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When it comes to selling your products, you have the choice of engaging a distributor or a referral partner (referrer). Alternatively, you could sell products directly to customers yourself by entering into individual supply agreements with each customer. This article explains the advantages and disadvantages of each option, as well as the necessary legal agreement you will need.
Engaging a Distributor
A distributor purchases products from you and then sells them to retailers. They are, therefore, acting as the middleman between you and the retailer in these transactions. When you sell your goods to a distributor, you are allowing them to set the retail price and terms of sale in their territory. When the distributor sells the products to customers, the distributor can add their profit to the price.
Crucially, the distributor-retailer relationship is typically non-exclusive, unless explicitly agreed upon beforehand with the retailer. Therefore, a distributor will maintain the flexibility to sell the same products to multiple retailers. Furthermore, some distributors may offer additional services such as product marketing and managing customer relationships. This differentiates them from competitors, attracts and retains new customers and suppliers and increases their revenue.
Engaging a distributor, especially an experienced or well-established one, has several advantages. We outline these in the table below.
| Advantages | Explanation |
|---|---|
| Market reach | Distributors often have specialised market knowledge, established networks, and broad audience reach. These existing business relationships can introduce your products to multiple retailers, helping you to break into competitive markets. |
| Logistics and warehousing | Distributors handle the logistics of importing, storing, and transporting your products. This reduces the burden on your own resources, which is especially useful if you are engaging an international distributor. |
| Local expertise | Distributors may have a better understanding of local markets, cultural nuances, and regulatory requirements. Collaborating with them facilitates smoother market entry, as they can market your products and manage customer relationships more effectively. |
| Core competency focus | Outsourcing distribution allows you to focus on your product development, manufacturing, and other core business activities. |
In addition, as distributors purchase and hold your stock, they often share some of the same financial risks regarding inventory and sales. This means they have a greater incentive to sell your products.
However, you should note that engaging a distributor usually incurs higher costs. This is due to the infrastructure costs for warehousing and selling your products, especially if there are specific storage instructions or requirements. Since distributors take a percentage of the sales price, you may also see lower profit margins. You also risk your brand image being conveyed differently to your wishes since you have less control over marketing. This can be addressed by maintaining consistent communication with the distributor. Furthermore, relying on distributors means that your success is tied to their performance, which could potentially be risky. Therefore, if you’re in the early stages of your business, engaging a distributor may not be the most cost-effective choice.
The Distribution Agreement
Before finalising any arrangement with a distributor, you should have a well-drafted or comprehensively reviewed distribution agreement in place. This legally binding agreement outlines the relationship between your business and a distributor, establishing the rights, responsibilities and obligations of each party. The distribution agreement will include key elements such as:
- what products are to be supplied and distributed;
- whether the distributor has exclusive rights to distribute the products in a particular region;
- how the products will be delivered;
- how payments will be made; and
- restrictions around distributing competing products.
This ultimately ensures clarity and transparency between your business and the distributor.
Agency
It is also important to note that a distributor is different from an agent. A distributor buys your products and, therefore, has ownership of them before selling them. This differs from an agent, who acts on your behalf to sell your products. While you ultimately have liability over the actions of an agent in the course of their agency, you are not liable for the actions of a distributor. Nevertheless, both a distributor and an agent have the capacity to influence the reputation of your business.
Hiring a Referrer
A referrer refers end customers to you. You will then sell your products to them directly, with the referrer earning a commission on the sales made. Importantly, referrers will not purchase or store your inventory. They, instead, are an intermediary that connects your business with consumers who want to purchase your products. The table below outlines some important benefits and disadvantages of hiring a referrer.
| Benefits | Disadvantages |
|---|---|
| Quick market entry: referrers can provide a faster route to market entry compared to building a distribution network. | Increased costs: Costs increase depending on the referrer’s commission and fees. |
| Cost-effectiveness: referrals are more economical than distribution, making them suitable for products that already have a strong brand presence. | Decreased sales risk: Referrers have a lower incentive to sell your products since they do not purchase and hold them. |
| Flexibility: using a referrer gives you the flexibility to collaborate with multiple referrers without having to consider exclusive rights restraints. | Lowered control: You have less control over how your products are marketed and sold. |
| Conflict of interest: You may have conflicts of interest if the referrer promotes competing products |
The Referral Agreement
Before hiring a referrer, you should have a referral agreement drafted or reviewed. The referral agreement is a legally binding contract between you and the referrer. It will include key elements such as:
- pricing and payment terms, including the referral fee;
- what warranties you will provide and which liabilities you will exclude;
- the terms of the agreement and how to terminate the agreement;
- how intellectual property will be safeguarded; and
- an outline of marketing terms.
The referral agreement functions as a comprehensive guide to ensure that both parties are on the same page and you receive successful referrals. It facilitates a clear understanding of both parties’ rights and obligations within the business arrangement.
Continue reading this article below the formSelling Directly to Customers
The third option, if you are not engaging a distributor or referrer, is to sell your products directly to customers. A prime example of a supplier successfully covering the entire supply chain is Apple.
Selling directly to customers has several advantages, including:
- higher profit margins, as you can retain a larger share of sales revenue;
- full control over product presentation and marketing quality; and
- autonomy over your supply chain.
However, selling directly to customers also has drawbacks. Firstly, there are logistics and distribution challenges, as you must build a customer base from the ground up as well as establish warehouse storage and organise delivery. This can be complex and resource-intensive, especially for a small business. Secondly, you have fewer marketing resources than a distributor or referrer who could assist in easing this burden on you. Lastly, you may experience increased costs from overseeing all stages of the product lifecycle and establishing international distribution channels.
The Supply Agreement
Before directly supplying your products to customers, you must have a well-crafted and reviewed supply agreement in place. This legally binding contract is a critical document between you and the customer that outlines the rights, responsibilities and obligations of each party and can reduce the chances of costly legal disputes down the line.
A typical supply agreement will include:
- what products will be supplied;
- payment and delivery terms;
- your customer’s obligations;
- limitation of your liability;
- the supply period length and procedures for termination; and
- safeguards for the protection of intellectual property and confidential information.
Notably, unlike a distribution agreement, every individual customer must agree to the supply agreement. If selling online, the supply agreement is often linked to a checkbox that the customer must tick before making a purchase. This ensures a transparent and mutually agreed-upon framework for the supply of products to individual customers.
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Key Takeaways
As a supplier, you have three pathways to bring your products to market. These are:
- collaborating with a distributor;
- hiring a referrer; or
- selling directly to customers.
Each option has its own advantages and disadvantages. Once you have determined the most suitable approach for your business, it is crucial that you have the correct legal document to manage the relationship (for example, having a referral agreement if you are engaging a referrer). This ensures that your chosen business model’s agreement includes the relevant terms, rights, and obligations.
If you would like assistance regarding ADR or have any further questions, contact our experienced contract lawyers as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
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