The 5 Most Deadly Mistakes of B2B Start Ups and Software Companies When Locating and Recruiting Distributors Abroad
Most start-ups and software companies in the B2B field recruit distributors abroad. The benefits are clear, and the following can be included as the major ones:
- A local distributor is a much cheaper alternative compared to the costs of opening an office and recruiting local employees
- The distributor has relations and better familiarity with the local market than we have – it reduces our time-to-market
- The distributor has presence and speaks the local language, resulting in better communication with customers regarding both sales, implementation and support needs
- The distributor can offer a selection of complementary products and services required by the customers jointly with your product that the company is unable or unwilling to provide, e.g. integration, localization and more
- The comfort in having a local party engage with end clients and taking responsibility from the stage of signing the contract, through supply and implementation to payment collection
- The distributor relieves us of the headache involved in handling administrative, logistic, local standardization and HR issues.
During my years of work in the global sales & marketing management and consulting field for B2B start-ups and software companies, I am surprised again and again after meeting managers who insist on repeating the same mistakes that other companies had already made, believing that their case and product are different and unique.
The mistakes, which we will specify below, are not exclusive to small to medium startups and tech companies in the B2B field, but play a prominent part in such companies.
- The distributor will do the job for us
Among most B2B start-ups and high tech companies that plan the stages of breaking into global markets there is a stubborn belief that they can continue and focus on product development and maybe even tech support, whereas in regards to the marketing and sales aspect, according to them, they will find a good distributor to do the job. The distributor allegedly has a clear interest as it will sell a new product and receive handsome profits and percentages from each transaction. Makes sense, doesn’t it? Otherwise, what are distributors for?
Experience in the field shows otherwise. Recruiting distributors at the breakout stage is different than a situation in which the company has based itself abroad, has a customer base and a wide network of distributors and is now looking to add several more. Distributors are normally risk haters and short term-oriented. Your company’s global marketing strategy interests them less than tactical issues, mostly the level of difficulty involved in selling the product. In practice, they might not know your specific sector and field as much as you, as you have all of your thoughts and funds invested in your venture and product. They, on the other hand, deal with selling other products and services and are looking for easy and fast sales, where they will focus most of their efforts. They will be in no rush to bear the whole responsibility, risk and investment involved in penetrating into the market with a new product, surely one with unparalleled technology. First, they would want to see whether you had success in the past and what it was. They would surely expect to see that you have customers in the Israeli market, but would prefer it if you already had several successes abroad – where the entry threshold is much higher and having passed it means that it is relatively easy to sell your products. They would also expect to see that you know how to do marketing. If you don’t have the ability to create marketing and sales tools, they will infer that you are not ready for international activity and would not be able to support them during the challenging penetration process. This all might seem to them as a rather large risk and as a difficulty in selling your products.
It should be remembered that the distributor also has other products and interests and does not report to you, as it is an independent company and not your employee.
This means that you must be ready to perform quality marketing and to be involved as a partner in the sales processes with potential customers whom you have reached directly and those whom you have reached via the distributor. Specifically, there is a superior importance in having direct familiarity with the market when it concerns a new product, seeing how customers react to the product, what adjustments are required and in general, being with a finger on the pulse. Cooperation with a distributor does not relieve the company’s obligation to be present in the market, therefore a marketing and sales budget must be reserved for visiting the target country, exhibitions and for lead generation.
- Not defining the functions of the distribution channel
When I ask the managers of the companies that I accompany and advise what functions are they expecting their distributor to perform, most of them reply that the important thing is that it will sell and do a little bit of marketing. Yes, everyone wants to sell. But does the customer want to buy ‘what sells’? Does your product also require installation, implementation, localization, adjustment to a local standard or integration with other systems, physical or remote support, inventories, supply, spare parts, logistics?
Many of the companies will argue that they are simply technology and product providers and that the other functions described above are not under their care and do not interest them. But it should interest them, in most cases, and that is indeed their problem. Not only that in these cases it is possible that customers will not be satisfied after purchasing the product, in fact they might not purchase the product at all. A B2B customer who wants local technical support, for instance, will not purchase the product if there is no local party to perform such function. This is not a customer support or operating and logistics problem, it is an absolute marketing problem.
This does not mean that the company needs to provide the entire bundle of complementary services or products, but it obliges the company to ensure that there will be a party delivering them, otherwise the products will not be purchased, as good and unique as they may be. And indeed, distributors can meet this need but this requires analysis of the functions or roles that we wish the distributor to perform, and if one partner is insufficient, it is possible that the company might have to ensure that another party or business partner is involved, so that the customer could receive the value they expect and so that the product will be purchasable.
In accordance with the roles that we define, we can derive the desired distributor profile and use it during the distributor evaluation and screening process when we examine which distributors might perform the roles required of them. This also assists in the process of matching expectations with the chosen distributor. For instance, if the solution requested by the customer also must include integration of the software with the organizational ERP system, then apparently, we will need to collaborate with parties that have abilities in this field in the distribution system, and if an inventory of spare parts is required, then we will need a distributor with logistic abilities and import experience.
- Signing with the first distributor in line
This is an especially common mistake among managers with no global experience in channel management: a company plans to develop its global operation and a potential distributor has made contact, whether via the company site, in an exhibition or via a shared contact. The company, eager to charge at global markets, assuming that it had already performed the international marketing preparation process, is pleased that a potential business partner abroad came across its path, and identifies and recognizes the potential of its product in the market, and makes haste in signing a distribution agreement with him. Inexperienced managers tend to say in these cases – “we have nothing to lose, let’s start working with them. What could possibly happen?”
The problem is that something can always happen. First, we may have lost other distributors who are more suitable to the functions that we wish they would perform, distributors who are more experienced and have a more impressive profile – they have not been examined at all. But moreover, an unsuitable distributor will cost the company great time and resources. It might address an unsuitable customer base or may not be perceived by the customers as someone that can provide a full solution. It will request and withdraw significant resources from the company such as preparation of price proposals, conference calls, special marketing materials and even visits to exhibitions and meetings with the wrong customers. Great time and money will disappear before the size and cost of the mistake become apparent. During this time, the distributor might mislead the company that it is in advanced negotiations with the customers and that the first sales are right around the corner, and thus valuable time and money that could have been channeled to managing an organized process of choosing a suitable distributor have gone to waste.
On the other hand, the business world is dynamic and sometimes you must think outside of the box and be open to opportunities. It is possible that there is indeed a good enough match with the first distributor, then why refuse? My approach is that if this is not a primary and important target market, but a casual and small one, and if the distributor meets the profile and functions we have requested – the option of working with that distributor without examining other alternatives should not be outright rejected. However, in other cases and in important markets, it is recommended to run a more thorough process so that we will know that we have chosen the distributor with the highest fit for us and chances of success. Thus, for instance, a company that defined one of its primary target markets as Germany will run an organized and meticulous process of examining other alternatives, whereas if a distributor from the small country of Slovenia has made contact, then more flexibility can be shown in the process and it might not be necessary to invest resources into examining other alternatives.
- Giving the distributor another territory in advance
This is one of the mistakes that create situations that, if the company would not have developed false expectations, might have been pretty funny. The scenario is this: the company is in negotiations to close with a potential distributor in one target market. Assuming it managed to avoid mistake no. 3 and is in no rush to appoint the first distributor that sought it, good relations and trust are beginning to form with the distributor. At a certain point during the agreement negotiations, the distributor requests to receive, sometimes exclusively, another country. The distributor’s reasoning is that he might have relations and certain activities in that market, that is why it would be easier for him to take responsibility for that territory as well.
This offer can seem magical to a company as it could put another pin on its conquest map – not just one country, but two. It also sees additional upsides: the price and the headache involved in managing a single channel of relations with a central distributor, as now it is getting two territories which makes the company’s share of the distributor’s product portfolio larger, and surely, he would invest more in the company and in promoting the company’s products. If the additional country is one that the company has yet to think about, then it would not care at all that the distributor would cover it and be satisfied.
There are several faults in the whole process described above. First, it should be checked whether the business and cultural environment in one country is identical and eases managing relations from another one; for instance, if the distributor from Czech Republic has also received Slovakia, then there is a certain logic and similarity between the two countries in the culture, languages and tight general and business history. But if it concerns a distributor in Hungary that has received handling of Czech Republic, then there isn’t much sense in it. From our point of view in Israel, these might be similar territories but, in practice, they are more different than alike: as far as it concerns language, culture and business practices, it’s not definitive whether the preferred alternative for Czech customers is purchasing products from Hungary.
A second fault is that we have basically skipped all stages of appointing a distributor: checking the functions it could perform in the second territory, the manpower it allocates, requesting a designated marketing plan and not to mention the market researching process, which was not performed at all. Rushing to satisfy the distributor might cost lack of focus in the primary territory, missing out on a better distributor in the second country, and conveying to the distributor a feeling of not taking another territory serious.
My approach in these cases it to tell the distributor that first we examine how things are managed and how the sales are doing in his home market and only then, and in light of the results, will we examine the option of the second territory.
- Not requesting a marketing plan from the distributor
Few of this article’s readers request this paper from their distributors. Why? First, because they don’t bother preparing a marketing plan for themselves, so surely, they won’t insist on one from the distributor. Additionally, on its part, the distributor is in no rush to invest in preparing this paper whether it knows how to write a marketing plan or not, or whether it wants to invest in this process or not. However, if it is unwilling to invest in preparing the document, what kind of guarantee do we have that it will invest resources in the marketing and sales activities?
The marketing plan that we request from the distributor is a short document which describes the target customers whom the distributor will seek, methods of reaching them, the resources it will dedicate to your products and the marketing and sales channels and activities it intends to use and perform in order to reach the mutually defined sales goals. Experienced distributors will also input basic demands from the company inside the plan, such as customization of the product to the target market, support during the sales process and participating in an exhibition.
It is not easy to extract such a plan from the distributor, however by waiving it we are basically consenting to not having defined and explained marketing and sales goals and not having an agreed plan with a series of actions, steps and resources (on both sides) meant to realize these goals.
In cases where the distributor does not know how to prepare this plan, he must be guided and assisted. This process will also strengthen relations with the distributor, and sometimes even its dependency on the company, which takes part in preparing its plan, and therefore able to influence its contents and offer ideas or requirements in accordance with the experience it had accumulated in other markets.
There is no need to wait until the end of the year to see that the distributor won’t meet its goals. If there is a marketing plan, then it is possible to examine whether the distributor is executing the actions specified in it and to predict how sales will develop later.
What critical mistakes do you face when locating and recruiting distributors?