Situation: A software company is evaluating its distribution network. Historically they have worked with resellers who aggregate software services into packages for larger customers. Recently they were approached by a reputable distributor seeking a master distribution agreement with favorable payment terms. Is this an option that they should pursue? How do you evaluate distribution alternatives?
Advice from the CEOs:
- There are at least three objectives to consider: market coverage, margin to the producer, and market risk.
- For market coverage, evaluate the alternatives in terms of their ability and commitment not only to serve your current market but to expand into adjacent markets.
- Regarding price and margin, there are two alternatives:
- Decide what price you want, and don’t worry about the reseller or distributor’s final price to the customer, or
- Establish a floor price for your product and ask for a percentage commission on sales.
- Run models on each and decide which will provide the best return on sales.
- Market risk is more complex. These are different approaches to the market.
- In evaluating the reseller option, insist on terms in reseller agreements that the reseller disclose the terms of their sales.
- Sharing of customer databases is another factor. Siemens, for example, considers their customer database as IP and only releases portions of their customer database selectively to resellers.
- A master distribution agreement has different risks. It puts all of your eggs in one basket. If the distributor adjusts focus away from your software during the term of the agreement your sales and revenue will suffer.
- Are there conditions where a master distribution agreement may make sense?
- If the distributor is willing to sign a multi-year agreement with sales guarantees at favorable pricing this mitigates the risk.
- The central issue is risk and guarantees. If you see the option as a low risk – high return proposition, it may be worth considering.