All types of businesses need a distribution strategy — because how one pursues the distribution of products and services determines how quickly, effectively, and profitably target markets are reached. Additionally, if distribution is outsourced, trade secrets and other intellectual property are exposed. Following are some effective distribution strategies.
Goals of a distribution strategy
An effective distribution strategy needs to:
- strive to maintain the uniqueness of a product or service offering;
- avoid competing on price;
- build a brand;
- penetrate markets quickly to foreclose competition;
- protect the intellectual property of the company;
- deliver consistent products and services; and
- do all of this within the available budget and resources.
If you have unlimited resources, you may already have a distribution system of employees. Usually, however, that is not feasible or even practical. Much of distribution must be outsourced to brokers, distributors, alliances, and partners who are in the essential channels. Outsourcing exposes important internal information to the world, which information must then be protected from disclosure, reverse engineering, and piracy.
From a legal perspective, it is critical to have correct and protective agreements and documents in place to enforce the goals of your strategy and to avoid liability. Like a chain being only as strong as its weakest link, having a rock-solid legal structure is necessary and irreplaceable for the entrepreneur seeking growth. The important elements of the distribution strategy are:
Protecting your product
Protecting the proprietary nature of the product or service so it is not imitated or “knocked off.” Categories of agreements articulating restrictions on the use of proprietary information, soliciting customers or potential customers, hiring away employees or 3rd party resources, and the use of marks; and providing for remedies for breaches include:
- Nondisclosure agreements
- Confidentiality and noncompetition agreements containing well-defined procedures to guard proprietary information
- Licensing agreements
- Franchise agreements
- Distribution agreements
- Master Customer agreements
- Manufacturing agreements
- Sales agency agreements
- Employee manuals
Training for employees, agents, and distributors to maintain consistency, proper handling, installation, and care for the product and/or service is key. In turn, there must be restrictions on the use of this training for any purpose other than benefiting the company. These restrictions may be in the form of a license.
Branding should include a name that is unique, even fanciful, which obtains a registration on the principal register. The brand should be a name that is clearly identified with the company and not confused with other products or companies. Generic names or geographical names are hard to protect and are confusing. If you are going to have multiple products, be careful to distinguish them. Customers, distributors, and agents must be controlled in how they use the brand, the look, and feel of company presentations and on the web.
Speed to market
Quick penetration of markets is important so that the claims relative to proprietary information, confusion of the public through the use of other names, or the look and feel can be validated. Leverage is important to move quickly. Also, all relationships must have the restrictions mentioned elsewhere in this article.
Using contractors as agents
Independent contractors acting as sales agents keep the sales staff off your payroll and allows you to select knowledgeable players in the channels who can get the job done quickly.
Using contractors as distributors Independent contractors acting as distributors who buy your product and resell it provide at even less cost the advantage of sales coverage and a party purchasing product.
Franchising or licensing
If the product or service is susceptible, franchising or licensing should be considered. With franchising greater protection is achieved as the franchisee agrees to operate under your brand, your systems and agrees not to compete. Franchising can be used for virtually any concept. This allows for rapid penetration using someone else’s energy ad capital. Franchisees can be difficult to control.
Licensees can give you many of the benefits of franchising but are harder to restrict because they are not operating under your brand/marketing plan and can more easily separate and compete. Stopping a licensing from competing and pirating ideas can be costly.
Using purchasing orders
Purchase orders drafted in your favor should be used. Where possible, master agreements should be used with brokers, distributors, customers, and agents. These master agreements will specify shipping terms, proper handling, use of trademarks and trade names, the proper look and feel of any offerings, provide limited warranties that do not extend only to replacement of product, and specifically disclaim consequential damages and lost profits. Further, if an offering is bundled with another product, there should be a disclaimer relative to the other product (e.g., a software program or add-on).
Incentives invest members of your team in your success. Prudence dictates that everyone share both in the successes and failures. Incentives must be clearly articulated. All agreements must incorporate licensing concepts so that the following issues are addressed: retaining ownership, controls over quality standards, controls over the look and feel, duties to protect the goods or services, and the ability to sublicense or disclose.
Disclaimer: This article is provided by LANCE S. DAVIDSON, P.C. for general education purposes only. The information should not be relied on as legal advice, nor does it serve to create an attorney-client relationship. Laws vary from one state to another. For legal advice on a specific matter, consult an attorney.