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Sales and Distribution
A Guide for Sustainable Entrepreneurs
SUSTAINABLE ENTREPRENEURSHIP PROJECT
Dr. Alan S. Gutterman
Sales and Distribution:
A Guide for Sustainable Entrepreneurs
Published by the Sustainable Entrepreneurship Project (www.seproject.org) and
copyrighted © 2017 by Alan S. Gutterman.
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 BY-NC-SA) 4.0 License, as more fully described
at http://creativecommons.org/licenses/by-nc-sa/4.0/legalcode.
About the Project
The Sustainable Entrepreneurship Project (www.seproject.org) engages in and promotes
research, education and training activities relating to entrepreneurial ventures launched
with the aspiration to create sustainable enterprises that 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 Project is involved in the preparation and distribution of Libraries of Resources for
Sustainable Entrepreneurs covering Entrepreneurship, Leadership, Management,
Organizational Design, Organizational Culture, Strategic Planning, Governance,
Corporate Social Responsibility, Compliance and Risk Management, Finance, Human
Resources, Product Development and Commercialization, Technology Management,
Globalization, and Managing Growth and Change. Each of the Libraries include various
Project publications such as handbooks, guides, briefings, articles, checklists, forms,
forms, videos and audio works and other resources; management tools such as checklists
and questionnaires, forms and training materials; books; chapters or articles in books;
articles in journals, newspapers and magazines; theses and dissertations; papers;
government and other public domain publications; online articles and databases; blogs;
websites; and webinars and podcasts.
About the Author
Dr. Alan S. Gutterman is the Founding Director of the Sustainable Entrepreneurship
Project and the Founding 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 Sustainable Entrepreneurship Project or the Business Counselor
Institute, please contact him directly at [email protected].
Introduction to Sales and Distribution Activities
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 Guide include the following:
Sales and distribution strategies
Legal and regulatory considerations for sales activities
Strategic planning for sales and distribution activities
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 Guide, 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 Introduction
Introduction to Sales and Distribution Activities
2 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
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.
§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
1 For further discussion of product development and marketing activities, see “Traditional Product
Development Process” and “Marketing” prepared and distributed by the Sustainable Entrepreneurship
Project (www.seproject.org).
Introduction to Sales and Distribution Activities
3 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 commission-
only basis. Before recruiting and selecting the sales personnel, the firm must carefully
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
2 For further discussion of activities during the launch phase, see “Entrepreneurship: A Library of
Resources for Sustainable Entrepreneurs” prepared and distributed by the Sustainable Entrepreneurship Project (www.seproject.org).
Introduction to Sales and Distribution Activities
4 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
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 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:
3 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.
Introduction to Sales and Distribution Activities
5 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
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
4 UCC §§ 2-509, 2-510 and 2-319.
5 UCC § 2-503.
6 UCC §§ 2-312 – 2-318.
Introduction to Sales and Distribution Activities
6 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
§4 Strategic planning for sales and distribution activities
Each function within a company should develop and execute its own functional-level
strategy to acquire and develop the resources necessary for the function to create and
sustain a core competency that can be converted into a competitive advantage for the
company as a whole. Functional-level core competencies generally fall into one of two
major areas: (1) the ability of the company to execute specific functional activities more
efficiently and a lower cost than competitors (“low-cost advantage”); and (2) the ability
to perform specific functional activities in a way that clearly and positively differentiates
the products and services of the company from those offered by competitors
(“differentiation advantage”).8
Sales activities are one of the most important issues and concerns in the overall strategic
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.9
The sales and marketing functions can create differentiation advantages by creating and
implementing sales and marketing strategies for targeted customer groups, tailoring
7 For further discussion, see “Globalization: A Library of Resources for Sustainable Entrepreneurs”
prepared and distributed by the Sustainable Entrepreneurship Project (www.seproject.org). Moreover, the
laws of each specific foreign jurisdiction should be closely reviewed as there may be substantial variance
from country to country. 8 G. Jones, Organizational theory, design and change (5
th Ed.) (Upper Saddle River, N.J.: Pearson/Prentice
Hall, 2007), 209-210. For further discussion of functional-level strategies, see “Organizational Design: A Library of Resources for Sustainable Entrepreneurs” prepared and distributed by the Sustainable
Entrepreneurship Project (www.seproject.org). 9 Id. at 211.
Introduction to Sales and Distribution Activities
7 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.10
The efficacy and strength of functional resources depends heavily on the ability of the
company to coordinate the deployment and use of those resources, which means that
structure must be also recognized as an important element of functional-level strategy.11
There is no single structure that be considered optimal for every functional area and it is
important for each function (e.g., research and development, manufacturing and
sales/marketing) to create an internal organizational structure that is specifically suited to
its resources (i.e., personnel, technology, plant and equipment, etc.) and the functional
domain in which it operates. Functional-level organizational structures fall somewhere
on a continuum between “mechanistic” and “organic” and managers making design
decisions for their department must determine how many hierarchical levels of
management control are necessary to achieve the optimal level of control and
coordination for the department’s activities, what amount of decision making authority
can and should be decentralized and pushed lower in the departmental managerial
hierarchy, and how much reliance should be placed on standardized rules and operating
procedures as opposed to granting managers and employees throughout the department
the flexibility to make choices regarding the use of the department’s resources based on
the specific circumstances they are confronting at that time.12
The organizational structure implemented as part of the functional-level strategy for the
sales department typically falls midway between the mechanistic structure typically used
for manufacturing and the organic structure preferred for research and development
activities. Since salespersons are generally compensated using incentive-based pay
systems there is a built in method of control and motivation that reduces the need for
overbearing direct supervision by layers of managers.13
Accordingly, the organizational
structure for the sales function generally tends to be relatively flat and decentralized and
managers and employees rely on standardized reporting systems to exchange information
on sales activities and the changing requirements of customers. Since salespeople usually
work on their own rather than in teams there is little need to rely on mutual adjustment.
Salespeople do have some discretion in tailoring the tone and content of their sales pitch
10
Id. at 211. See also R.M. Johnson, “Market Segmentation: A Strategic Management Tool,” Journal of Marketing Research, 8 (1971), 15-23. 11
Id. at 212 (citing also D. Miller, “Strategy Making and Structure: Analysis and Implications for Performance” Academy of Management Journal, 30 (1987), 7-32). 12
Id. at 213. For further discussion of each of these characteristics of organizational structure, see
“Organizational Design: A Library of Resources for Sustainable Entrepreneurs” prepared and distributed by the Sustainable Entrepreneurship Project (www.seproject.org). 13
Id. at 213. See also K.M. Eisenhardt, “Control: Organizational and Economic Approaches,” Management Science, 16 (1985), 134-138.
Introduction to Sales and Distribution Activities
8 when dealing with specific types of customers; however, standardization still plays a
dominant role in that salespeople must adhere to the messages developed by the
marketing group and follow uniform guidelines regarding pricing and bundling of
products and services.14
When designing the organizational structure for the sales function managers must take
into account the unique requirements of important specific customer groups and ensure
that the functional structure is configured in a way that motivates and encourages
salespeople to use the most appropriate form of sales approach for the targeted customers.
For example, a retailer providing products and services to a wealthier clientele will
generally want the members of its sales team to use a patient, courteous and satisfaction-
oriented approach when interacting with those types of customers. In that situation,
mutual adjustment, rather than standardization, should be a preferred value in the
organizational structure and salespeople should be steered away from hard-sell sales
tactics by eliminating strict incentive-based compensation structures. On the other hand,
if and when the retailer is dealing with mass market customers the sales team may
simplify its approach by relying more heavily on a standardized sales pitch and limited
exceptions (i.e., discounts) to fixing pricing and product/service bundles.15
Companies can select from among a wide range of strategic and organizational options
for their sales activities. For example, companies should consider, and often adopt, one of
the traditional organizational structures that direct sales managers, salespeople and
supporting resources around dimensions such as geography, products, markets or type of
sales activities. The choice of a primary dimension by a company should be driven by
strategic considerations. While these traditional structures are generally based on the
principle that interaction between the company and an account will be initiated and
nurtured by a single salesperson employed by the company, companies may also use
outside (“independent”) sales agents or representatives in appropriate situations.
Another option that is growing in popularity is the concept of “team selling,” which
retains the salesperson as the responsible party for exchanging information with the
purchasing agent for the account but also brings in specialists from other functional areas
(e.g., marketing, manufacturing, product development, engineering and logistics) to work
with counterparts within the account's own purchasing organizational structure to design
a unique solution and build a strong and lasting relationship that will hopefully lead to a
sustainable stream of revenues and profits. A basic team selling model includes the lead
salesperson for the seller, a team of functional specialists from the seller that are
specifically trained to support sales activities and long-term customer relationships, the
leader purchasing agent for the buyer/customer and a team of functional specialists from
the buyer/customer focusing on ensuring that the procurement decision and relationship
meets the requirements set by the buyer/customer. The lead salesperson and purchasing
agent ensure that information flows smoothly between the parties and the appropriate
specialists are involved in defining the products and services to be sold and purchased
and resolving technical and business issues. The idea is to build and maintain friendship
14
Id. at 213. 15
Id. at 214.
Introduction to Sales and Distribution Activities
9 and trust between the participants on both sides of the process.
Finally, companies obviously have alternatives to direct face-to-face interaction with
potential customers during the sales process. A good example is the increasing reliance
on e-commerce and telemarketing. Telemarketing can be used for a number of different
activities relating to sales and customer service including identification of prospective
customers; screening and qualifying prospects; actual solicitation of sales from smaller
customers and solicitation of reorders from non-major accounts; order processing;
product service and support; and account management and customer relations.
§5 --Elements of the business plan for sales activities
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
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.
§6 --Factors for consideration in developing a sales strategy
Smaller companies, particularly when they are first starting out, often dispense with a
formal strategic plan for sales activities and will either use a “shotgun” approach that
seeks prospects among a wide group of potential customers or focus all of their efforts on
doing whatever is necessary to close an initial sale with one or more key accounts
identified by the founders. As the company grows, however, it is important to implement
a more disciplined approach to the development and implementation of a sales strategy
that takes into account the following factors:
Introduction to Sales and Distribution Activities
10
The company must have a solid understanding of its current market(s) and any
additional markets that might be good opportunities for the company’s products in the
future. For one thing, the company should know why its current customers are
purchasing from the company and why other potential customers might be looking
elsewhere for their requirements. The company should also examine what might be
done to entice current customers, particularly the most profitable, to increase their
sales. As for additional markets, the company should determine whether its products
might be viable in those markets and develop strategies for penetrating those markets.
The company must understand its competitive position in each of its markets
including how the company ranks in terms of market share, profitability, product line,
quality of service and reputation. Competitive analysis should be broad enough to
include firms that offer products that are not the same as those offered by the
company but which may serve as effective substitutes in the eyes of customers.
The company should examine its distribution strategies to evaluate their effectiveness
and should also prospect for new ways to get its products in front of potential
customers. For example, it may be feasible to bundles products with those of other
firms in order to tap into the distribution network of the business partner.
The company should examine its supply chain to determine how well it supports the
company’s sales strategies. For example, by negotiating better pricing for raw
materials or product components the company can put itself in a position to offer
more aggressive pricing for its finished products to its own customers. Similarly,
improvements in quality controls along the supply chain allow the company to offer
products that have higher value in the eyes of customers.
Using the information obtained from the competitive analysis, the company should
determine the position that it wishes to occupy within the relevant markets. For
example, the company could elect to offer a broad line of generic products or focus
on a small group of high end products that are clearly differentiated from the
offerings of competitors and which can command a premium in terms of pricing.
The company should determine which promotional tools should be used to
disseminate the desired messages regarding its products to the target group of
customers. While promotion falls largely in the domain of the marketing group the
sales function should provides its opinions on what it believes is necessary to build
customer awareness of the company’s products so that the sales process can proceed
more smoothly.
The company should evaluate its pricing strategies in light of the cost structure
associated with its products and conditions in the marketplace. Consideration should
be given to implementing variable pricing models for different markets and/or
customers and to creating financing programs to allow customers to access credit
offered by the company.
The company should evaluate the quality of the service and support provided along
with its products to determine whether it is perceived by customers as having value
and how it compares with the offerings of competitors. The company should
establish procedures for monitoring the quality of its service and ensuring that
adequate training and other support is available.
Introduction to Sales and Distribution Activities
11 §7 --Measures of performance of the sales function
As with every important business area the company should set sales objectives or
benchmarks and implement appropriate quantitative methods for measuring the
performance of the company against those objectives. While revenue and profit goals, as
well as targets for the number of product units to be sold, should always be identified it is
important to gauge how well the company is doing in relation to competitors and
economic conditions in its marketplace. For example, companies can focus on market
share and track how well their growth performance compares to the relevant industry or
sector. Period-to-period comparisons should also be made and each of the measures
should be evaluated against various qualitative factors which might have an impact on the
success of the sales strategy including overall economic conditions, competition,
marketing strategies, changes in technology or product offerings, changes in the size of
the target markets, seasonality, disruptions in the supply chain, and the skills and
experience of the sales group.
The appropriate scope and detail of sales data should be carefully determined by senior
management to ensure that they have sufficient information to track the progress and
effectiveness of the company’s sales strategies. In general, companies should collect
information regarding total sales; sales by product/brand or department; market share;
seasonality of sales; geography of sales; target market segment sales; locations sales;
product/service type sales; and sales by employees. Many companies create and track
various ratios of sales efficiency such as “sales per sales employee” and use these to
compare performance within the sales group and establish minimum performance
thresholds that salespersons must exceed to avoid termination or other form of discipline.
The performance of salespersons may also be measured by other factors such as number
of sales calls; number of inquiries/leads; number; size, or value of orders; number of new
customers. Sales data should also be available to allow tracking of particular strategic
initiatives such as focusing on new products and/or customers. Finally, additional
information on sales activities and customer relations should be collected from customer
surveys, reports on customer complaints and sales reports from sales personnel.
Salespersons may be required to prepare a variety of reports including call reports,
expense reports, new and lost business reports and reports on business and economic
conditions in the market served by the salesperson.
§8 --Sales and product development activities
Sales and distribution activities should also be analyzed by reference to how they fit into
the company’s overall product development and commercialization process and the
process of developing and implementing an overall strategy for the company. For
example, sales and distribution, along with pricing and promotion (i.e., marketing), may
be placed within a customer fulfillment team that is one of several key groupings within
the organizational structure including groups focusing on product design and
development, manufacturing, customer support and strategic planning. In this type of
overall organizational structure the customer fulfillment team would take direction from
the strategic planning team, including the CEO and other senior executives, with regard
Introduction to Sales and Distribution Activities
12 to sales objectives and market focus, and interact intensively with the manufacturing and
customer support teams on important issues such as quality control, production
scheduling, training, customer service and customer research. As appropriate, the
customer fulfillment team should also provide feedback to the product design and
development team in the form of information gathered from customers regarding their
requirements and preferences for product design and functionality. Communication and
collaboration is essential for this type of model to be successful and the senior
management team must establish processes for ensuring that the various teams work
together as necessary and share all information that might be needed in order for all of the
teams, acting together, to satisfy customer demands and expectations.16
§9 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.17
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.18
§10 --Economic factors
16
F. Ostroff and D. Smith, “The Horizontal Organization (Redesigning the Corporation”, The McKinsey Quarterly (January 1992). 17
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 is discussed in detail in “Sales
and Distribution Arrangements and Contracts” in “Product Development and Commercialization: A Library of Resources for Sustainable Entrepreneurs” prepared and distributed by the Sustainable Entrepreneurship Project (www.seproject.org). 18
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).
Introduction to Sales and Distribution Activities
13
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 in-
house 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 commission-
based, 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
a sales agent has made it the preferred option for smaller companies.19
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.
§11 --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.
19
H. Novick, Selling Through Independent Reps (AMACOM, American Management Association: New
York, 1988).
Introduction to Sales and Distribution Activities
14 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
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.20
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.21
§12 --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 in-
house 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
20
E. Anderson. "The Salesperson as Outside Agent or Employee: A Transaction Cost Analysis", Marketing
Science (4(3) (1985)), 234-254. 21
T. Powers, Modern Business Marketing (St. Paul MN: West Publishing Company, 1991).
Introduction to Sales and Distribution Activities
15 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,
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.22
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.
§13 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.
§14 --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
22
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.
Introduction to Sales and Distribution Activities
16 generated by the agent/representative's activities.
23 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
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.
§15 --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
23
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 Sustainable Entrepreneurs” prepared and distributed by the Sustainable Entrepreneurship Project (www.seproject.org).
Introduction to Sales and Distribution Activities
17 services offered through the particular channel program.
24
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 "value-
added" 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,
24
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 “Purchasing” in “Product Development and Commercialization: A Library of Resources for Sustainable Entrepreneurs” prepared and distributed by the
Sustainable Entrepreneurship Project (www.seproject.org).
Introduction to Sales and Distribution Activities
18 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.
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.25
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.
§16 --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
25
For discussion of sales activities in foreign markets, including selection and use of local distributors, see
“Globalization: A Library of Resources for Sustainable Entrepreneurs” prepared and distributed by the
Sustainable Entrepreneurship Project (www.seproject.org).
Introduction to Sales and Distribution Activities
19 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.
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.
§17 --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
Introduction to Sales and Distribution Activities
20 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
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.
§18 ----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.
§19 ----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.
§20 ----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
Introduction to Sales and Distribution Activities
21 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.
§21 ----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
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.
§22 ----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.
§23 ----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.
§24 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
Introduction to Sales and Distribution Activities
22 structure to support the activities of the sales group.
26 The key design principals when
designing the sales organization structure include the following:
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.
§25 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
26
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).
Introduction to Sales and Distribution Activities
23 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.
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 commission-
based 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.
§26 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 contract27
, 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,
27
For discussion of negotiating a long-term supply and purchase contract, see “Purchasing” in “Product Development and Commercialization: A Library of Resources for Sustainable Entrepreneurs” prepared and distributed by the Sustainable Entrepreneurship Project (www.seproject.org). 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.
Introduction to Sales and Distribution Activities
24 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
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.
§27 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.
§28 Distribution agreements
In many ways, a distribution agreement is similar to a long-term supply and purchase
Introduction to Sales and Distribution Activities
25 contract.
28 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
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.
§29 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,
28
For discussion of negotiating a long-term supply and purchase contract, see “Purchasing” in “Product Development and Commercialization: A Library of Resources for Sustainable Entrepreneurs” prepared and distributed by the Sustainable Entrepreneurship Project (www.seproject.org).
Introduction to Sales and Distribution Activities
26 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.
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
Introduction to Sales and Distribution Activities
27 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
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.
References and Resources
The Sustainable Entrepreneurship Project’s Library of Resources for Sustainable Entrepreneurs relating to
Introduction to Sales and Distribution Activities
28 Product Development and Commercialization is available at https://seproject.org/product-development-
and-commercialization/ and includes materials relating to the subject matters of this Guide including
various Project publications such as handbooks, guides, briefings, articles, checklists, forms, forms, videos
and audio works and other resources; management tools such as checklists and questionnaires, forms and
training materials; books; chapters or articles in books; articles in journals, newspapers and magazines;
theses and dissertations; papers; government and other public domain publications; online articles and
databases; blogs; websites; and webinars and podcasts. Changes to the Library are made on a continuous
basis and notifications of changes, as well as new versions of this Guide, will be provided to readers that
enter their names on the Project mailing list by following the procedures on the Project’s website.
08.2017