If you're looking to expand your sales to new markets, then there's one big question you must ask: do I build a direct sales presence or use a distributor? Each method has its benefits and drawbacks, but we're going to make a strong case to use one method over the other in almost every instance.
What's the difference between direct sales and distributors?
A direct sales presence means that your company establishes, manages, and pays a sales team of one or more people in the target market.
An outside agent is any entity that will sell your product in exchange for a service fee. One example is a sales rep, who sells your product in exchange for a percent of the sale. A distributor is similar to a rep, except they would buy product from your company and sell it directly to the end customer.
Is Direct Sales Better?
For most businesses expanding into new markets, especially international markets, hiring a distributor is a better decision-at least until there is enough return from the market to justify building a direct sales presence.
Sure, there is one major advantage to having a direct sales presence-control. Control over the day to day activities of your sales personnel is appealing to most business owners. But this control comes at a heavy price. To start, you'll need to spend the time to hire someone in that market, then train them, then equip them with sales material and management, if not office space and equipment. These costs are prohibitive for most small businesses looking to expand internationally.
And there are even more costs that we haven't mentioned yet. Each market has it's own unique laws, cultures and customs that are essential to master if your company wants to establish a successful sales presence. Japan is a classic example of a marketplace with unique legal structures and business customs that, if not followed, guarantee the failure of any sales efforts. It's hard to pin down an exact monetary value to this learning, but ask yourself this: Can you afford to establish, manage, and pay a sales force in a foreign country for at least a year while they learn the ropes and generate no revenue?
What about a Distributor? Is a Distributor better for new markets?
Distributors are a cost effective means to enter a new marketplace successfully. Here are just a few of the reasons:
- No Overhead: Unlike running your own sales team, a distributor will take care of the hiring, managing, payment, and optimization of its channel. You're just borrowing their distribution, while they handle the maintenance.
- Established Channel with Local Knowledge: A good distributor will already know all the laws and customs of the market you're entering. You don't need to reinvent the wheel-you can use someone who already has valuable local knowledge.
- Understand Pricing and Purchasing Power of Market: Along with knowledge of the laws and customs comes knowledge about the most successful ways to price and market your product locally.
- Cost Effective: Since you won't be paying for the above items, distributor relationships are much more within reach of a small business trying to enter a new market.
Using a distributor has some downsides as well, but they can be minimized by building a good relationship with a distributor.
- Not your own people: You won't be able to directly manage every step of the process. While it may make you nervous to lose some control over the sales process, you can manage the risk by building a transparent relationship with your distributor with constant updates and feedback from both ends.
- Distributor has many products to represent: You may not be the distributor's top priority at any given time, and you want to be sure your product is not getting shuffled to the back of the line. Once again, a well-established relationship with constant contact will ensure that your product is getting the attention it deserves.
- Not a "turn key" solution: You can't just give the distributor your products and expect success. You'll have to manage the relationship. This takes time, but it's still less costly than trying to install a direct sales team from scratch.
So what do I do next?
If you aren't convinced that a distributor would be better for your organization than establishing a direct sales team, seek help from a consultant who has experience establishing a presence in new markets. A consultant can use his or her experience to analyze your opportunity and recommend the best course of action.
Before you choose a distributor, you need to know ….
Choosing the wrong distributor will set you up for failure. The wrong distributor simply won't generate sales, and you'll have wasted at least a year finding and setting up an unprofitable relationship.
There are certain things to look for in a distributor, and they are different for every market. The best thing to do is to find a professional, one with experience in distributor relationships, and hire that professional to help you search for and identify the right distributor.