclusive deal to get the distributor to invest in sales & marketing. Larger companies with more resources may benefit more from a co-exclusive deal.
Summary
A co-exclusive deal is a very good agreement for both sides, supplier and distributor. As long as both have the same goal and working close together, this kind of agreement has big potential.
Co-exclusive deals work in territories were exclusive deals are popular.
Conclusion
Each of the distribution agreements above has their own advantages and disadvantages, and as a distributor we mostly have to agree with the terms that a supplier offers us. However we hope this blog has persuaded suppliers to be more aware of the options and has to give distributors the opportunity to explain what they could do to promote their products if they were to sign an exclusive or co-exclusive contract with them.
Biozol is a leading life science distributor based in Germany. If you are a manufacturer and would like to speak to Biozol about increasing your sales in this important European market please email info@pivotalscientific.com and we will introduce you directly.
