In this edition of our blog mini-series on life science distribution, we’ll be discussing the use of contractual terms to help motivate distributors. Previous posts were on improving the performance of existing distributors and distributor selection.
Distributor relationships start from the moment you first make contact with them, and the things you do in the process of signing a life science distributor are almost as important as the things you do after they are signed. A well designed distribution agreement alone doesn’t ensure that the relationship will be successful, but a poorly designed contract can single-handedly ensure the distributor-supplier partnership fails. The terms of your agreement can go a long way in motivating your distributors to perform and greatly help your sales in the process.
The first thing you need to do is understand why a distributor wants to sell your products. By understanding what their motivation is you’ll be able to create ways to motivate them further. Is your product a great fit for the distributor’s current line? Do they think the product would be an easy sell to their existing customers? Is your product a new and promising technology that they appreciate and are excited about? Perhaps they lost the distribution rights to a similar product and want to fill the gap in their product offering? On the other hand, maybe their motivations aren’t as ingenuous. Do they just want to scoop up as many products under exclusive agreements as they can, or simply have a huge catalog of products? Do they have a customer or two that have expressed interest and simply want to sign as fast as possible to get a discount so they can make a quick profit? Even if you have actively sought out a potential distribution partner, don’t be afraid to ask why they would potentially be interested in selling your products. The answer is important.
By definition, everyone is in business to make a profit. Before discussing other contractual terms which may motivate a life science distribution company, we need to consider what financial terms would motivate the distributor while being appropriate and fair to all parties, potentially including your other distributors. Think about what both of your financial goals are and how you can motivate the distributor to reach them. For example, tiered discounts based on performance can be a great motivator. For example, basing discount in the following period off sales figures in a previous period, or increasing the discount as sales targets are hit within a period. A similar discount system can be based on the order volume, although I’m personally not as big of a fan of this system since while it encourages the distributors to keep inventory, I don’t believe it to be as good a motivator in achieving higher sales overall. There are many other methods of offering financial incentives for performance as well. Despite which financial incentives you choose, they need to be explicit and achievable in order to effectively motivate the distributor.
Financial incentives are certainly not the only type of contractual considerations you can use to help motivate your life science distributors. Perhaps the best example of a non-financial motivator is exclusivity. Knowing that they are the only distribution company in their territory that will be able to offer your products is a great boon to the company. They will often put far more effort into marketing and sales if they know that they won’t have competition. However, giving away such benefits freely is often too kind, not to mention shortsighted. Exclusivity tied to performance is an excellent motivator. Marketing assistance can likewise be added to a contract and tied to performance. Guaranteed technical support, or even just the assertion of responsibility for tier 2 and / or tier 3 support, can make your products more attractive for distributors to sell. Again, figuring out exactly what is important to your distributors will be instrumental in determining what the best terms may be. Don’t lay all your cards on the table, so to speak, but don’t hesitate to ask questions and inquire as to what a distributor values in the supplier-distributor relationship.
The right contractual terms can go a long way in helping to motivate a life science distributor. Know their motivations, understand what is important to them in the relationship, and use that to craft appropriate terms that effectively motivate the distributor, financial and otherwise. By using the right terms, you’ll be moving towards a mutually beneficial relationship with your new distributor. Even if you already have a mature and / or complete distribution network, it’s never too late to renegotiate the terms to better incite performance.