Welcome to part two of our guide to growing your business internationally. In this edition, we’ll take you through some ideas on choosing the correct distribution strategy for your business.
So, you’ve decided to grow your business internationally. Great! As we outlined in our introductory article this decision takes place after you’ve done your research, secured the advice of experts, and even sanity checked if it’s right for your business to grow overseas in the first place. Once you’re happy with the decision to go forward internationally, you’re going to need a distribution channel strategy.
A distribution channel strategy answers the fundamental question: “How do I get my products into the hands of customers in another country?”
Direct and Indirect Distribution
There are two types of distribution; direct and indirect. Direct means you, as the producer, provide your products directly to the end customer. Indirect distribution uses any number/combination of intermediaries who become part of the path to getting your products to the customer. This could include agents, wholesalers, and retailers dependent on your distribution channel strategy.
And selection depends on a number of factors which differs even between businesses in similar industries; for example digital businesses aren’t automatically direct distributors simply because they can sell online. Distribution intermediaries might be critical to the success of their business; for example Amazon for digital books, iTunes for digital music etc.
Factors Impacting Distribution Channel Strategy
Distribution is not just a logistics issue, there are four key factors that will impact your distribution channel strategy:
- Sales: Who is your customer – is there a local market provider who already reaches this audience you should collaborate with? And how do they like to buy e.g. is it a “high touch” product customer need to touch, see, and try before buying. Will you need specialist agents to sell it? Or is it customized so you need direct access to your customer.
- Logistics: How will it, ultimately, reach the end customer? Is it a perishable that needs fast, managed shipping and strict control standard or a one-click download? Are there local regulatory factors you need to take in to account?
- Finance: What working capital will you need/have access to? What credit arrangements will you need/offer? How will you process customer payments?
- After-Sales Support: What happens after the product is in the hands of the customer? Do they need any ongoing support or training? What if there’s a problem, how will you resolve it e.g. repairs and returns.
Any of the above factors can place certain limitations – or highlight opportunities – based on your product and business.
For example, if you sell clothing and don’t have the working capital to establish manufacturing in another market you may decide to sell direct via an online shop, or you may run a cost analysis and decide that the most profitable way to both sell and manufacture locally is to license a local manufacturer to product your clothing. In that case, the best channel, is the one that best addresses the business’ needs.
Distribution Channel Stakeholders
When developing your channel strategy, there are three types of stakeholder to consider:
- Customer: Your No 1. Consideration starts with the Customer. Do they want your product? Are they willing to pay for it? How do they buy? Asking some hard questions, and quantifying with research, at this stage will prevent costly mistakes.
- Intermediaries: These break down further into Agents, Wholesalers, and Retailers. You may choose any combination of these for indirect selling.
- Producer (you): Ultimately the distribution channel has to make sense for you. If it’s damaging your brand equity or simply not profitable you need to ask yourself why your doing this. Which leads us to….
The Four Steps do Distribution Channel Selection
Taking the above Factors and Stakeholders together we recommend going through a four-stage process to select your distribution channel strategy.
We’ve created a handy planning matrix you can download, print out and work with while going through these decision steps.
- First, start with your customers: What are their needs? How does your product meet those needs? How will they find you? Buy from you? And even become brand evangelists?
- Then ask, “Does this make sense strategically?”: Remember back in Growing Your Business Internationally: Part 1 the second step was to think strategically and decide if selling overseas made sense for the business. We’ve repeated that decision step here specifically related to channel selection – the channel must make sense for your current corporate and marketing strategies.
- Next, make sure your product fits: It might be a relatively simple step to set up an online web store and ship from the UK to overseas but does that work for your product? High touch items need a greater degree of hand-holding. Likewise, some products come with their own logistical challenges – like perishables – that even though they can be shipped there is an impact on both quality and profit margin.
- `Finally, check the finances work: You’re in business for a reason, primarily to make money. So the distribution channel you pick has to work profitably for the business. It doesn’t matter if there is a crazy amount of demand for your product in another market – if you can’t provide it to them cost-efficiently (and without impacting quality/brand perception) then you need to go back to the drawing board and choose again until the numbers add up.
We can’t be prescriptive about which is the right distribution channel for you but we hope we’ve helped by providing a framework for your decision making process. Like most strategies, coming up with your distribution channel strategy takes a little time and a lot of knowledge about your business and the market you wish to sell to.
A Quick Guides To Intermediaries:
You source an agent to represent your business in the target market managing both selling and customer services. Often these are setup as commission only deals making this a low-cost route into a new market, but bear in mind you will probably have to provide sale collateral and invest in marketing support for your agent. You may even need to invest in training them to deliver high touch sales.
When working with a distributor they usually buy from you and then are responsible for selling on to a customer – this may be direct or on to other businesses. This option works well when you find a local distributor with a good base and expertise in selling to your customer but the reduction in risk means you can lose a lot of control – in particular with how the product is marketed and after-sales support.
Business create a Joint Venture or licensing partnership to sell a product or service locally with a partner – they may even manufacture your product/s locally. It can offer more control than a distributor deal but the risk becomes shared.
Retailers are the last stop in the supply chain and sell to the customer direct. Retailers take on all the burden of attracting customers, making sales, and offering after-sales support. For this reason they can negotiate tough contracts on everything from product & packaging, delivery and volumes, payments terms, and both wholesale and recommended retail pricing. A good retail agreement can boost your business but a bad one can cause losses. Approach with caution.
Wholesalers are like agents and distributors. They purchase product (at wholesale prices and typically in large volumes) and then sell on or distribute to retailers, distributors, or even other wholesalers.