Survey after survey during the pandemic has shown that businesses need to rethink what they sell and how they sell it. Adam Smith’s adage of ‘do what you do best and outsource the rest’ still holds true in many circumstances. For many businesses, outsourcing is already part and parcel of their contact centre and/or back office functions. Technology has, without doubt, helped to facilitate this.
But what about core functions like sales? Sales teams sit at the heart of most businesses and are of course revenue generating. They require a deep understanding of what their business can offer and more importantly, what their customers need (sales pipelines are often long and complex, not to mention personal).
On the face of it, outsourcing a key business operation might seem risky, but in the retail, fashion, beauty and FMCG sectors, outsourced sales arrangements are commonplace – and we expect this to only increase as margins in these sectors narrow and removing costs from the bottom line continue to be a primary focus for all CFOs and FDs as we move into what is going to be a challenging second half of the FY.
In the UK (and throughout most of the world), there are two key outsourced routes to market: sales agents and distributors.
Routes to market
Sales agents procure contracts between their principal (you) and customers. The agents are not legally party to the customer contracts. Agents may have authority simply to make introductions or may have a wider remit to negotiate terms (and sometimes conclude contracts) on behalf of their principal.
Sales agents are not to be confused with distributors. Distributors purchase products directly from the principal, and go on to sell those products independently, at a price of their choice. The distributor has a contractual relationship with its own customers. Distributors are referred to as resellers in some territories. The distributor has the risk of having to sell the stock once it has committed to buying it, subject to limited exceptions.
While there are many other important distinctions between these two methods, picking the right one (or a combination of the two) will require you to consider some of the key advantages and disadvantages below.
Sales agents:
Advantages
- You can retain control of the route to market, including pricing and terms of sale
- You can retain control of customer relationships and can choose customers
- You may make more margin (commission is usually less than the discount given to distributors, to reflect the risk assumed by distributors)
- You have greater control over marketing – something very important to most brands
- Agents may have better contacts on the ground than if you sell directly into the market
Disadvantages
- Sales risk stays with you
- Requirement (in EU) to pay compensation to agent on termination of the agreement (watch out for this …its tricky and can’t be contracted out of – speak with us!)
- Tax implications – you may be regarded as trading in a territory if you have an agent there, which may lead to a taxable presence (the importance of this post Brexit is something to bear in mind depending on any deal struck).
Distributors:
Advantages
- You pass the sales risk to the distributor (i.e. any leftover stock is distributor’s problem, unless sale and return (or retrospective rebates/discounts) are agreed)
- Helps spread the risk of expansion into new products or territories
- Relies on distributor’s experience and contacts to make sales
- Avoids the need to monitor accounts with multiple customers, just with the one distributor
- Commercial Agents Directive does not apply – so there is no requirement to pay compensation to a distributor on termination of the agreement in the UK, but some overseas territories can require compensation to be paid to a distributor on termination
Disadvantages
- You have less control over the distributor’s activities e.g. sale price and marketing (although distribution agreements can include instructions on how the distributorship should be operated)
- More expensive/less margin (level of discount on sales price to distributor reflects risk that distributor takes)
As with any outsourced relationship, the importance of a robust written agreement is key. Structured correctly, these routes can help to increase sales, potentially take cost and risk out of your operation and free up your time (as Adam would say) to do what you do best (be that product innovation or something else).
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