Developing and Managing Distribution Networks

You’ve strategized and struggled.  You’ve created and developed.  You are ready to sell your new product.  Now what? 

Entrepreneurs have always struggled with this issue.  Your distribution strategy for a new product should not be off the shelf because distribution strategies are not one size fits all.  When deciding what distribution strategy you should use for your product, here are a few things to consider. 

One of the first questions that you should ask yourself is whether you want to grow your own distribution network or outsource some or all of your distribution to others.  There are many factors to consider in making this decision.

Case for developing your own distribution network:

In general, building and utilizing your own distribution network allows you to maintain a greater level of control of the operation and to keep a greater percentage of your revenues than if you were to utilize a third party.  You don’t need to worry about your third party distributor[1] ignoring your product or making illegal payments to a government official for which you may have liability under onerous anti-corruption/bribery laws such as the FCPA.  Moreover, you can retrench and refocus your distribution efforts with few limitations if you utilize your own distribution network, whereas your ability to modify or terminate your relationship with a third party distributor may be significantly limited by lengthy termination notice periods, termination or other payments.  The confidence and flexibility that controlling your distribution network, along with the long term potential economic reward for doing so, are strong reasons why so many large companies, particularly in heavily regulated industries such as life sciences, use their own distributions networks whenever possible. 

Case for utilizing third party distribution network:

Developing your own distribution network takes significant time and resources, generally much more so than utilizing an existing third party distribution network.  Good third party distribution networks can offer you almost immediate market penetration as you benefit from the distributor’s knowledge of the market.  Moreover, when doing business internationally, there may also be significant legal and customary barriers to entry that are difficult or practically impossible to overcome without utilizing local distributors.  Good local distributors overcome these barriers for you.

In the event that you choose to utilize third party distributors as part of your distribution strategy, here are a few things to keep in mind as you negotiate the terms of your agreement with the distributor.

• If you grant any sort of exclusive distribution rights to a third party, make sure that the definition of those rights and the territory in which those rights exist is clear to all parties.  For example, if the distributor is the only party allowed to sell in the territory, you need to make sure whether that exclusion not only applies to other third party distributors, but to you as well.  Also, if you grant exclusive rights to sell, you need to me mindful of passive and cross territory sales. 
• You need to be careful not to inadvertently grant overlapping exclusive rights.  This risk is reduced by careful negotiation of the exclusivity and territory rights, but a matrix of rights granted in each territory should be developed and continuously maintained to preclude overlapping grants of exclusive rights. 
• You should negotiate for levels of performance from your distributors, both based on efforts and results (e.g., minimum sales levels, minimum number of sales calls per period, response time requirements for phone or other electronic contacts, average delivery time from order).  The failure to satisfy these requirements would be a breach of the agreement giving you the ability to terminate without penalty or modify the agreement to your economic benefit. 
• You need to negotiate carefully that ability to terminate the agreement.  Many distributors, especially those with an exclusive territory, want comfort that the effort that they expend in building a market for your product will not be for naught and seek to make termination of the agreement difficult, time consuming and expensive.

If you wish to learn more about developing and managing distribution networks, or about ALR Law and what it can do for your company, please contact me at Andy@ALRLawLLC.com.

[1] The term distributor is used here generally, and may refer to a sales agent, franchisee or another contractual business relation that has the right to market, sell and/or distribute your product.