Why Distribution Negotiation Fail And How To Safeguard Success
Manufacturers and channel partners are two sides of same coin - one produces and the other sells. Together, they make a successful business entity. Though the relationship is mutually beneficial and one should court the other like a perfect marriage - in reality, it does not happen always.
As part of vanik.com online platform - everyday we come across large number of manufacturers looking for channel partners - as also eager channel partners seeking suitable manufacturers. We connect the two and many of them manage to build successful distribution channels - benefiting both partners. However, in several cases, in spite of best intentions on both sides - deals do not materialize. Why does it happen ? What are the deal breakers in manufacturer - distributor negotiation ? Based on my research - here's a short list that both manufacturers and channel partners should be aware of to avoid future disappointment.
This Is Not A General 'Why Deals Break' Type Article
A deal may break for many reasons - from emotional ones to general disagreement. Hundreds of articles have been written on the subject by experts - one may easily search from Google. However, the scope of this article is limited to negotiation between manufacturer and channel partners or rather reasons of their failure to reach a successful distribution agreement. I have tried to identify the underlying reasons here - so that both parties may prepare accordingly.
Imbalance In Distribution Agreement
Distribution agreement or rather biased distribution agreements - in my view, is a major deal breaker in otherwise positive distribution agreement. Balance in a distribution agreement ensures that neither party holds unfair power over other. The responsibility to maintain balance mainly rests on manufacturers, as generally channel partners are expected to sign a manufacturer's distribution contract. I have seen outrageous clauses in distribution contract like demanding blank cheque from distributors - that no sane person can agree. Other less outrageous but equally disputed clauses may be in terms for contract termination and renewal, impractical demand on sales growth, treating channel partners like buyers, rather than partner etc.
Most imbalances come from lack of experience and bad advice. Many times, imbalance originates from one partner's desire to gain advantage over other. So, how to reduce disagreement over distribution contract ? The simple solution is to stick to market standards. Solicit a model distribution agreement from your industry association and make changes.
We at vanik.com offer model distribution contracts to our members, whenever needed. Here's a blog article on same topic
Treating Distributor As Buyer
Many manufacturers, especially those building distribution network for first time - make this mistake. Distributor is not buyer - but your partner in progress. Manufacturer appoints distributors for markets where he/she is unable to reach physically. So, distributor works on behalf of manufacturer - as reseller. If the distributor is successful – so is the manufacturer, it’s a win-win situation. Hence, it rests on manufacturer to train and nurture every distributor and make him successful. A distributor, properly trained and active - is an asset for the business, as the former not only sells but also helps manufacturers in many other ways like cash flow, market feedback, sales promotion etc. Relationship with distributor is a life long process - not one time sale.
Wholesaling And Distribution
Manufacturers need to understand relationship between wholesaling and distribution as the knowledge can be used for building successful distribution channels. Distributor, like wholesaler, buys in bulk from manufacturer and sells in small lots to retailers or wholesalers. The similarity ends there. Unlike wholesaler, distributors are not independent, rather they act as representative of manufacturer. They enter into legal contract with manufacturers and can't do anything that might be detrimental to manufacturer’s interest (e.g. selling competitor's product). In fact, distributors are extended sales arm of manufacturer. Often, a manufacturer may appoint distributors and also maintain a small sales team to support distributors. In addition, distributors may have to invest some money upfront for getting distributorship.
As is evident, distribution is a tight-knit, legally contracted operation that needs upfront money to be invested. As a result, many channel partners may not prefer to get into distributorship - specially for new, untested products. Wholesaling is a far safer option to test market viability of a product. If everything goes well, the relationship may be transformed into distributorship.
Manufacturers should recognize the insecurity and uncertainty of channel partners and work for long term relationship building. In distribution negotiation, if channel partner is undecided about viability of a new product - an offer to wholesale during initial days may rescue a broken deal. The channel partner relationship is a long-term affair - never rush it for quick return.
At Vanik.Com, we offer the wholesale platform of BazarA2Z.Com for B2B E-Commerce transactions. Members of Vanik can create wholesale store at BazarA2Z.com for initiating wholesale relationship with channel partners. The twin platform of Vanik and BazarA2Z helps in building robust disbution channel within short period.
Distributors work for margin - so, manufacturers must take special care to make a deal attractive. Making a deal attractive does not mean giving unlimited leverage - but to offer something that is as per market standard and beats competitors. Failure to do so results in deal breaking. Manufacturers should be prepared to offer market-rate distribution margin and build distribution cost in product pricing, so that distribution cost does not come as shock during negotiation. Following blog article describes general distribution margin for various channel partners. Please consult market and calculate your own figures. Here's a blog article on how to take into account distribution margin in product pricing.
Security Deposit Vs. Credit
Distribution business work on credit - sooner or later, manufacturer has to offer credit to channel partners. However, giving credit without any guarantee is an unwise decision. So, manufacturers demand a security deposit from distributors to maintain credit balance. However, this condition may upset aspiring distributors as they prefer to test a product for market acceptability before getting. A middle path may be adopted in such cases - No Security Deposit - No Credit. Distributor does not pay security deposit but then pay cash for first few transactions. This way, interests of both partners can be secured.
There are a few fraud manufacturers who promise astronomic return from their magic products and demand huge security deposit. Once the deposit is received - the so called manufacturer starts ignoring distributor or vanish from market. Be wary of such manufacturers - they pollute the market and cheat unsuspecting, newcomers.
A product sells on the strength of marketing and its predominantly manufacturer's responsibility to provide marketing support. Manufacturers must nurture a market jointly with distributors. Big companies build brand equity through national advertisement campaign in TV, Print or Social Media and distributors take its advantage to sell to retailers. However, what happens for a small business unable to afford such big ticket brand promotion ? Some
amount of local marketing is essential for such new products. Usually, manufacturers appoint Area Managers who oversee local marketing support as also sales and distribution. If manufacturer is unable to do so or wishes to delegate marketing support to channel partner - an agreement relating to cost of such operation is worked out where manufacturer bears cost of local marketing - partly or fully. Manufacturers must keep in mind distributor's problems and resolve issues accordingly as distributor's success is his success.
Discounts, Retailer Schemes, Third Party Commission
For successful launch of a consumer product - manufacturer offers various incentives for retailers like discount, schemes, free gifts etc. The distributor may have to appoint sub-dealers, specially in far flung rural markets. All these entail costs on manufacturers. Manufacturers may well keep these issues in mind while negotiating and work out product pricing accordingly.
Well begun is half done - the English proverb sums up what's necessary for a successful distribution negotiation. Understanding sensitivities, strengths and weaknesses of other party and insight into reasons for negotiation failure gives manufacturers a head start. Concluding the negotiation successfully then becomes that much easier. Hopefully, manufacturers will take into account above research findings while negotiating distribution agreement.