Product Development and Commercialization

Product Development and Commercialization A Library of Resources for Growth-Oriented Entrepreneurs Introduction to Sales and Distribution Activities

INTERNATIONAL CENTER FOR GROWTH-ORIENTED ENTREPRENEURSHIP 2015 Edition Dr. Alan S. Gutterman

Product Development and Commercialization: A Library of Resources for Growth-Oriented Entrepreneurs 2015 Edition published in 2015 by the International Center for Growth-Oriented Entrepreneurship (www.growthentrepreneurship.org) and copyrighted © 2015 by Alan S. Gutterman (www.alangutterman.com). All the rights of a copyright owner in this Work are reserved and retained by Alan S. Gutterman; however, the copyright owner grants the public the non-exclusive right to copy, distribute, or display the Work under a Creative Commons Attribution-NonCommercial-ShareAlike (CC BYNC-SA) 4.0 License, as more fully described at http://creativecommons.org/licenses/by-ncsa/4.0/legalcode. About the Center The International Center for Growth-Oriented Entrepreneurship (www.growthentrepreneurship.org) engages in and promotes research, education and training activities relating to entrepreneurial ventures launched with the intent to achieve significant growth in scale and value creation through the development of innovative products or services which form the basis for a successful international business. In furtherance of its mission the Center is involved in the preparation and distribution of Libraries of Resources for GrowthOriented Entrepreneurs covering Entrepreneurship, Leadership, Management, Organizational Design, Organizational Culture, Strategic Planning, Governance, Compliance, Finance, Human Resources, Product Development and Commercialization, Technology Management, Globalization, and Managing Growth and Change. About the Author Dr. Alan S. Gutterman is the Founder and Executive Director of the International Center for Growth-Oriented Entrepreneurship and the Founder and Executive Director of the Business Counselor Institute (www.businesscounselorinstitute.org), which distributes Dr. Gutterman’s widely-recognized portfolio of timely and practical legal and business information for attorneys, other professionals and executives in the form of books, online content, webinars, videos, podcasts, newsletters and training programs. Dr. Gutterman has over three decades of experience as a partner and senior counsel with internationally recognized law firms counseling small and large business enterprises in the areas of general corporate and securities matters, venture capital, mergers and acquisitions, international law and transactions, strategic business alliances, technology transfers and intellectual property, and has also held senior management positions with several technology-based businesses including service as the chief legal officer of a leading international distributor of IT products headquartered in Silicon Valley and as the chief operating officer of an emerging broadband media company. He received his A.B., M.B.A., and J.D. from the University of California at Berkeley, a D.B.A. from Golden Gate University, and a Ph. D. from the University of Cambridge. For more information about Dr. Gutterman, his publications, the International Center for Growth-Oriented Entrepreneurship or the Business Counselor Institute, please visit www.alangutterman.com and/or contact him directly at [email protected].

Product Development and Commercialization: A Library of Resources for Growth-Oriented Entrepreneurs Contents

PART I

PRODUCT DEVELOPMENT

PART II

RESEARCH AND DEVELOPMENT

PART III

PURCHASING

PART IV

MANUFACTURING

PART V

SALES AND DISTRIBUTION

Preface Chapter 1

Introduction to Sales and Distribution Activities

Chapter 2

Strategic Planning for Sales and Distribution Activities

Chapter 3

Organization and Management of the Sales Function

Chapter 4

Sales Compensation Plans

Chapter 5

Negotiating Direct Sales Contracts

Chapter 6

Negotiating Sales Agency Arrangements

Chapter 7

Negotiating Distributorship Arrangements

Chapter 8

Customer Service and Support

PART VI

MARKETING

Preface Chapter 1

Introduction to Marketing Activities

Chapter 2

Marketing and Considerations

Chapter 3

Strategic Planning for Marketing

Chapter 4

Organizing and Managing the Marketing Function

Chapter 5

Developing a Product Marketing Plan

Advertising

Activities:

Legal

and

Regulatory

Chapter 6

Selecting and Managing a Public Relations Firm

PART VII

ONLINE MARKETING AND SALES ACTIVITIES

PART VIII

COMPARATIVE STUDIES OF PRODUCT DEVELOPMENT

Chapter 1

Product Development in Developed Countries

Chapter 2

Product Development in Developing Countries

This is a Part or chapter from the Library and you can get copies of other Parts and chapters by contacting the International Center for Growth-Oriented Entrepreneurship (www.growthentrepreneurship.org) at [email protected]. The Center also prepares and distributes other Libraries of Resources for Growth-Oriented Entrepreneurs covering Entrepreneurship, Leadership, Management, Organizational Design, Organizational Culture, Strategic Planning, Governance, Compliance, Finance, Human Resources, Technology Management, Globalization, and Managing Growth and Change. Attorneys acting as business counselors to growth-oriented entrepreneurs who are interested in forms, commentaries and other practice tools relating to the subject matter of this Part or chapter should also contact Dr. Gutterman at the e-mail address provided above.

Product Development and Commercialization: A Library of Resources for Growth-Oriented Entrepreneurs (2015) Part V – Sales and Distribution

PART V Sales and Distribution Preface

This Part discusses sales and distribution activities, which include the steps that companies take to create and develop sales channels for the company’s products in selected target markets (e.g., direct sales, telemarketing, sales agents, distributors etc.). The Part begins with an overview of the typical activities in the sales are including an introduction to initial sales and distribution strategies; and also includes a brief summary of relevant legal issues, including laws governing sales contracts and transactions. The Part than discusses various issues relating to strategic planning for sales and distribution activities, including factors for consideration in developing a sales strategy and measures of sales function performance. The Part continues with an overview of the issues that should be considered when designing the management and organizational structure in the sales area and when creating and administering sales compensation plans. The Part also covers the issues that must be considered when choosing between in-house sales personnel and outside sales agents and the issues that arise when negotiating direct sales contracts, sales agency arrangements and distributorship arrangements. The Part concludes with a discussion of customer service and support.

Chapter 1 Introduction to Sales and Distribution Activities Setting the Stage Once the ideas for new products have been identified and vetted and the product development process is largely completed, the full attention of the company should be focused on the activities directly related to promoting and selling the products and tending to the post-sale needs of customers with respect to service and support. In the initial stages of the company’s development reliance is often placed on one or more of the members of the founding group with significant experience in sales and marketing and, in fact, many companies are established in order to meet a need in a specific market where the founders have worked in the past. However, as time goes by, and the company matures and expands, experienced professionals will be brought in as senior managers of the sales function to create and develop sales channels for the company’s products. Even when companies have brilliant ideas about solutions for their customers, they will not be successful unless and until they figure out the best way to close the sale.

Key Topics Covered Key topics covered in this chapter include the following:  

Sales and distribution strategies Legal and regulatory considerations for sales activities

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     




Choosing between in-house sales and outside agents Management of outside sales networks Organization and management of the sales function Sales compensation plans Direct sales contracts Sales agency and distribution agreements Customer service and support

Learning Objectives After reading this chapter, you should be able to: 1. Understand the process for selecting the best method for selling and distributing the initial product. 2. Explain the advantages and disadvantages of outsourcing sales activities. 3. Recognize the legal and regulatory issues associated with sales activities. 4. Explain the strategic advantages available through sales activities and the elements of the business plan for sales activities. 5. Recognize the factors to be considered in choosing between an in-house sales force and outside sales agents. 6. Understand the specific terms of various types of outside sales relationships and the steps that should be taken to effectively managing outside sales networks. 7. Explain the key principles for organizing and managing the sales function. 8. Understand how to design an effective sales compensation plan.

§1:1

Introduction

Once the ideas for new products have been identified and vetted and the product development process is largely completed, the full attention of the company should be focused on the activities directly related to promoting and selling the products and tending to the post-sale needs of customers with respect to service and support. In the initial stages of the company’s development reliance is often placed on one or more of the members of the founding group with significant experience in sales and marketing and, in fact, many companies are established in order to meet a need in a specific market where the founders have worked in the past. As time goes by, and the company matures and expands, experienced professionals will be brought in as senior managers of the sales and marketing functions. While their activities are often complimentary, sales personnel focus on the creation and development of sales channels for the company’s products and marketing personnel concentrate on promotional message to be delivered to prospective customers. In addition, marketing is the engine for identifying customers, ascertaining customer needs and requirements, selecting the proper mix of new products and services to create customer satisfaction, establishing pricing strategies, and building and maintaining a unique company identity (“branding”).1

1 For further discussion of product development and marketing activities, see the Parts on “Product Development” and “Marketing” in this Library.

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The first step in the identification, description and execution of all of the necessary sales and distribution activities is the creation of the appropriate sales strategy for the company. Once the strategy has been finalized it is up to senior management to design an organizational structure that is fully aligned with the strategic objectives. Among the issues that must be resolved in selecting a structure that maximizes interaction with the company’s target customer groups and making sure that the company makes the right choices with respect to the sales channels that will be used for each of these groups (e.g., direct sales, telemarketing, sales agents, distributors etc.). The structure must also be based on the appropriate dimension—products, geography or industries—so that all of the resources allocated to the sales process will be efficiently deployed and that activities of various departments can be coordinated and must include sufficient resources to properly serve the target markets identified in the company’s sales strategy. Regardless of how sales activities are organized the company must also implement appropriate sales and management processes. Sales processes include lead generation and qualification, sales techniques, contracting and activity tracking. Sales management processes include hiring and termination of sales personnel, training and development, design and implementation of compensation plans, performance measurement and management and the sales culture. Finally, companies must invest in the technological tools necessary to ensure that its sales force can operate effectively and satisfy customer expectations. §1:2

Initial sales and distribution strategies

One of the most important strategic decisions for any business is choosing the best method for selling and distributing its initial product. Since most of the focus at the time the business is launched is on new product development, decisions regarding allocation of resources to sales will often be deferred until the development work is close to completion. During that interim period, the founders and other senior managers will spend a good deal of their time calling on prospective customers, often looking to either land one large initial contract or build a small set of reference customers that can be used to test the product and build credibility in the larger market segment. While direct involvement of senior management in sales can be an important plus factor at this critical stage, the firm must ultimately build a sales strategy that relies on others—both inside and outside the company—since senior management must be freed to tend to the other aspects of managing a growing business.2 Among the key factors to consider when developing the initial sales and distribution strategy is the nature of the product and required sales effort and the size and composition of the target market. For example, if the target market for the initial product is relatively narrow or the sales effort is focused on a small number of potential OEM customers, then it is likely that the firm will elect to emphasize a direct selling effort using either in-house personnel or “manufacturers’ representatives” who are compensated on a commissiononly basis. Before recruiting and selecting the sales personnel, the firm must carefully 2 For further discussion of activities during the launch phase, see “Entrepreneurship: A Library of Resources for Growth-Oriented Entrepreneurship” prepared and distributed by the International Center for Growth-Oriented Entrepreneurship (www.growthentrepreneurship.org).

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evaluate the way in which the prospective customers will approach the procurement process and the type of information they will need in order to make their decisions. In some cases, customers will want more assistance in understanding the technical aspects of the new product. In other situations, however, the technology will be less of an issue and the optimal sales approach would focus on educating the customer about how the new product can be integrated into the customer’s product line. Since each sales approach requires different sales skills, the firm will want to be sure that it hires sales professionals that are best suited to the particular selling effort.

There is evidence to the effect that smaller companies will experience more rapid growth if they can establish close contacts with customers and minimize their reliance on the use of outside sales agents. However, although it is certainly possible for one company to possess the financial and technical resources for internal development of products and direct sales of the products to end users without the use of intermediaries, it is more likely that one or more outside partners will eventually assist in distribution. Engaging with sales representatives and distributors allows companies to minimize the costs of creating and maintaining an internal sales force, the cost of which can exceed the cost of developing many products. In addition to the cost involved, creating a sales force is a time-intensive and prolonged process. Time estimates are generally one to two years to create a sales force covering all of a market. The risk is that the time spent in developing the sales force may mean that a company’s products may miss the market opportunity, and that senior executives are wrapped up in only one issue—developing a sales force—instead of attending to all the other pressing issues facing the company. Creation of an in-house sales team is also not warranted, or cost-effective, when the firm is entering a market in which the customer base is fragmented and individual sales transactions involve relatively small dollar amounts. In those situations, the firm must base its sales strategy on developing a network of independent sales representatives and/or distributors that already handle a broad line of similar products in the target market and who are willing to carry the company’s products as additional items. The advantage of outsourcing sales activities is that sales representatives and distributors are in the business already, have established accounts, and can accelerate the time to market. Even if such sales representatives or distributors are asked to handle the company’s products on an exclusive basis, and not sell any other products, their experience will make the roll out much faster. A side benefit of hiring individual sales representatives as independent contractors is that they are not employees, and the restrictions in many jurisdictions on hiring, treatment and termination of employees do not apply. On the other hand, selling through outside agents can be a challenging undertaking for small firms with no track record and little initial bargaining power with the agents, particularly larger distributors who prefer to focus on products that have already established themselves as high volume items and the distributor’s sales personnel rarely have the time or qualifications to engage in the direct sales effort normally required to inform customers about the attributes of a new, and relatively unheralded, product. In fact, the knowledge base of the distributor is typically limited to the information on product data sheets; however, the firm will usually have an opportunity to brief the distributor’s sales force in live presentations at the time the distributor agrees to take on the product. The relationship with any distributor will

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usually be conditioned upon attainment of agreed minimum sales volumes and slow moving products will generally be dropped by the distributor after an initial trial period. §1:3

Legal and regulatory considerations

A sales transaction is a contract for the purchase and sale of goods. Assuming that the seller and purchaser are both US parties their legal obligations will generally be governed by rules set out in a state-specific version of Article Two of the Uniform Commercial Code ("UCC"), which is a model act that has been adopted with certain variations in all of the states except Louisiana.3 Article Two of the UCC deals with all of the fundamental issues that arise in a sale of goods transaction, including the following: 





Formation of the sales agreement, which can occur by using standard forms that set out the basic terms of the transaction, through negotiations leading to an agreement that is customized to the needs of the parties, and by oral discussions and negotiations that ultimately create an enforceable contract. The time or event when the risk of loss or destruction of the goods passes from the seller to buyer. If the parties have not reached their own agreement regarding the risk of loss, the default rules in the UCC will apply and, as a general rule, the UCC provisions place the risk of loss on the party who was in the best position to have prevented the loss, on the party who was at fault, or on the party with the broadest insurance coverage.4 The general obligations of the seller under the contract of sale, including the seller's obligations to tender the goods in the manner provided in the contract and to provide goods that conform to the specifications set out in the contract.5

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References herein are to the model act version of the UCC and parties relying on UCC Article Two should be mindful that some states have modified the model provisions relating to certain subjects, particularly limitations on remedies, and that reference should always be made to the applicable state version of Article 2 covering the specific contract. Also, while the discussion in this Library assumes that the sale of goods transaction occurs between merchants, a large number of states have adopted legislation relating to sales transactions involving consumer products. Not surprisingly, the states have shown the greatest interest in disclaimers of warranties provided to consumers and in limitations of remedies in sales of consumer goods. See generally Clark and Smith, The Law of Product Warranties ¶ 8.05[2]; Clark & Davis, “Beefing Up Product Warranties: A New Dimension in Consumer Protection”, U. Kan. L. Rev., 23 (1975), 567; Clifford, “Non-UCC Statutory Provisions Affecting Warranty Disclaimers and Remedies in Sales of Goods”, N.C. L. Rev., 71 (1993), 1011. Most states have achieved this result by amending their versions of UCC §§ 2-316 and/or 2-719; however, other states, including California (Cal. Civ. Code §§ 1790 et seq. (Song-Beverly Consumer Warranty Act)), Kansas (Kan. Stat. Ann. §§ 50-623 et seq. (Kansas Consumer Protection Act)) and West Virginia (W. Va. Code §§ 46A-1-101 et seq. (West Virginia Consumer Credit and Protection Act)) have special warranty protection legislation outside the commercial code that offers consumers broad protection in sales transactions, and specifically curtails the ability of a product seller to disclaim implied warranties.

4 5

UCC §§ 2-509, 2-510 and 2-319. UCC § 2-503.

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 




The warranty obligations of the seller, including warranties of title, non-infringement, merchantability and fitness for a particular use, and the manner in which the seller might disclaim any warranty that is otherwise provided for under the UCC.6 The general obligations of the buyer under the contract of sale, including the obligations to pay the purchase price when it becomes due and to accept goods that conform to the specifications in the contract and that are tendered in the manner agreed upon by the parties. The remedies for breach of the contract of sale. For the seller, these might include the right to receive from the buyer adequate assurances of performance, the right to retain a security interest in the goods, the right to sue for the contract price, the right to receive damages for non-acceptance or repudiation and the right to resell any conforming goods that were not accepted by the buyer. For the buyer, remedies include damages for non-delivery, the right to reject nonconforming goods and the right to purchase substitute goods and recover from the seller any additional costs incurred due to the need to purchase such substitute goods.

A number of other legal issues should be considered when offering and selling goods, either directly or through intermediaries (i.e., independent sales representatives and distributors), including federal and state product liability laws that expose manufacturers and their resellers to substantial financial risk and which often require modifications to product designs; government product testing requirements; antitrust laws, which might consider an arrangement with a distributor or other type of reseller as creating a restriction on competition; intellectual property laws that determine the protection available for the company’s patents, trademarks and other intellectual property once its products have been sold into the market; federal and state laws proscribing the use of deceptive acts and practices in the sale of goods; consumer credit laws and regulation; and laws and regulatory guidelines that determine whether a sales representative might be deemed an employee of the company and thus entitled to the protections and benefits available to employees under federal and state labor laws. When selling products outside of the US, either directly or with the assistance of a local sales agent or distributor, companies must consider US export laws, as well as the import laws of the foreign country; foreign laws relating to the relationship between foreign manufacturers and any local agents, including laws regulating the term and termination of the relationship, compensation and restrictions on activities of local agents; foreign competition laws; local laws designed to regulate the quality and safety of imported goods; and US and local anti-bribery laws, including the US Foreign Corrupt Practices Act.7 §1:4

Strategic planning for sales and distribution

Sales activities are one of the most important issues and concerns in the overall strategic UCC §§ 2-312 – 2-318. For further discussion, see “Globalization: A Library of Resources for Growth-Oriented Entrepreneurship” prepared and distributed by the International Center for Growth-Oriented Entrepreneurship (www.growthentrepreneurship.org). Moreover, the laws of each specific foreign jurisdiction should be closely reviewed as there may be substantial variance from country to country.

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planning process for any company. The sales and marketing functions can lower production costs by increasing demand for the product. For example, if the sales and marketing functions conceive and execute a successful marketing campaign for a product that increases sales and market share the company can be more comfortable with expanding manufacturing activities to the point where the manufacturing function can begin to realize the benefits of economies of scale and thus decrease per unit costs of production. The lower costs can be converted into higher margins or lower prices that contribute to even more success in the volume of sales and the level of market share. While sales and marketing campaigns typically focus on existing markets it is often even more productive to achieve higher sales volume by entering new markets and many companies launch globalization strategies as a way to develop new outlets for their products. The sales and marketing functions can create differentiation advantages by creating and implementing sales and marketing strategies for targeted customer groups, tailoring product designs and features to customer requirements, and developing and promoting brand names. For example, by conducting market research the marketing department can identify the specific requirements of particular customer groups and pass the information along to the research and development department so that product developers can design new products with features that will be perceived as valuable by a larger group of potential customers. In addition, by staying in touch with the needs and demands of customers the marketing group can support the overall efforts of the company to build a reputation in the marketplace as being responsive and innovative. The important elements of the business plan for the sales activities of any company should include a statement of the overall mission or purpose of the plan, identification and description of specific goals and objectives and an explanation of the strategies and tactics that will be deployed in order to achieve the stated goals and objectives. At the highest level the mission of the sales function should be to create customers, retain their loyalty and build relationships with them by offering value that results in the generation of revenues necessary for the company’s business to survive, prosper and grow. All this may be more simply put by stating the obvious—the mission of the sales function is to maximize revenues. The goals and objectives associated with this mission might include developing new business, retaining and increasing current business, increasing customer loyalty and improving the level of service provided to customers. In addition, of course, the company should establish objective performance goals and objectives with respect to revenues, profits and market share. As for strategies, they can be broken down into sales strategies, which are the actions to be taken by salespersons to support achievement of the stated goals and objectives, and sales management strategies, which are the plans chosen by sales management with respect to acquiring and allocating the resources needed to execute the sales strategy and the positioning of the company in the market. Creating an effective strategy is not an easy task and calls for consideration of pricing, promotional techniques, negotiating strategies, opportunities for adding value for prospective customers, service and support capabilities, technology relating to sales activities and internal processes for reviewing and approving sales transactions. In addition, the sales organizational structure must be properly aligned with the favored

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sales strategies. Finally, strategy dictates the type of sales compensation plan that should be adopted and the preferred skills and personalities of the members of the sales group. §1:5

Choice between in-house sales and outside agents

One of the most important decisions that must be made by companies in the sales area is whether to use independent sales agents in lieu of, or in conjunction with, an internal sales force. Independent sales agents are individuals or firms that contract with a company, generally a manufacturer, to sell the company’s products on a commission basis. A sales agent is an independent contractor, not an employee, of the company, and thus is free to structure its sales activities in a manner that it chooses; however, the parties generally agree upon certain general guidelines for the actions of the sales agent that are set forth in a sales agency agreement. While a sales agent may be given sample of the products for training purposes and to use while communicating with prospective customers the agent does not purchase the products from the company for resale and instead focuses on lining up orders that will be fulfilled by the company. 8 Use of sales agents varies depending on the industry, the specific market and competitive conditions; however, studies have found that a significant number of companies rely on sales agents for support in promoting and selling some or all of their products. Companies must consider a number of factors when choosing the appropriate mix of internal and external sales activities and Crawford et al. logically broke these factors down into economics, strategy and control.9 §1:6

--Economic factors

With respect to economics, the relevant factors include cost and efficiency. When cost is an issue, as it often is with smaller firms when they are first starting out, an agency relationship is generally cheaper than hiring managers and employees to build an inhouse sales group. Sales employees generally receive some amount of base salary, even though it is common for a significant portion of their compensation to be commissionbased, and the company is also responsible for selling expenses, social security, taxes and other fringe benefits regardless of the level of sales generated by the employee. In contrast, there is little or no overhead associated with a sales agent, who is only paid on a commission basis tied to successful selling. The cost-effectiveness associated with using 8

Another type of outside sales relationship, a distributorship, involves the actual sale of the products by the company to the distributor with the intent that the distributor will resell the products to the ultimate end users. The distributor is compensated for taking on the reselling risk by receiving a discounted price for the original purchase and be allowed to keep the difference between the price and the revenues received from the end users when the products are resold. While the discussion in this section focuses on sales agency relationships, the same decision factors apply when a company is thinking about outsourcing sales communications to end users to one or more distributors. Distributorship are discussed in detail in the chapter on “Negotiating Distributorship Arrangements” in this Library. 9 J. Crawford, R. Dunipace and G. Wynn. The Sales Agent Versus the Company Sales Force: Some Issues and Insights (Third Annual Hawaii Conference on Business, 2001). See also G. Churchill, N. Ford and O. Walker, Sales Force Management: Planning, Implementation, and Control (Richard D. Irwin Inc., Homewood, Illinois, 1985).

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a sales agent has made it the preferred option for smaller companies. 10 However, even when the company has sufficient resources to invest in an internal sales force an agency relationship must be used for efficiency reasons, such as when the product to be sold is not an important part of the company’s core business activities or the sales activities are to occur in a territory or market where the company does not have a presence and is not ready to make the required investment to be able to go on its own. A good sales agent can offer efficiency in the sales process since the agent, lacking a steady source of income, understands the importance of using time and resources effectively to identify and close transactions. In many cases the sales agent will handle complimentary products that will be offered to the agent’s customers along with the products offered by the company and this allows the agent to spread its sales expenses over all of its products. Using a sales agent also eliminates the learning curve that must be overcome by employees since agents should already know the territory and have existing relationships with target customers, which means that the agent can assist the company with achieving accelerated penetration of new markets. §1:7

--Strategic factors

With respect to strategy, consideration must be given to the nature of the market, sales force factors, internal expertise and resources and the nature of the product. In some markets the reputation and experience of a particular agent may be a strong incentive to rely on the agent as a strategic partner and customers may prefer local representation, a factor that is especially important when selling products in foreign markets. Local representation is also important when customers demand technical support for the products and a quick response when questions or problems arise with respect to the products. Concerns about turnover in the sales force, which can be costly and disrupt customer relationships, may dictate use of a sales agent since agents are generally considered to be more likely to be able to maintain long-term relationships with customers that will survive the loss of a particular person. Sales agents are generally considered to be more stable since they usually have a pre-existing relationship with their customers and the territory in which they work. If the company does not have in-house technical expertise to sell and support certain products, which is often the case with smaller firms, it might make sense to rely on an agent with experience with the relevant technology and in selling generally. The need for sales agents with resources to sell highly technical products is probably greatest when the product is first introduced and the company is relatively small and still lacks the resources to hire and train an internal sales force large enough to penetrate the market quickly. As the demand for the product grows, however, sales agents may be unable to provide sufficient services and it begins to make more sense for the company to investing in developing the requisite technical expertise in-house. Another factor to consider is the availability of sales agents with the particular type of technical experience relevant to the 10

H. Novick, Selling Through Independent Reps (AMACOM, American Management Association: New York, 1988).

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company’s products and when technical expertise is a selection factor the company may be faced with limited choices among the sales agents serving the specific territory of interest to the company. Finally, sales activities for products that are only in demand during certain times of the year (i.e., seasonal products) might be outsourced since it makes little sense to enter into employment relationships for activities that will not be full-time and year-round. Another situation where the nature of the product might dictate use of a sales agent is when the particular product has a low unit value, standardized and well understood and accepted and ordered or re-ordered in small quantities with relatively little intense sales effort.11 In addition, products for which the demand has yet to be established, or which are purchased infrequently, might be best suited for a sales agency relationship.12 §1:8

--Control factors

With respect to control the issue is how much control the company needs over the sales process. While there are certainly advantages associated with relying on sales agents, the decision to rely on agents means that the company is ceding a large amount of managerial control over an activity that is mission critical to the success and survival of the company and choosing the wrong agent is one reason why many companies fail completely or stumble for extended periods of time before gaining traction in the market. Using an inhouse sales force provides senior management with tighter control since sales agents are, by definition, “independent” and thus more difficult to manage since agents have their own businesses to run and may make decisions that are not always in the best interests of the company. For example, when a sales agent controls access to the customers of interest to the company the agent, not the company, evaluates the needs of the customer and may choose to promote other solutions that do not include the company’s products. Companies are likely to prefer to rely on in-house sales personnel in situations where company management wants to exert a high level of behavioral control over the persons involved in the sales process. Behavioral control includes not only the methods used for selling but also other parts of the sale process including sales reports and records of communications with customers. Strong behavioral control works well with standardized products that are well established in the marketplace and allows the company to build and maintain a long-term sales strategy and strengthen customer relationships. However, behavioral control requires significant time and attention from management including the need to implement systems for evaluating how well employees are executing the desired behaviors. In order for strong behavioral controls to be effective sales employees must understand that their compensation will be tied not only to the volume of sales generated but also to their selling behaviors. If the company can develop a fair process for measuring how well employees execute the required behaviors the requisite level of control can be achieved; however, if behavioral measures are perceived to be unfair, 11

E. Anderson. "The Salesperson as Outside Agent or Employee: A Transaction Cost Analysis", Marketing Science (4(3) (1985)), 234-254. 12 T. Powers, Modern Business Marketing (St. Paul MN: West Publishing Company, 1991).

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perhaps biased, morale will suffer and the efficacy of the controls will be undermined. When strong behavioral controls are used companies should also ensure that employees are adequately trained and have access to technology that can assist them in completing the activities associated with the target behaviors.13 If the company is not prepared to monitor its behavioral controls it should probably opt for the simplicity of the sales agency relationship. If the primary interest of the company is the output of the sales process—the revenues derived from sales of the products—a sales agent may be the appropriate choice since the company is less concerned about the details of the process. §1:9

Management of outside sales networks

In several of the previous sections we have discussed the advantages and disadvantages of relying on outside parties, particularly independent sales agents and distributors, to supplement the in-house personnel and other resources that the company has allocated to sales activities for its products and have also discussed the key factors that companies should consider when attempting to strike the appropriate balance between in-house sales and outside agents. The following sections provide a more detailed description of sales agency and distributorship relationships, as well as authorized dealer arrangements for retail sales, and also describe some basic guidelines for effectively managing outside sales networks. §1:10 --Sales agency relationships Access to the existing customer relationships and other resources of third parties to increase sales of the company’s products can be obtained through a sales agency relationship, which involves a contract between a manufacturer or reseller of products and an independent agent who will act as the representative of the manufacturer/reseller in locating potential customers for the manufacturer/reseller's products. Unlike a distribution arrangement, which involves the actual sale of the products to the distributor prior to any resale to the ultimate customer, the sales agent or representative is not required to incur any inventory risk. Actual sales will be made by the manufacturer/reseller directly to the customer, and the agent/representative will normally be compensated based on the volume of sales by the manufacturer/reseller which may be generated by the agent/representative's activities.14 A sales agency arrangement is one of the quickest ways to enter a new market and a relationship with a strong and reputable agent can be an immediate source of revenues and business growth and can substantially 13

For further information, see Erin M. Anderson and Richard L. Oliver. "Perspectives on Behavior-Based Versus Outcome-Based Sales Force Control Systems", Journal of Marketing, 51 (October, 1987), 76-88. 14 While the discussion in this chapter is on domestic sales representative arrangements, companies often rely on local independent sales agents in foreign countries as an initial strategy for entering new foreign markets. Foreign countries, particularly those with a civil law tradition, often have different categories for agency relationships that will determine the rights and duties of the parties (e.g., employee agents, commercial agents, commission agents, del credere agents and brokers). For further discussion of foreign sales agency arrangements, see “Globalization: A Library of Resources for Growth-Oriented Entrepreneurship” prepared and distributed by the International Center for Growth-Oriented Entrepreneurship (www.growthentrepreneurship.org).

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enhance the image of the company. However, care must be taken in selecting sales agents because the wrong decision could cause long-term damage to the reputation of the company and its products. §1:11 --Distribution relationships

A distributorship relationship involves a purchase of goods by the distributor from the principal, who is generally the manufacturer of the goods but who also may be an agent acting on behalf of the manufacturer or another party in the distribution chain for the goods, and the resale of the purchased goods by the distributor for its own account to its customers. A distributor’s customers may be the ultimate end users of the goods, such as consumers or industrial purchasers, or they may be other parties in the distribution chain, such as dealers, brokers or retailers. A distributor can be one of the company's strongest strategic partners, and it is essential that companies select distributors that are reliable and willing to aggressively promote the company's products in the marketplace in order for the company to realize its own goals and objectives with respect to market share and profitability. These factors will be particularly important in the case of an exclusive relationship, since the company is, in effect, ceding responsibility for the chosen market to the distributor over the contract term. In searching for a distributor partner, consideration should be given to compatibility, functional skills and resources, managerial and financial resources, and facilities and support. The company should also investigate the existing product line of the proposed distributor, its experience in selling and servicing similar products, its reputation with the actual customer base, and the scope of its sales network. Also, if possible, the potential distributor should be asked to put together a marketing plan for the products and a description of the steps it will take to train its sales for about the company’s product line. Such a plan not only demonstrates the distributor's commitment to the relationship, but also can serve as a basis for reviewing the arrangement after it has begun. Other requirements include formal certification as a reseller and, of course, the establishment of minimum annual purchase commitments. In some cases, the company may charge a fee to a distributor in order for the distributor to be allowed to participate in various channel marketing programs that may be established by the company; however, the willingness of the distributor to pay the fee obviously depends on the margins associated with carrying and selling the products as well as the scope and value of the services offered through the particular channel program.15

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While the discussion in this chapter assumes that the company will have sufficient bargaining power to choose from among a range of potential distributors for its products, a distributor may itself require that any manufacturer wishing to launch a new vendor relationship complete the distributor’s own pre-contract review and approval process, including due diligence on the manufacturer and its products, preliminary technical and market testing of the products and negotiation of a letter of intent prior to drafting a definitive agreement that reflects demands and expectations of the distributor that are similar to those of a purchaser in a supplier relationship, a topic discussed in detail in the Part on “Purchasing” in this Library.

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Distribution relationships can take a number of different forms; however, the most common types are: 







Basic Distributorship: The sale of products by the manufacturer to the distributor and the subsequent resale of the products by the distributor to customers in the designated territory. The distributor's sole income from the transaction is derived from the markup of the price of the goods that are sold to the customers. The manufacturer's price to the distributor will typically reflect a discount from its regular retail prices and the amount of the discount will vary depending upon the size of the orders and the scope of the activities to be performed by the distributor. Since a distributor often needs to maintain sales offices, keep inventory on hand, and train its salespersons, it will want to ensure that there will be sufficient "margin" for it to make an adequate profit, after taking into account its own costs and investments relating to marketing. Original Equipment Manufacturer (“OEM”): Similar to the basic distributorship relationship, it involves the sale of products by the manufacturer to a company that is engaged in both manufacturing and distribution; however, in this case the products of the manufacturer are typically designed and produced to meet the precise specifications of the contract partner and that party will add some "value" to the goods, such as enhancements or additional applications, and then sell the "valueadded" products to its customers. Manufacturing and Distribution License: The manufacturer grants a license to the distributor to actually manufacture the goods and distribute the finished products to the distributor's customers. In return, the manufacturer receives a royalty based upon some measure of the distributor's performance, such as the number of units sold or the net proceeds received by the distributor from the sale of the products. Dealers: Dealership arrangements are actually a special form of distributorship relation in which the distributor promotes and sells the products primarily from one or more fixed locations. In some cases, a dealership actually amounts to a franchise arrangement when the dealer's product line is limited to items supplied by the manufacturer.

It is worth noting that several important distinctions are often made within the general concept of “distribution relationship”. For example, a “non-stocking” distributor eliminates the cost of maintaining an inventory by purchasing goods from the manufacturer at the time an order is received from a customer. A “stocking” distributor, on the other hand, maintains a stock of the manufacturer’s goods in its inventory for sale to its customers. The other common distinction is between a non-exclusive distribution arrangement, which allows the manufacturer to sell its products directly into the designated market and/or appoint other local distributors who, in effect, may compete with the original distributor, and an exclusive distribution agreement that allows the distributor to promote and sell the specified products of the manufacturer in the designated market without fear of lawful competition from another distributor or, in many cases, the manufacturer itself.

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The utility of the other types of distributor relationships will obviously depend on the particular circumstances. For example, a properly structured OEM relationship can provide smaller firms with a significant customer for their products at a time when they may be struggling to develop their own distribution network and stable of customer accounts. Licensing may be attractive when the distributor has the capability to manufacture the goods at or below the costs that would be incurred by the manufacturer. It is also frequently used for sales activities in foreign markets when there is a need to localize the goods in order to conform to specific requirements of the country or region in which the distributor is selling the products.16 However, while a licensing arrangement can be cost-effective, the manufacturer may have a concern about losing control of the technology and associated intellectual property rights. §1:12 --Authorized retail dealer networks In order to retain control over the marketing and sale of their products in the retail channel, many companies establish formal policies and procedures relating to the selection, oversight and evaluation of the outside parties that will be interacting directly with the consumers who will be buying and using their products. One method that may be used by a company is the creation of an “authorized retail dealer” network throughout the geographic territory in which the company would like to distribute its products. From the company’s perspective, this type of system is the best way to ensure that consumers have a good experience when they see, inspect and evaluate the company’s products. Among other things, the company can take formal steps to make sure that all of its authorized dealers understand the company’s products; adhere to the company’s guidelines and expectations with regard to the display and promotion of the products; employ trained and knowledgeable salespersons; and provide high quality and objectively measurable pre-sale and post-sale support to the consumer, including accurate and realistic explanation of features and benefits, proper setup and delivery. Authorized dealers will generally be required to acknowledge and agree to the terms of the company’s authorized retail dealer policy. A comprehensive form of such policy will address all aspects of the reseller arrangement between the parties including review and approval of authorized sales locations; restrictions on sales to other retailers and wholesalers; delivery and use of sales aids including catalogs and signage; guidelines on advertising, promotion and solicitation activities including Internet sales activities; payment terms and credit arrangements; sales forecasts and minimum volume requirements; pricing; warranties and service; and dispute resolution. All these issues are important; however, there are a couple that are worthy of more detailed consideration. First, the company will have a keen interest in how its dealers choose to advertise and promote the company’s products and it is common for companies to include a separate advertising policy as part of its formal contract with its dealers. 16

For discussion of sales activities in foreign markets, including selection and use of local distributors, see “Globalization: A Library of Resources for Growth-Oriented Entrepreneurship” prepared and distributed by the International Center for Growth-Oriented Entrepreneurship (www.growthentrepreneurship.org).

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Second, authorized dealers will be expected to meet minimum annual volume requirements and maintain showroom displays that showcase the company’s current products. Third, while antitrust considerations dictate that the company afford its dealers freedom to determine the price and terms of sale for the company’s products, companies will often publish “minimum suggested prices” and seek to regulate advertised pricing through unilateral minimum advertised pricing (“MAP”) policies that do not run afoul of antitrust law requirements. Finally, the company will retain the right to review the performance of its dealers and, if necessary, terminate the arrangement if the dealer does anything that raises legitimate concerns for the company regarding the way that its products are being presented to the consumers. Examples of problems include not identifying the company’s products by name with correct specifications in accordance with the company’s advertising policies and guidelines; failure to maintain a representative display of the company’s products; inadequately trained personnel; insufficient or misleading promotion and advertising of the company’s products; failure to pay invoices when due or the taking of unauthorized deductions; failure to provide adequate service under the company’s warranty; or other material violations of the policy or any related policy or guidelines such as the manufacturer’s MAP policy.

Done and managed correctly, a company’s network of authorized dealers can be a key strategic advantage that builds and maintains customer goodwill and loyalty. In order to accomplish this the company should develop policies that are clear and strong yet build incentives into the policy that motivate the dealers to perform and provide assurance to performing dealers that others who do not adhere to the required standards will not be granted entry into the network. Policing the network is obviously important for the company; however, dealers themselves do not want all their hard work in building the company’s brand undermined by the sloppy work of others. One way for companies to make sure that their dealers understand the key elements of the authorized retail dealer program is to publish a separate “question-and-answer” document that explains issues that are of greatest concern to the parties including compliance with the MAP policy and the advertising policy. §1:13 --Methods for structuring effective relationships with reseller partners Distributors, dealers and other resellers are an essential part of the company’s overall sales strategy. As such, it is important for the company to carefully consider the tools that can and should be used to provide incentives and support for the reseller group and motivate them to vigorously promote the products of the company. While many companies provide short-term rewards and bonuses for distributors that are successful in their sales activities, the most successful companies develop and implement formal reseller programs that form the basis for forging and maintaining long-term relationships based on shared visions and goals. The company should provide prospective resellers with clear guidelines with respect to the measures used by the company to identify a successful partnership. The guidelines should lay out the requirements and rewards for doing business with the company and should be very clear about the company’s expectations with respect to revenue, market

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penetration and “value add” from resellers. In turn, the company should also be prepared to clearly describe the value it is prepared to give to resellers. Successful companies understand that it is often necessary for them to market themselves to their resellers and treat resellers in the same way as customers with respect to service and support. §1:14 ----Requirements of end users

The ultimate key to the success of any distribution or other reseller arrangement is the satisfaction of the end users of the products developed by the company. Depending on the distribution channel, these products may pass through several levels starting with a wholesaler and then moving to a reseller that ultimately sells the products to consumers. In order for the company to make the right choices about the structure of its reseller strategy, it must have a clear understanding of the needs of the end users. This means conducting solid customer research to identify the types of resellers that will be most likely to reach the most desirable market segments and provide superior value-added services to the end users to complement and enhance the products of the company. §1:15 ----Reseller commitment While, as mentioned above, companies need to treat resellers as customers, it is also important for companies to demand that resellers demonstrate the same level of commitment to the relationship. Companies often make the mistake of focusing on generating quick sales and neglect to invest the time and energy on resellers who are truly interested in making a long-term commitment to the company and its products. Companies should be wary of entering into relationships with resellers who are reluctant to take on the company and its products. The better strategy is to begin with one partner who has an established business and a strong business model and ensure that the partner is committed to training and other types of support for the company and its products. In addition, qualified resellers should be brought into the company’s business planning process as necessary. §1:16 ----Revenue and profitability requirements The reseller program should include various rewards and incentives including marketing dollars, product and training discounts and other support; however, it is important for the company to condition these items on attainment of clear and mutually agreed revenue and profitability requirements. Companies often create reward programs that are multi-tiered and contemplate higher levels of support for resellers that achieve the most revenues and/or profits. Special programs for certain resellers should be avoided since other resellers will likely find out and may feel that they are being treated unfairly. §1:17 ----Relationship building and communications Once the reseller relationship is in place, the company should be prepared to work on building the relationship and maintaining close communications. The company should assign a channel account manager to oversee each of the relationships, and he or she

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should stay in regular contact through newsletters, emails, telephone calls, site visits and even annual conventions. The channel account manager should monitor the level of effort that the reseller is devoting to the company’s products. In addition, the manager should make a conscious attempt to understand the specific business model of the reseller so that the company can identify specific ways to assist the reseller without deviating from the overall revenue and profitability requirements described above. Finally, resellers should be kept in the loop regarding new developments in the company’s products, marketing strategies and sales goals. §1:18 ----Performance measurement The program should establish procedures for measuring the performance of resellers against the goals and expectations included in the program. Obviously, revenues are an important performance metric; however, the company should use other methods to evaluate reseller performance. For example, many companies focus on market share and also closely monitor how resellers are doing in relation to one another. End users are also an important source of information and can be asked to provide input on how the reseller is promoting the company’s products. It should not be forgotten that performance measurement is a two-way street, and companies should not be afraid to ask their resellers about their feelings with respect to the service, product quality and value being offered by the company. §1:19 ----Periodic review

In almost all cases, companies are confronted with a dynamic and rapidly changing business environment that will require regular review of all aspects of its business strategy, including channel relationships. It is important for the company to institutionalize periodic reviews and updates of its reseller programs, and resellers should be notified in advance that the program, including the performance goals and objectives, will be reviewed and that changes may be made at some point in the future. Of course, when make changes to the reseller program, consideration should be given to input from the various resellers as they often have good ideas about the type of support required and structuring rewards and incentives. §1:20 Organization and management of the sales function Sales activities are obviously an essential, if not the primary, concern of senior management and great care must be taken in designing the appropriate organizational structure to support the activities of the sales group.17 The key design principals when designing the sales organization structure include the following:

17

The discussion in this section is adapted from materials prepared by C. Schwepker, M. Williams, R. Avila, R Laforge and T. Ingram. “Module 4: Sales Organization Structure and Sales Force Deployment”, in Professional Selling: A Trust-Based Approach (South-Western Educational Publishing, 2007).

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  

  


The structure should be built around the most strategically appropriate marketing dimension such as geography, products, market, types of sales activities or specific large customer accounts. The skill set and allocation of human resources within the organizational structure should be driven by the necessary activities and the level of sales effort need to achieve success with the target accounts. The structure should reflect the proper balance between the need for centralized authority and providing managers and salespersons at lower levels with sufficient latitude to make decisions needed to close sales transactions within acceptable parameters. Spans of control within the organizational structure should be reasonable and allow for adequate managerial support. The structure should include processes for coordinating activities among different sales groups working on common projects or types of accounts. The structure should be stable and transparent yet provide for flexibility that allows the sales organization to quickly adapt to changes in the marketplace.

§1:21 Sales compensation plans It should be obvious that salespeople are some of the key representatives of the company to the outside world and their performance is mission critical to the ability of the company to generate revenues for survival and attain its long-term strategic objectives. A company can have the best product or service on the market; however, if its salespersons are unable to communicate the advantages of the company’s offerings in the marketplace and build sufficient trust with customers to close transactions all of the efforts with regard to product development will be worthless. The enthusiasm and effectiveness of the sales team, as well as the way they go about organizing their sales presentation and negotiate with customers, are highly dependent on the sales compensation plans adopted by the company. When the sales compensation program is properly designed it will provide incentives for salespeople to act in ways that support the business objectives of the company and will clearly reward those salespeople who are able to make the type of contribution thought necessary by senior management for the company to succeed. While there are a variety of elements that could be included as part of a sale compensation plan, it is generally the case that companies rely on some mix of base salary, commissions and sales prizes. Practices vary by industry and it is important to carefully evaluate the plans offered by competitors as part of the process of designing a compensation plan. For example, some companies in the technology area have offered stock option grants to members of their sales team as an additional incentive, and it is also possible to include salespersons in phantom stock programs and revenue-based bonus programs that might be offered to a broader range of managers and employees across various functional areas. Salespersons will also have opportunities to participate in benefits programs offered by companies including paid vacations, health and life insurance and other types of fringe benefits.

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The terms and conditions of the employment relationship with any sales manager or salesperson should be covered in a written employment agreement. Special agreements may be needed for certain types of sales employees such as telemarketers, who will also be required to abide by the terms of a separate code of conduct and sales presentation policy. It is common for the contents of any commission plan to be placed into a separate document, since the plan may change from time-to-time as the company revisits its overall sales strategy. In most cases, companies issue an updated commission plan for each new fiscal year. Smaller companies may use a short-form sales commission policy which is essentially limited to announcing the company’s intent to provide commissionbased incentives. Larger companies will include specific performance targets as well as detailed information on calculation of commissions and guidelines on how the sales process should be completed in order to ensure that sales activities are tracked and properly recorded. Regular salespersons may have a relatively brief commission sales agreement. Senior sales executives may have more complicated programs and agreements with compensation being tied to the performance of the entire sales group and different incentives offered for attaining revenue targets while achieving the desired level of profit margin. Sales commission and bonus plans may also be structured to create specific incentives for certain activities such as the pursuit of business from new accounts. Commissions due to salespersons should be carefully tracked using a commission summary statement. §1:22 Direct sales contracts The most basic form of sales transaction is a direct arrangement between the manufacturer and the ultimate consumer or user of the product. While these transactions have many of the same elements as a long-term supply and purchase contract18, the focus in this section is on what are essentially “closed-end” transactions. There is neither an ongoing sales relationship, nor an overriding agreement covering a large number of future sales transactions. A closed-end sale may or may not be on open account, that is, where the seller relinquishes control over the goods prior to receipt of full payment, deferring his or her right for immediate payment upon delivery. While standardized forms are often used for sales of goods transactions, every business should develop its own preferred form of contract relating to the sale of goods, whether the business is the purchaser or the seller. In cases where a transaction, albeit not part of a series of ongoing sales between the parties, involves material sums of money, or essential goods, the parties For discussion of negotiating a long-term supply and purchase contract, see the chapter on “Purchasing” in this Library. When the company enters into negotiation for a long-term sales agreement with a customer that will extend over a specified period of time and cover a continuous stream of orders the following additional issues become particularly important: the scope and specifications of the goods covered by the agreement; ordering procedures and preparation of forecasts; shipping, delivery and other logistical matters; pricing and payment terms; warranties and indemnities; and term and termination. The agreement may be accompanied by various schedules that address electronic exchanges of information regarding orders, specifications and warranty and repair services. It is recommended that each of the parties designate a management-level representative to oversee the arrangement and ensure that adequate internal resources are being allocated to making sure that the relationship between the parties is successful and that communications flow easily and quickly between the parties. 18

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should consider taking the time to negotiate a customized sales agreement in order to anticipate potential problems and minimize subsequent disputes.

Management of the sales function should develop and carefully administer a formal sales process that allows for tracking of communications with prospective customers and proper recording of the status of negotiations and the final terms and conditions of each sales transaction. Salespersons should be provided with guidelines and forms for use in providing customers with quotations, bids, estimates and proposals and the company should have its own standard version of an order form that includes all information necessary to identify the goods and the agreement of the parties with respect to price, payment terms, delivery and other matters. The order form is generally supplemented by detailed terms and conditions of sale that may be included on the back of the order form or posted on the company’s website and incorporated by reference in the order form. Progress can be tracked in a variety of ways including a prospect contact summary and daily reports from each salesperson regarding their activities. Special needs of various customers should be taken into account. For example, in order for the company to put together a sales proposal it will often be necessary to elicit detailed information from a prospective customer that the customer considers sensitive and confidential and the company should be prepared to enter into a mutual nondisclosure agreement that covers proprietary information exchanged during the negotiation process. §1:23 Sales agency agreements When negotiating and drafting a sales representative agreement, the parties must determine whether the representative will have exclusive or non-exclusive rights with respect to the specified products or markets. The agreement should also spell out the duties of the representative with respect to the level of promotional activities and the reports that will be provided to the company with respect to the market and customer reactions. In many cases, representatives must meet minimum sales requirements in order to avoid termination of the arrangement. Sale representatives should be required to observe non-disclosure duties with respect to the company’s technical information and marketing plans with respect to the products. The most controversial areas, however, with these types of contracts are the compensation to be paid to the sales representative and the procedures for terminating the arrangement. §1:24 Distribution agreements In many ways, a distribution agreement is similar to a long-term supply and purchase contract.19 For example, the parties must cover the description of the goods, ordering, pricing and payment, shipping and delivery, inspection and acceptance, warranties and limitations on liability. However, the usual terms covering the sale and purchase of goods will be supplemented by additional provisions regulating how the distributor is to pursue the company’s principal objective of penetrating a market in which direct sales For discussion of negotiating a long-term supply and purchase contract, see the chapter on “Purchasing” in this Library. 19

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efforts are either inappropriate or economically infeasible. For example, the scope of the distributor’s appointment, including any territorial and/or customer restrictions and grants of exclusive distribution rights, is obviously a key issue. The distribution agreement should also describe the specific steps that the distributor is expected to take to promote and sell the company’s products and the factors that will be taken into account in reviewing the performance of the distributor. Finally, the parties should reach agreement on the procedures for amending and terminating the arrangement.

The leverage of either party in negotiating the agreement will depend largely on the size of the manufacturer. Large manufacturers that produce well-known brand names can generally choose from among a wide range of distribution channels and will rarely cede significant rights to any distributor. On the other hand, smaller companies are anxious to have their products carried by larger wholesalers who have access to end users and other firms farther down the distribution channel and thus are more likely to agree to requests for exclusivity, favorable payment terms and liberal return policies. When documenting the arrangement with a prospective distributor, the company must carefully consider a variety of strategic issues as well as the nuts and bolts of the economics of the particular arrangement (e.g., pricing). If the company has not used a distributor in the past, the main concern is making sure there is sufficient flexibility for the company to test alternative methods for sale and distribution of the products in the event the initial distributor fails to perform as expected. This is advisable even if the distributor is perceived as being exceptionally strong since, inevitably, there may be changes in the marketplace as time goes by, and the distributor may itself wish to shift its emphasis to other products or vendors. If the new distributor will be one of several third parties working to promote and sell the products, the company must be concerned about actual or potential channel conflicts and the possibility that a new agreement will breach existing contracts to which the company is committed or jeopardize an existing relationship with another successful distributor. §1:25 Customer service and support Completion of the sale of the product or service is just the beginning of the development of the relationship between the company and its customer base. Companies must establish a clear and comprehensive policy for providing customer service and support. While companies differ in how primary responsibility for customer service and support is allocated, it is clear that success depends on co-operation from a number of departments, including sales, marketing, repair and maintenance, and accounting. In addition, companies often rely on outside service providers to assist with service and support, including warranty repairs and handling customer questions. Since a service program is, or should be treated as, a discrete product, the company needs to conduct some form of organized market research to determine the needs and requirements of their customers. Once those needs and requirements have been identified, the company needs to implement appropriate service plans that include, among other things, preventative maintenance, procedures for repairs and replacement of parts, training and other types of support to assist customers in using and enjoying the benefits of the products.

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Summing Up 1. Among the key factors to consider when developing the initial sales and distribution strategy is the nature of the product and required sales effort and the size and composition of the target market. For example, if the target market for the initial product is relatively narrow or the sales effort is focused on a small number of potential original equipment manufacturers, then it is likely that the firm will elect to emphasize a direct selling effort using either in-house personnel or “manufacturers’ representatives” who are compensated on a commission-only basis. However, although it is certainly possible for one company to possess the financial and technical resources for internal development of products and direct sales of the products to end users without the use of intermediaries, it is more likely that one or more outside partners will eventually assist in distribution. Engaging with sales representatives and distributors allows companies to minimize the costs of creating and maintaining an internal sales force, the cost of which can exceed the cost of developing many products. Creation of an in-house sales team is also not warranted, or cost-effective, when the firm is entering a market in which the customer base is fragmented and individual sales transactions involve relatively small dollar amounts. In those situations, the firm must base its sales strategy on developing a network of independent sales representatives and/or distributors that already handle a broad line of similar products in the target market and who are willing to carry the company’s products as additional items. 2. The advantage of outsourcing sales activities is that sales representatives and distributors are in the business already, have established accounts, and can accelerate the time to market. Even if such sales representatives or distributors are asked to handle the company’s products on an exclusive basis, and not sell any other products, their experience will make the roll out much faster. A side benefit of hiring individual sales representatives as independent contractors is that they are not employees, and the restrictions in many jurisdictions on hiring, treatment and termination of employees do not apply. On the other hand, selling through outside agents can be a challenging undertaking for small firms with no track record and little initial bargaining power with the agents, particularly larger distributors who prefer to focus on products that have already established themselves as high volume items and the distributor’s sales personnel rarely have the time or qualifications to engage in the direct sales effort normally required to inform customers about the attributes of a new, and relatively unheralded, product. The relationship with any distributor will usually be conditioned upon attainment of agreed minimum sales volumes and slow moving products will generally be dropped by the distributor after an initial trial period. 3. Sales transactions will be governed by applicable laws and regulations pertaining to the content and enforceability of sales contract, such as Article Two of the Uniform Commercial Code in the United States. Other legal issues which should be considered when offering and selling goods, either directly or through intermediaries, include product liability laws; government product testing and safety requirements; antitrust laws; intellectual property laws; laws proscribing the use of deceptive acts and practices in the sale of goods; consumer credit laws and regulations; export controls and import laws of foreign countries in which selling activities are occurring; foreign laws relating to the relationship between foreign manufacturers and any local agents; and anti-bribery laws. 4. The sales and marketing functions can lower production costs by increasing demand for the product and the lower costs can be converted into higher margins or lower prices that contribute to even more success in the volume of sales and the level of market share. The sales and marketing functions can also create differentiation advantages by creating and implementing sales and marketing strategies for targeted customer groups, tailoring product designs and features to customer requirements, and developing and promoting brand names. The important elements of the business plan for the sales activities of any company should include a statement of the overall mission or purpose of the plan, identification and description of specific goals and objectives and an explanation of the strategies and tactics that will be deployed in order to achieve the stated goals and objectives. Creating an effective strategy calls for consideration of pricing, promotional techniques, negotiating strategies, opportunities for adding value for prospective customers, service and support capabilities, technology relating to sales activities, internal

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processes for reviewing and approving sales transactions, design of the sales organizational structure and implementation of effective sales compensation programs.

5. Use of sales agents varies depending on the industry, the specific market and competitive conditions; however, studies have found that a significant number of companies rely on outside sales agents for support in promoting and selling some or all of their products. Companies must consider a number of factors when choosing the appropriate mix of internal and external sales activities including cost and efficiencies; the nature of the market, sales force factors, internal expertise and resources and the nature of the product; and how much control the company needs over the sales process. 6. Outside sales relationships can take a variety of forms including sales agency arrangements, basic distributorship arrangements, original equipment manufacturer arrangements; manufacturing and distribution licenses and dealership arrangements. While many companies provide short-term rewards and bonuses for distributors that are successful in their sales activities, the most successful companies develop and implement formal reseller programs that form the basis for forging and maintaining long-term relationships based on shared visions and goals. Reseller programs should include various rewards and incentives including marketing dollars, product and training discounts and other support; however, it is important for the company to condition these items on attainment of clear and mutually agreed revenue and profitability requirements. In addition, once the reseller relationship is in place, the company should be prepared to work on building the relationship and maintaining close communications. Finally, the program should establish procedures for measuring the performance of resellers against the goals and expectations included in the program and conducting period reviews of the relationship. 7. The key design principals when designing the sales organization structure include building around the most strategically appropriate marketing dimension such as geography, products, market, types of sales activities or specific large customer accounts; striking the proper balance between the need for centralized authority and providing managers and salespersons at lower levels with sufficient latitude to make decisions needed to close sales transactions within acceptable parameters; and processes for coordinating activities among different sales groups working on common projects or types of accounts. 8. The enthusiasm and effectiveness of the sales team, as well as the way they go about organizing their sales presentation and negotiate with customers, are highly dependent on the sales compensation plans adopted by the company. When the sales compensation program is properly designed it will provide incentives for salespeople to act in ways that support the business objectives of the company and will clearly reward those salespeople who are able to make the type of contribution thought necessary by senior management for the company to succeed. Companies generally rely on some mix of base salary, commissions and sales prizes; however, practices vary by industry and it is important to carefully evaluate the plans offered by competitors as part of the process of designing a compensation plan. The terms and conditions of any commission or bonus plans should be clearly stated to avoid misunderstandings. Companies should revisit commission and bonus plans on a regular basis and should consider structuring such plans to create specific incentives for certain activities such as the pursuit of business from new accounts.

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