Today we will examine the pros and cons of use of an agent or a distributor when expanding overseas compared to using your own sales force.
I will focus on working with a partner in our target market but consider entering the market with a company from your home country.
If you know of a company with complementary products, consider forming a Joint Venture to enter the country together. Much of your research will apply to your potential JV partner. You may even have identified that you will have a higher degree of success if you bring a complete package to the marketplace. But you need to assess their financial resources, the robustness of their business, and the capability of their people before agreeing to a Joint Venture. More importantly, does their enthusiasm for the project match yours? Remember, there will be setbacks, and troubles lie ahead unless their commitment is as strong as yours.
For marketing your products or services, there are three common approaches:
- Set up your in-country sales organization
- Use an agent
- Use a distributor
What is the difference between a distributor and an agent? Put simply, a distributor is your customer, an agent finds customers for you. A distributor should have the capability to buy, store, market, and, as the name implies, the ability to distribute your product to the end user. An agent has none of this infrastructure; an agent finds customers who want to buy your product, the customer places an order directly with your company, and the agent gets paid a commission on the sale.
Setting up your sales team:
- Gives you better insight into the marketplace
- Helps you identify opportunities
- Can focus on the long term – distributors and agents may take a short-term view
- Increased credibility with customers – shows commitment to the country
- No need to share profits with agents or distributors.
- You have to do everything yourself
- Hiring staff requires a good knowledge of labour law and practices in the target country.
- Will likely be considered a Permanent Entity making you liable for taxes and statutory filings
An alternative to your own in-country sales team, distributor, or agent is to use your home-based sales staff as international sales representatives. Not my preferred approach; part-time effort equals part-time results. There may be tax implications for your staff depending on how long they stay in the country.
Using an Agent
A sales agent acts on your behalf by finding customers you supply and invoice directly. The agent receives a commission on the sale.
Agents already selling complementary but not competing products or agents with a well-established reputation within your customer’s industry are often good choices.
- Simplicity and speed. An agent can promote your products within days of a contract being signed.
- Benefit from the agent’s industry knowledge and experience.
- No recruitment costs or tax liabilities
- Flexibility. The contract can be for one year or less, allowing either party to terminate the contract if it is not working.
- An agent does not hold inventory. This will impact your time for delivery. If your competition has stock in the country, they can deliver in days rather than weeks.
- You take on the credit risk
- After-sales service can be challenging
Would a distributor be better for you?
- Holds inventory
- Market and sells your products to end customers
- Manages distribution
- Takes on the credit risk
- Will expect significant discounts and extended credit terms
- Long-term commitment required
- Loss of control of your marketing strategy
When using an agent or a distributor when expanding overseas ensure you understand the relevant anticorruption legislation. Insist that your distributor or agent agrees to comply all with international and local regulations.