Can Distribution be Optimized?
Carlton Hoyt
A key to the success of many small bioscience products companies is the creation and maintenance of an effective global network of distributors (or dealers / resellers). Ensuring that you get the most out of your distribution network, however, is not a simple task. There is no formula to follow. It must take into consideration the changing competitive landscape, both among distributors and among competing products. It involves active relationship management. It needs to take into account marketing strategies and product positioning. It requires diligent contract negotiation to establish mutually favorable terms and provide a framework for a win-win outcome. It requires planning, preparation, and needs to be frequently revisited to ensure that goals are being met and proper analysis when they are not to determine the causes. Establishing and maintaining a distribution network can indeed be a daunting task, but the rewards are great when done properly. In this post, I’ll go over the most common issue that comes up when determining distribution strategy – coverage. Is it better to have one distributor in any given territory or as many as possible, such that life science researchers can get your products just about anywhere? This question alone has a highly multi-faceted answer.
Exclusivity vs. Availability
There is an opposing force of sorts when it comes to distribution. You want your distributors to put forth a good marketing and sales effort. At the same time, you want your product to be readily available to end users. This is a conflicting position, as maximizing the availability of your product means maximizing the number of sales channels that offer your product. On the other hand, if everyone offers your product, distributors will be hesitant to market your product since their marketing dollars are not guaranteed to have a return if customers can purchase your product anywhere. Balancing these two needs requires strategic planning, however the nature of the product can guide your decision-making somewhat.
Generally, more coverage is good for a product that may be somewhat universal, has a market leadership position or strong brand recognition, has an extremely short sales cycle, and does not require much effort to sell. If customers are more often than not going to be seeking out your product, you want to make it very easily available to them. Let us take a quick look at a company and product line that has such a strategy – Scientific Industries and their Vortex Genies. The Vortex Genies are a very popular line of vortexers, and the line is highly recognized among life science researchers. Distributors know that their products are going to sell reasonably well, and many distributors are willing to compete for a share of the large volume of sales. As is common with a simple and low-cost product, they know that the product will take little or no sales effort – they simply need to let the lab managers or other purchasers know that they carry the line. Scientific Industries is therefore better served by having a lot of overlap in their distribution network.
Now let’s look at a company and product that is in a much different position – Zellwerk and the Z RP tissue culture bioreactor. The Z RP bioreactor is a highly technologically complex and very expensive product that serves a niche market. It presumably takes a considerable amount of effort to sell and probably has a very long sales cycle. With this kind of a product, it is important that distributors know that their efforts in sales and marketing will be rewarded. No distributor will want to put forth the marketing expenditures, hours upon hours of customer interaction, and other necessary time and costs if they know that the customer can just turn around and buy the product from someone else who offered to undercut them on price. The way to reassure your distributors that they will indeed be rewarded for their efforts is with exclusivity in their territory (note that exclusivity need not necessarily be contractual, however this will not be discussed here since it’s a bit off-topic). Zellwerk should be working with one or few select organizations in any given territory, and these organizations should have a strong competency in tissue culture.
OEM / Private-Label
Products that are sold under OEM or private-label agreements are another potential challenge. These agreements can be very lucrative, however they can also take away control of the distribution of the product from both the manufacturer and the private labeler, as they will likely each have their own distribution networks for the product. While in many instances an OEM or private-label agreement is lucrative enough to be worth it regardless of the distribution issues it creates, the benefit should ideally be assured via favorable contract terms and frank discussion between both companies.
Direct Sales & Other Considerations
Another important issue when thinking about distribution is whether your company offers direct sales. Direct sales are a great high-margin revenue source, and a company can often achieve greater sales and a greater market share in it’s home market when marketing and inside sales are performed in-house. This, however, creates another conflict since distributors will not want to have competition from the manufacturer. Dealing with this issue can be complex, and solutions are not necessarily simple, but it is an issue that can be dealt with to mutual benefit.
There are a host of other, less common issues that can effect distribution coverage strategy that undoubtedly arise due to each company’s unique situation. Recognizing and dealing with these issues is key to maximizing global sales and achieving beneficial, long-term distributor relationships.
Everything has an opportunity cost. For those not familiar with the concept of opportunity cost, it basically means the cost of not making a given decision (