Are International Distributors Right For You?
Distributors Re-Sell Products To Customers Located In Foreign Countries
International expansion offers new markets for your products. How to enter those markets is one key to your success.
There are seven basic approaches to reaching new foreign customers, each offering advantages and disadvantages: ecommerce; distributors; strategic alliances; licensing; new foreign office; joint venture; and acquisition In this article, we look at distributors, one of the simplest and fastest ways to find new international customers.
What’s a Distributor?
In this model, suppliers sell products to another company (the distributor) who is not the end user, but instead re-sells the products directly or indirectly to its customers located in foreign countries.
This model has several variations, but in each, the distributor purchases the product from the supplier and sets the price at which it is resold. The difference between your selling price to them and the end price to the customer is the distributor’s margin.
That margin covers the distributor’s many costs – carrying inventory, local sales, marketing and customer service, and customer delivery. They must replicate many of the functions the supplier provides for its local customers – thus, the distributor’s margin can be viewed as internal costs avoided by the supplier, rather than a cost.
The right distributors already have an existing local customer base which they can quickly tap into. They know their local market well, and are a low-cost source of market information. They can help strategize about product pricing and positioning, customize local marketing and sort out any local requirements.
No expensive brick and mortar investment is required, and this strategy can be implemented relatively quickly. It can be scaled to access many different foreign markets. While investment is needed by both supplier and distributor to develop the local market, this method can produce significant longer-term sales growth.
Many companies underestimate the commitment and resources needed to effectively find, support, and manage distributors. Finding distributors is easy. Finding distributors to truly invest in growing your business, and fully training and supporting them is much more difficult.
Maximizing local sales may require product/marketing changes, and if you’re unwilling to do this, the distributor may lose interest in your products. Changing distributors and/or exiting markets can be time and resource-intensive.
Effectively managing third-party companies can be challenging without the required skills and sufficient focus. A common risk is over-extending and trying to manage too manage countries. Another is slow or non-payment. While insisting on cash in advance is appealing, this can create cash-flow issues for your distributor if they are not paid promptly by their customers. Investment in financing tools may be needed to address this.
The biggest disadvantage: distributors have the relationships with the customers, often limiting supplier access to users and unfiltered market feedback. Suppliers often disagree with their distributors about the amount and types of local investment needed, but cannot directly control how their distributors spend their time and resources.
Suppliers need to consider distributor due diligence, export/import compliance, and often-complicated international returns, and corruption risks, as the distributors’ business practices are often different than at home.
Are Distributors Right For Me?
You should consider using a distributor if you lack resources or experience to make larger investments, are somewhat patient for growth as distributors get up to speed and develop their local market for your products, or would like to selectively test demand in a promising market.
The model also is appropriate for companies whose products are easy to store and ship, and are priced so that distributors can purchase in quantity without having to lease or finance. In addition, companies should consider distributors if their products require some minor customization, or need servicing and support, if the partner already has these skills or can be trained, or if the supplier can provide this directly.
In summary, finding new customers using distributors is an attractive strategy for many companies. It requires relatively low investment, and offers potentially quick access to foreign customers. However, control over the local customer experience is limited, and it requires more considerably more investment than e-commerce and requires dedication and specific skills to achieve best results.
Next, we’ll look at strategic alliances as another way to reach new international customers.
Doris Nagel is CEO of Globalocity, and has over 25 years of hands-on global experience, focusing on strategic partnering, indirect sales channel management, and market entry. She’s a frequent speaker and author, and is currently working on a book on international distributor networks. Check out Globalocity’s free infographic summarizing the seven international expansion models discussed in this series.