Establishing International Channels, Part 1
Companies need to have a strategy to successfully exploit international business
opportunities in a cost effective way. Early entry into foreign markets is usually
opportunistic, but can often be a way to grow revenues with modest incremental
costs. The Internet can drive demand internationally and you need to be ready
to respond!
Unfortunately, there are many high-tech horror stories of failed attempts to
build international sales, and any number of investors who'll remind management
what percentage of Microsoft's sales come from outside the US. So, when
should you set up international channels?
If you are successful in the US, you can be successful internationally. You
need a stable/proven US business model. Typically, once you have three US sales
offices (east coast, west coast, and mid-west), you should also have your first
international channels in place.
International Channel Options
Sell Direct from the US
Many companies treat international opportunities as an extension of their
US sales territories, for example, giving Asia to a San Francisco based sales
person, or Europe to an east coast guy. This can work well in the early stages
if you have a Fortune 100 customer base or strong US channel partners to leverage.
In fact, you might want to retain the rights to sell directly from the US, especially
where you can sell into the international offices of local US clients. You should
certainly consider doing this if you have a multi-channel US sales model. In
these cases, you can often contract local front line (level 1) support to a
distributor.
Sell Through Distributors
There are many different kinds of distributors. Unfortunately, in most key
territories, you need more than one. For example, despite the continued political
integration of the European Union, there are few European distribution channels,
especially for face to face sales.
- "Looks Like Me" Distributor: This kind of distributor
resembles a subsidiary, having most of the components of your own company
other than R&D and manufacturing. These distributors have the same kind
of sales, support, and delivery resources as you have in the US. Sometimes
these distributors are two-way exclusive (they only sell your product and
have exclusive rights in the territory) or, more commonly, they are semi-exclusive.
Exclusive distributors will need to provide level 1 and 2 support in the local
language to your customers. They may also develop local language training
or product documentation, which is often reimbursed through product credits
or discounts.
Many companies find that their best international sales come from successful
LLM distributors. It isn't uncommon for the distributor to be acquired and
rebranded as the new subsidiary. In these instances, it is critical to secure
the services of the founders, who are often the rainmakers for the business.
This can usually be achieved through an extended earn out arrangement.
- Regional Distributors or Channel Partners: There are several successful
regional distributors in Europe, and a few in SE Asia. If you can get their
attention and commitment, their expertise and multilingual sales teams can
shorten your time to revenue and deliver impressive results.
- Channel Partner: These companies sell similar products to your target
market and may also sell your competitors' products. They will be similar
to your US channel partners. The relationship will be non-exclusive. You have
little control and there is little loyalty. You can use soft dollars to fund
market promotion. When selecting channel partners, check to see if they advertise
in local publications that reach your markets. Ask for customer references,
especially if they will field level 1 support calls.
- Localization Partner: This kind of distributor is most often seen
in Japan or PRC. The distributor takes responsibility for any special non-recurring
engineering needed to enter the market and/or government approval/testing
that is needed. These are usually long term, exclusive relationships.
For software, the need for localization is usually driven by double byte character
support as much as local language user interfaces. The publisher needs to
retain rights to the modified source code and any documentation created, though
it isn't unusual for the localization partner to insist on a reverse royalty
in the event of early termination. With exclusive distributors and localization
partners, agreements must include minimum sales commitments.
You need to think through the early exit options for these kinds of contacts.
In Japan, the most successful localization distributors have seen their US
partners acquired all too frequently, and will insist on strong and long agreements.
Subsidiary
This is a local sales and support office operating as an arms-length business
unit. You have most control, but this is usually more expensive and complex
than adding a US sales office. You'll need to hire local staff with market and
industry expertise. This creates the most long-term value. In many countries
there is a pool of experienced local country managers. It is usually best to
work with someone who's "been there, seen it, and done that". Ask
to see the T-shirt!
Joint Venture Company
Where the investment and commitment to a market requires close cooperation
between the manufacturer and local distributor, a joint venture company, JVC,
may be a good choice. If the exit terms are clearly defined, then this path
can initially deliver significantly better results than a subsidiary.
Manufacturers Agents
If you use this model in the US, it is extensible to certain international
markets. It will work successfully in Europe and certain Asian and South American
markets.
An International Channels Warning List
There are a number of things to be wary of as you create your international
channels.
- It's often difficult and sometimes dangerous to have a US VP of Sales manage
international channels, but usually this is the easiest option. The need for
extensive travel and the complications of local agreements and purchasing
procedures make it important to dedicate management resources to these markets
early.
- You must also consider your own company's exit strategy. If, as is common
in these difficult days, it's through acquisition, try and create international
channels that can be delivered to a larger acquirer in a state that is ready
to merge with their local operations.
- During the early stages of developing international business through distributors,
it is NOT a handicap to only speak English. When selling direct it will limit
the markets you can address. But later, you will hire management that is fluent
in the local language.
- Make sure you check the references of local management hires very carefully.
Try and get US references, too. Stay in touch with your local offices and
the employees; if the local manager leaves, you'll want the rest of the staff
to stay!
- Remember that the distributor has costs to recover and needs to be profitable,
too. In software, for example, distributors are looking for discounts of 20-50%
off US list. The nature of the channel and the value added by the distributor
will determine the correct level. Look at your own cost of sales & marketing.
If 40% of your costs are sales, it's unlikely the distributor can do much
better.
In the next issue, we'll discuss the "how tos" of international channels
development. Policies, pricing, and more.
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