More startups are using established distributors as an important marketing channel. This can be a win for both sides. Established companies often want to add more to the basket of what they sell to their customers to increase revenues as well as deepen customer relationships. And they are more willing these days to include goods and services from startups, often because it helps them appear innovative. Startups want access to lots of customers and to minimize their sales and marketing expenses, and are happy to yield the wholesale margin to a distribution partner.
A further bonus is those distribution partners might invest in or acquire the startup once the new product becomes a hit. Many established companies have established venture funds in recent years. Many know they need to source much of their innovation from the outside.
Building effective distribution partnerships is a combination of marketing and sales skills. Companies that consider distribution partners as like a commissioned salesperson, sometimes referred to as “coin operated”, rarely succeed. Instead it is vital that companies consider both how to sell-to (making it worthwhile for the distribution partner) and how to sell-through (showing partners how to sell to their customers).
Success comes from pitching the deal well to the optimum distribution partners, negotiating the best agreement, then putting in the time and effort to make the partnership a success.
Pitching to Distributors
Successfully enlisting a distribution partner requires making a sales pitch that addresses three main points:
Demonstrate why their customers will want your product or service. The distributors want to minimize the amount of selling they need to do, without jeopardizing their current business with the customers by pushing something their customers do not want or need.
Describe how adding the new product will be low effort for the distributor. Distributors want to avoid more sales, fulfillment, and service burdens by having to adapt to suppliers’ processes. They want to deliver consistently to their customers so as to maintain respect and loyalty. No amount of extra profit opportunity is worth adding hassles.
Show them how selling the new product will make them more money—for the distributor and for their sales people. Make it worth their while. There needs to be sufficient margins available for everyone to be happy and motivated to sell.
In some cases the partner may ask to work together with the startup on one or two prospects through the complete sales and implementation cycle before discussing a full partnership. They often want to learn first how their customers view the product and how well the two companies can work together, before creating a long-term relationship.
The pitch process is important to set the right expectations and the tone for how both sides will contribute to success.
Negotiating the Arrangement
Distributor arrangements come in many shapes and sizes. Three basic forms are:
Lead Generation. In some cases the distribution partner simply exposes the startup to their customers, and leaves it to the startup to make the sale. This may be called cross-marketing, affiliate marketing, or lead generation. In most cases the startup pays a small commission or a finder's fee, perhaps in the range of 5-10% of the revenue for those customers they close. This type of arrangement is low intensity and rarely requires complicated agreements.
Distributors. In the case of distributors, the established company would do much of the lead generation, selling, provisioning, billing, and customer service. This is well established in the hardware business, such as how CDW works, and it is becoming more common with software services, including SaaS. For playing a more significant role the distributor might get to keep 30-50% of the retail value.
Resellers. In some cases the distributor may bundle the startup’s products or services within their own, often including the price. If the startup offers a white label option the distributor might offer the combined services under their own brand. For some resellers there is no apparent retail price for the startup’s portion, so the startup would sell to the reseller at a wholesale price and allow the reseller to markup their price however they want or even give the added product away for free. The startup may know nothing about the identities of the customers using their products.
There are other variations that fall between these models. It all depends on the interests of both sides.
Agreements have many potential elements. The considerations go way beyond just setting the price. The elements could include:
Roles with customers. The distributor arrangement must make clear which company is responsible for each part of the customer interaction. For some roles, such as sales and customer service, there might be joint responsibility. The range of roles could include: lead generation, selling, closing, provisioning, integration, professional services, customer training, billing, customer service, up-selling, and more. Being clear about the roles ensures the companies jointly address all the customer needs, and the price model can reflect the respective work commitments.
Pricing. Negotiation of pricing can be complex, and may be affected by all the other aspects of this arrangements list. Price could be on an absolute level or a discount from retail. There might be discounts or price breaks for hitting higher volumes. The agreement may also need to address the rules or limits of price increases.
Special development. If the distributor requires extra features or integration into their own product, specify this as part of the agreement. They may pay for that directly with NRE funds or the startup might build the costs into the pricing arrangements. If the distributor requires a significant amount of work up front, the startup would be wise to negotiate some minimum volumes and a take-or-pay arrangement.
Discounts, commissions, and residuals. The distributor may make its money from the gap between the price they pay the startup and the market price they charge their customers. Or they may earn discounts, a commission, or residual payments (percent of revenues in perpetuity). Residuals apply most often when the distributor owns the customer relationship and plays a strong role in their continuing as customers, versus the sale being a one-time transaction.
Volumes. It is helpful to discuss likely sales volumes as part of the negotiations—both to ensure the startup is ready to hit high volumes and to establish some floors that will ensure the distributor promotes the product. The incentive for the distributor to increase sales may come from having better pricing at higher volumes, or there may be a penalty or take-or-pay arrangement to ensure they reach specified minimums that increase over time.
Exclusivity. Many distributors will try to negotiate some form of exclusivity. If the new product is successful they want it all to themselves. Exclusivity could be by geographic region, type of customer, period of time, or some combination of those. The startup founders will likely want to avoid or minimize any exclusivity, providing flexibility to bring in other distributors. Just the same some amount of exclusivity might be unavoidable, so the goal is to limit the duration or range as much as possible, or to extract other concessions (such as high take-or-pay volumes) that will make the deal worthwhile.
Off-limits accounts. In some cases the startup may want to specify accounts that the distributor must avoid. There may be a list of, say, 100 national accounts the startup plans to sell directly. In other cases the startup may maintain a dynamic list of accounts that various distributors can claim as their own.
Branding. The distributor agreement may permit the distributor to market under their own brand; the startups often refer to this as a white label offering. Another option is a hybrid, where the distributor applies their own brand, but then say something like “powered by” the startup brand name. Some startups would be wise to insist on their own brand name if they are trying to build a reputation; some may be happy to hide their brand so long as they see growth; and some may care about their brand only in their home market.
Renewals. Most distributor agreements will specify the period of time in which they are in effect, and lay out the process for renewals. The renewal may set limits on how much the prices can change.
Access to distributor sales team. Another important element to have in the discussions, regardless if it is in the agreement, is how much access the startup has to the distributor sales force. As the next section of the post makes clear, the more insights the startup has about the how the distributor’s sales force works and the more access to sell to and train those salespeople, the better the results. Avoid waiting until after signing the agreement to have these discussions.
Prepare for these negotiations to take a long time, even after the distributor has qualified the product or service. There are many elements to discuss and define. The distributor will involve lots of different people, often overwhelming the startup team with 5 or 10 times the number of people in each meeting. And the final agreement will need to go through a lengthy legal review by the distributor’s legal team.
Different objectives and concerns will hamper the pace. The startup will want the process to go quickly and require a minimum of invested time. Although the team from the distributor side may look forward to growing their revenues, they will also be concerned about avoiding mistakes. People in larger companies are often risk averse. There is far more career downside from doing something wrong than there is upside in doing something right.
Make the Distributor Arrangement Work
Signing up a new distributor is just the start of the process. Some describe it as getting a license to hunt, with more work needed before there is food on the table. Too often I have seen companies celebrate prematurely because their new distributor sales force initially cheers for having something new to sell, but then they relegate the new product to the bottom of the bag when they find it too difficult to sell.
Making the distributor arrangement successful requires many activities:
Provide marketing materials that help the product sell itself. You will be unable to train the distributors’ sales people as well as yours, so will have to give them the tools to succeed regardless.
Sell their sales force on your product. If you establish the right deal you will have access to the distributor’s sales training meetings and conventions. It takes much time to work these events but it pays off.
Streamline the sales, ordering, fulfillment, and billing processes. Adapt your processes to work well within the distributor’s current workflow.
It is a good idea, if possible, to spend a week or two early in the launch process riding with several of the distributor’s sales people. Learn about their customer interactions. Observe how they sell. Find out what types of marketing materials work best for them—brochures, slide decks, product samples, videos, white papers, or follow-up emailed information. Knowing this will help you develop the marketing support that will best drive your business. An alternative is to arrange to provide sales support for the first 10 or 20 prospects the distributor meets, even if your agreement states the distributor will eventually do all the selling alone. It will take some of your time, but you will have better insights about how you can best support their sales force and you should be able to rack up some early sales successes that will help build the momentum of your partnership.
Once the new product or service is in the channel, it is often a good strategy to find the handful of salespeople who have the early successes, learn what is working for them, and amplify their stories throughout the distributor network. That can help focus the sell-in effort and demonstrate to their peers it is possible to make more money selling your product.
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Making a distributor partnership work is a daunting task. Just the same it can help launch a startup by riding on the wave of the distributor’s reputation, customer contacts, and large sales force.