Channel Tuneup: How Do You Handle Requests for Exclusivity?

When receiving inquires from overseas distributors, the question of exclusivity is inevitable. With some markets in North America, it is a common request as well, especially in the K-12 education market where customers (schools) and territories (school districts or states) are clearly defined.

From an international value added distributors' perspective, they prefer investing in developing a territory for a vendor when they will be offered protection in the form of exclusivity. They don't see it in their interest to invest in developing a brand and then, once sales pick up, for the vendor to appoint another distributor.

Expect distribution partners in Asia to
 ask for exclusive distribution rights.
 What's your policy for handling exclusivity?

For the vendor entering a new territory, it may make sense initially to limit distribution of an offering to one partner, to ensure that the partner invests the necessary resources to sell the offering effectively. However, there often reaches a point where a single partner is not able to cover a whole market and additional channels should be added (albeit carefully) to maximize revenue and profits. Multiple channels, when managed  correctly, are like a rising tide that raise sales for all the channel partners.

This is not quite the Catch 22 it might appear to be. I've found over the years working with a number of emerging companies that a straightforward, honest approach is in the interest of both vendor and distribution partner.

As a general rule, I avoid exclusive contracts and any contract language that contains the words exclusive or sole, unless the word is "non-exclusive." This is clear and straight forward.  On the other hand, depending on the offering, for companies entering a new market having one partner per country may make sense in the beginning, depending on the offering and the market. (In fragmented or large markets -- China, for example -- it may be impossible for one partner to come close to providing reasonable market coverage and from the git-go multiple partners are required. Do your homework and figure out the best approach for your company.) Or, if you're offering a telecommunications product and your channels are the telcos of each country, you would naturally approach each telco as a partner.

If your approach is to appoint a single distributor, I always insist on a sales plan to cover the entire country, a marketing plan with clearly stated objectives, a sales forecast and placing an initial, significant, stocking order worthy of the size of the territory. I make it clear from the beginning that if the distributor wishes to remain the only distributor it must achieve the stated objectives. A key element in this sales process is the prepaid opening stocking order, because that demonstrates real commitment from the distributor. If your offering is really as good as you believe it to be and your would be "exclusive" distributor is unwilling to commit to two months (or more) of inventory with an initial prepaid order (or back the purchase order with an irrevocable, confirmed letter of credit), this is a warning sign.  Is your distributor under capitalized? Is the distributor really going to push your product? Does the distributor really have the capability to sell your offering effectively? Or, is your would-be partner simply negotiating for exclusive rights as a tactic to lock you out of the market by not selling your product? (Yes, this is attempted all the time.)

The stocking order consummates the marriage, but, as with a joyous wedding night, this is just the beginning. Maintaining that special relationship requires achieving objectives of the plan. This demands effort from both sides: the vendor must support the distributor with training and its know-how. If plans and objectives are not met, both sides need to evaluate the situation to see what adjustments can be made to get progress back on track. And if, within a reasonable period of time the situation is not rectified another distributor needs to be appointed.  This should not be a surprise to the distribution partner if conditions were stated clearly in the beginning.

Beware of distributors requesting exclusive distribution rights across several countries, for example, the Singapore-based distributor requesting exclusivity in Singapore, Malaysia and Indonesia, or the Swedish distributor demanding exclusivity in Scandinavia. Do your due diligence and make sure the distributor is capable of effectively selling your offering in each country.

Many times, when stocking orders and significant commitments have not been made, the distribution relationship just doesn't get off the ground. Although the odds of failure are lessened with the mutual commitment of the stocking order, success is not guaranteed and the relationship must be nurtured and closely managed.

If your policy is to appoint multiple distributors from the beginning, state that clearly, and consider offering marketing and/or product launch funds to the partner. At the end of the day, if it's going to be very profitable for a distributor to sell your product, even on a non-exclusive basis, how can they say no to an offer they can't refuse?