Whether you sell a service or a product, expansion often requires decisions about how you plan to connect with new customers and get what you sell into their hands.
Let’s start with an unusual example: a law firm. Consider the situation facing a firm with expertise in the legal and regulatory requirements governing export and import activity. A business such as this may represent and advise clients on issues such as trade and economic sanctions, export control laws, and anti-terrorism controls.
If the partners in this firm intend to attract clients for this niche service, there is a limit to how fast it can scale up through promotion, referrals, and networking. What alternative methods might be used to generate revenue? One option is to work as a contractor with other law firms that lack this narrow expertise. Essentially, working through a different law firm is a new method of distribution.
The law firm is no different than an industrial company preparing to sell outside its home market. Both have options for working collaboratively with other companies to distribute products and services.
Strategy requires trade-offs
At the heart of the question of how to expand your market is whether to sell directly to the end user or through another company. Selling through an intermediary requires trade-offs. You will have to give something up to get the benefits you seek.
Let’s use an equipment manufacturer as an example. The company can sell directly to customers and it will take on 100% of both the risk and the reward. It also takes full responsibility for all functions of the business, such as financing the expansion, sales and marketing strategy, and production. A lower level of involvement could involve selecting a local company to resell products. This company would be a local dealer. In that scenario, the equipment manufacturer is taking on far less of the frontline responsibility to run a profitable business in that new market. Essentially, the equipment manufacturer is giving up some profit to work with a competent partner that brings different strengths to the table.
In some industries, there is another intermediary layer between the manufacturer and the customer. In this scenario, manufacturers sell to distributors that can store product and distribute to local dealers. In many industries, the terms “dealer” and “distributor” are used interchangeably, but the point is that your business must determine what specific value it is best suited to provide as a product or service moves through the chain of companies that lead to the end user. Your strategy, built around this insight, must embrace trade-offs, such as giving up some margin for a specific required benefit.
To evaluate trade-offs, it is crucial to properly understand the benefits of a potential arrangement. Selling through an intermediary puts you in touch with customers quickly. Usually, most of these new customers would never have the opportunity to buy from you directly. Intermediaries can also provide crucial knowledge related to what motivates customers and the process they follow when buying your product. Convenience is another valuable benefit. For example, as an alternative to hiring an experienced sales rep with an existing network, a local dealer can provide an immediate established presence in a local community with sales and service infrastructure.
Selling through an intermediary also has several drawbacks. It almost always provides lower margin because of the need to allow for a reasonable markup on the product or service. But other, more subtle disadvantages also emerge, such as losing direct contact with the end user. This loss could be a real problem for a manufacturer that has traditionally closely tied product development to customer feedback. Lack of customer contact may also result in commodity-style price competition with other suppliers.
Know your strengths
The arrangement between your company and an intermediary can be structured in several ways but should be appropriate for both companies’ strengths.
Some highly technical companies, such as those in the life sciences, choose not to market a technology or product themselves. In some cases, the cost of building a manufacturing facility and marketing the product may be prohibitive. One option is to license the technology to a strategic partner with existing production and marketing infrastructure. In this arrangement, partners pay a fee to use a technology in the manufacturing of their own products.
As well, some technical companies lack certain expertise, such as local market knowledge. I see this fairly often when a company begins expansion outside its home market. This may be an appropriate situation in which to sell through a dealer network of local companies with an established sales and service market presence. Alternatively, it may be wise to sell through sales agents, which are essentially local independent salespeople willing to work on contract.
Focus on your strengths and shore up your weaknesses. Ideally, your company would develop the skills it needs to expand independently. But it may be less expensive, quicker, and more effective to work collaboratively with a different company.
You're getting married
Distribution partnerships require close relationships. Many entrepreneurs describe the relationship as being similar to a marriage. There is a courting stage, during which you learn about the partner. And it can be difficult and painful to get out of the contractual relationship. But when a distribution relationship is working well, you wouldn’t trade it for anything.
As with marriage, seeking a partner to help you access a new market is difficult. It is most often a long process involving personal contact with many people. Spend time in the local market to understand who the good performers are. Depending on the industry, this may involve meeting directly with end users or walking through potential dealerships. Personally, I find it tremendously helpful to speak with customers and ask which local dealers they prefer to buy from.
A distribution partnership with another company is appropriate if you are open minded about growing the pie rather than focused on capturing all possible value in the market for yourself. For a partnership to work, your company will have to trade some of the margin for something of value that you do not possess. The result can be highly profitable, but the key to success is often the effort put into making the relationship work.