Pricing, distributors, consumers, strategy

International distribution channels for consumer products can often be complicated due to the number of parties involved in any buying chain. As such all these parties can directly impact on the end selling price, the one the local consumer pays for the product. Management of pricing is, of course, further effected by international logistical costs, local taxation and duties, and the trade margins expected to be enjoyed in any given market.

My main international trade experience was gained with a consumer products company which possessed valued brands which required the appropriate price to be paid by consumers and the trade alike. Each Brand/product had a target consumer price set on a market by market basis taking into account local competitive activity.

These notes describe the process we carried out to ensure a target consumer price was established in each market. Whilst this process was broadly successful throughout the world, we will take the English Caribbean markets as a practical example.

The background is this. The region comprises of a number closely grouped countries, each with their own taxation and duties in addition to a Caricom common external tariff (CET) and a common local currency the East Caribbean Dollar (EC$). For many islands (all being independent countries) one could see the next island a few miles away. In other words a closely knit business community with few secrets between each country.

The first step was to set an agreed target price for each product so that a local resident travelling to a neighbouring country would find his preferred product at the same price on the shelf. For this exercise to be more than a strategy it required the wholehearted understanding and cooperation of all of the company’s distributors within the region.

Therefore all distributors were regularly consulted on the target price taking into account the economy of each country, level of local competition pricing and, quite simply, what would their consumers be prepared to pay for the product taking into account the perceived value of the brand/product. They also had to subscribe to agreeing a regional target price rather than one just set wholly for their own circumstances.

My company would then set about establishing the appropriate price for our goods, country by country, to ensure the target price could be achieved. Again this could not occur without the wholehearted assistance of the distributor.

We would use a price model format to calculate each product price and work downwards from the target consumer price which is invariably a retailer’s price on the shelf. The following is an abbreviated summary:

Target consumer price

       ↓

Retailer margin

               ↓

Distributor price

               ↓

Distributor price

               ↓

Landed cost

               ↓

Taxes & duties

                ↓

CFR

                ↓

Ex-works

Within this Region all distributors preferred a CFR arrangement so a specific figure was calculated for each product for each country. In practice due to the varying taxes & duties it meant that each distributor was charged a different price for the same products. In normal circumstances this would have created a major problem between the company and its distributors.

Some distributors were making more, some making less cash profit as compared to some of their fellow distributors. It was not a problem because this was an open trading situation where all parties had subscribed to mantra that a standard consumer price was the most beneficial for business.

There were other problems as well. Politicians of the day would wish to influence the policy. I well remember on two separate occasions meeting with finance ministers to discuss how we did business and the rationale used. Naturally my local distributor was also in attendance. I used the price model to illustrate both our thinking and how we literally structured our prices. We had nothing to hide.

We pointed out the key criteria of targeting (not setting) a consumer price. This was set to ensure we were not undersold or oversold by the trade; we wanted the consumer to pay the right price for our brands/products. It should be added that in these two situations there was local manufacture of similar products albeit of a lower quality and retailed at a much lower price point. We highlighted the need to ensure there was real separation in pricing between these local products and our own as we were not seeking conflict.

We also illustrated the key fact that any difference in prices charged to the distributor were wholly in line and due to the duties and taxes charged in their country. In both instances after a   long discussion both ministers were satisfied with our approach. There is no doubt that using the price model as an illustration rather than just discussing figures was the critical factor.

These local concerns lead on to the legality of this approach. Today anti-trust laws in many countries actively prohibit any selling party imposing a margin or a selling price onto another. This is not suggested in this process.

Our view was to quite simply agree with a distributor a target consumer price bearing in mind he is the only person who can ‘police’ its implementation locally through recommendation and the active use of his salesforce. Without this process the consumer price of the product would float and in most instances become unaffordable for the local consumer.

This case study has highlighted a common group of markets where we to tried to ensure some consumer price conformity across them all. This principal of setting a target consumer price was adopted in all of our markets as standard practice. As already discussed the pricing strategy would be first discussed and agreed with the distributor for him to follow through locally. We would set our FCA price accordingly.

When appointing a new distributor we would, at the outset, introduce him to the concept and process to ensure he was actively involved at the start.

So does this work? The short answer is yes. In most markets we would find our products being sold at or close to our target consumer prices.  In these instances we knew consumers were buying at the right price for the right product at the right quality.

SETTING UP A DISTRIBUTOR NETWORK IN THE USA A Case Study

After trading successfully in many parts of the world, my company decided to enter the US market. Whilst this market offered the obvious benefits of size it is also fraught with many commercial dangers. Potential issues ranged from controlling this vast market through to addressing the numerous legal barriers both at Federal and at State level. We exported consumer products and our target market in the US was primarily the Asian-American consumer. Demographically the main areas of population were found in the ‘Chinatowns’ and ‘Little Vietnam’ neighbourhoods in prime cities such as San Francisco, Los Angeles and New York. A number of secondary cities such as Chicago, New Orleans & Atlanta were also identified. California was by far the key state by not only possessing the highest share of this consumer group but was also the first point of entry for successive generations of  immigrants. Of the many issues to be resolved when entering this market, distribution was a key factor. A number of options were considered. Agency arrangements were quickly dismissed as we required stock inventory to be placed in-market and to be freely available for trade purchase. Our main competitors were US and we could not afford to be out of stock. We required a distributor arrangement where our products were purchased, stored and supplied in-market. We then had to decide upon the most effective distribution arrangement. We considered and discarded a state by state appointment of distributors. We believed a high number of reporting lines into our UK head office were undesirable and difficult to control. In particular there would be a danger locally of ‘range wars’ where one party sells into another’s designated territory.  US anti-trust laws place a particular pressure on distributor/principle relationships in that the exporter cannot, in any way, directly influence the distributor’s price or his margin. Yet pricing is, in itself, a key issue in successfully marketing consumer products so the only solution was to develop very strong relationships with the distributor to ensure both parties were working to the same end. This would be very difficult to achieve if working with a number of partners in the same market. So the conclusion was to appoint a national distributor wholly responsible for all US business. This decision then raised other potential issues such as how to ensure all major priority areas received the same degree of attention and focus locally. This was not just in terms of product supply but in sales and marketing effort to ensure there was appropriate market development. There was the additional matter of ensuring that we capably handled the ethnic requirements locally. We therefore decided that we would set up sub-distributor arrangements in each key location, each being managed and serviced by our national distributor. The basics of such an arrangement are: Each sub-distributor is in contract with the national distributor Each sub-distributor purchases stock from the national distributor The price of that transaction is set by the national distributor The national distributor forgoes part of his profit margin in his price by passing it onto the sub-distributor We then set out to locate a suitable candidate for the national role who was based in our prime market of California. Space prohibits discussion on the selection process except that it took over three months from selection to appointment. Our appointee was non-Asian but highly experienced in consumer product distribution and sales. At the outset the idea of a sub-distributor arrangement did not appeal to all but our chosen partner already possessed experience in this process. As important he showed an early willingness to work closely with us and saw our business as an incremental opportunity to both grow his business and develop his influence in other states. He was based in the Bay area of California so we supplied product to him via Oakland port. We agreed a launch plan which consisted initially of the two Californian conurbations to be followed by New York 6 months later. With California being a highly litigious state, the drafting of a contract including the sub-distributor responsibilities was a drawn out-affair but nevertheless was successfully completed... We agreed, as part of our support for the initial launch into California, to run a special training programme for his sub-distributor appointees. This was ultimately carried out in Las Vegas, a highly motivational location for Asian Americans. Once the sub-distributorship arrangements were in place, the launch was initiated. The timing coincided with a West Coast trade show so we jointly hired a stand for ourselves, the national and sub-distributors to exhibit. Generally in the US, attendance at Trade shows is high and much business is done through them. It proved to be the same for our business. Our new direct and indirect business partners were successfully able to promote both their business and our products to existing and new trade customers. Whilst there are many facets to any product launch, focusing on the product supply and trade distribution aspects our launch was successful. Within the target launch period we were able to achieve our distribution targets that had previously been set with our trade partners. During our Las Vegas meeting we had agreed on the numbers of key trade outlets to be sold to such as Asian-American specialists, supermarkets, wholesalers etc. in San Francisco and Los Angeles. Naturally there were teething problems with the launch but the fundamental strategy of using national and sub-distributorships was sound. The main benefit to us, being based in the UK, was the ability to manage the business locally through one contact point After 6 months of successful trading we all agreed to move to the next phase which was New York. In terms of product supply we set up a new arrangement to overcome the logistical problem of servicing the East from the West coast. Once the new sub-distributor was selected and appointed, we would supply their product requirements direct albeit on behalf of the national distributor.

The US remains both an opportunity and a potential problem for many exporters. For us we spent much time at the outset considering the pros and cons of distribution in this market, we found an appropriate solution.

Tales from the Road 5: Beware the Automaton Traveller

It was 1995. We had been selling capital woodworking machinery through two distributors in the USA for years, one in Massachusetts, and another in North Carolina, but we didn’t seem to be getting much business from the East Coast. So I embarked on a three week trip taking in both existing and potential distributors. Many USA distributors will claim national coverage, but the reality is that most don’t have the infrastructure to support their claim.

My children were 10 and 8 years old, and this was to be my longest time away since they were born. So I did two things. I wrote short poems or stories, or notes giving clues on where to find small presents around the house and garden, and put them in envelopes for them to open each day. I traced a map of the USA and made a fridge magnet with a caricature of my head, so they could track my journey. And they did!

I arrived at an awful Holiday Inn near JFK for a stopover before an early morning flight to Vancouver where we had an excellent Canadian distributor. There was a notice on the door warning of the possible dire consequence of opening it to the pizza delivery man! That was based on a couple of recent gangland shootings where the pizza box had been used to conceal a handgun. The pizza was okay and I am still here.

I had been booked into Holiday Inns throughout my journey, and was relieved when Vancouver’s version was cleaner and less intimidating. I was there a few days and made time between meetings to take in the sights and sounds of the city. My abiding memory was seeing white lights in the distance moving up and down a night sky, and it took me ages to work out that they were ski lifts and not aliens landing.

The 7am flight to Seattle was spectacular, flying between mountain ranges on a clear frosty morning. I spent a long, incredibly hectic day there. It was February 14th, and the hippy cab driver who took me from the airport to my first meeting had a box of heart shaped chocolates in a heart shaped box that he was offering to all his passengers that day.

That was the fun bit. I was late for two out of the following four meetings because I hadn’t worked out my logistics properly. I felt constantly on the back foot. Some of the companies I’d identified as being potential distributors were more like local dealers, something that Google Earth might have signalled had it been around then. From Seattle I flew on to Portland Oregon, to arrive in their Holiday Inn just before 10pm when the restaurant was near to closing.

I left my bags at reception and had my evening meal straight away. Something light for my starter- a salmon terrine. When it arrived it wasn’t a terrine at all but a massive piece of salmon caught that day in the Columbia River. I began to dread what size my fillet steak main course might turn out to be. That was enormous too, a real ‘Tom & Jerry’ steak covering the plate. I managed half of it, partly because I was so tired and partly because it was so vast! I had a brandy nightcap, collected my bags, went to my room and fell on the bed.

There I woke up at 3am still fully clothed, got up to use the bathroom, and in my semi-comatose state I walked straight into the wall! The Holiday Inns I had stayed in until that night had been configured with the bathroom on the right as you walked in, a bed on the right, and desk on the left, and then a sitting room area in front of the window. In Portland, they did things differently. My room was the other way round. So ‘SMACK!’ and it really hurt. I woke up later to my 6am alarm to find an impressive bruise developing above my right eye. It looked like I’d been in a bar room brawl, and I was being collected at 6:30am by an important guy I had never met before!

When you travel extensively it’s very easy to slip into automatic. It’s a bit like that feeling you get after driving from London to Manchester, wondering whatever happened to Birmingham? That kind of thing mainly happens when you fail to pace yourself properly, when you put your mind and body under too much stress. And if you are not on top of your game you will reduce your chance of a successful outcome.

So what lessons can be learned?

1. It’s easy to cram too much into a business trip. It isn’t easy to stay fresh and alert if you do.
2. Plan your trips, and appreciate the size of the country, distances and journey times.
3. Research every company you plan to visit. Know their strengths and weaknesses.
4. Google Earth gives a useful impression of the premises you are about to visit.
5. Don’t arrive for a first meeting with a blackening eye. It can only get worse!
6. Children grow quickly in three weeks.


JOHN REED

Tips on Controlling Agents & Distributors

Good management practice prescribes that one needs to check ‘what was done is what one originally wanted to be done.’ Easy to say but particularly difficult when doing business with partners in remote locations. It is further complicated by the nature of overseas operations – arguably business being done through agents should be easier to control than that being transacted through distributors.

Using Agents

If using an agent, you retain direct contact with end-customers as the agent is selling on your behalf and selling at your price. The task is to control salesmen who act like any other salesmen throughout the world. The core requirements are to ensure the agent is:

•calling on all suitable customers
•spending the right amount of time with each customer
•selling the appropriate range of products
•gaining the correct size of order
•seeking new business
•feeding back competitor and market information
In other words, each order you receive from the agent is a direct measurement of his performance and can be evaluated by traditional sales productivity criteria i.e. in a given sales period:

•Number of orders, by customer
•Number of products sold, by customer
•Average order size and value, by customer
•Orders received this year to date, versus last year to date, versus this year’s planned forecast
•Customer retention
•New customers
•Spread of customers across assigned territory
Using distributors

Dealing through distributors is more difficult. They sell stock purchased from you to their own customers in their own way at their price. Legally you cannot control their margin or their sales-out price. The problem is you may not know to whom and how well they sell.

If you subscribe to the view that ‘I give my distributor the best price and expect him to get on with it’ then this article is of no value to your business. If, however, you believe overseas business is best developed by nurturing partnerships please read on.

There are three main elements:

1.Key result areas
2.Reporting methods
3.Making market visits
Key result areas

The main issue is the reporting of in-market sales. At the outset the exporter only knows what is shipped to a distributor, but has no idea where these products are sold in the market. In-market sales provide the actual measurements of performance and the basis on which future marketing and sales decisions can be made. Additionally, information on distributor stock inventory is of particular value in assessing the distributor’s ability to order the right quantities at the right time to satisfy future demand.

Examples of basic reporting will include:

•In-market sales by product & variant/packing
•Key trade sector in-market sales
Then dependent upon the level of distributor sophistication and cooperation:

•Stock inventory by product & variant/packing
It may be of commercial benefit to understand more about how this business was achieved, similar to assessments made on an agents’ performance:

•Distribution of product, by outlet and/or trade channel
•Salesmen coverage and number of visits.
•Number of salesmen employed full or part-time on sale of exporter’s products
Reporting methods

It is critical that the distributor provides a series of regular reports. This level of formal reporting will be supported by informal and regular contact on current issues. The two basic requirements should be, at least, the provision of a regular report, say monthly and an ad-hoc market research questionnaire. It is recognised that this requirement can often be a contentious issue between both parties with the distributor either not able or not wishing to provide information. This article cannot address the management skills required to handle this but a number of rules must be agreed at the appointment stage of a new distributor.

Recognising that many distributors sincerely believe it is an intrusion into their own business, the exporter must be clear on what and why he requires regular reporting and find an early amicable solution to the issue. If not, he will operate remotely and in the dark. The basic requirements of a regular report would be to:

•Measure performance against standards, targets and objectives
•Obtain feedback
•Prompt corrective action as required
As a minimum, the distributor should possess the necessary internal systems to report on:

•Actual in-market sales this year
•Cumulative sales this year to date
•Actual sales for same month last year
•Cumulative sales for last year to date
•Sales performance versus budget
Ideally he could also provide:

• Sales by customer & trade sector
•Stock and sales
◦Opening stocks
◦Shipments received during reporting period
◦Market sales
◦Closing stocks
◦Forward orders
Again the matter of inventory management is potentially a complex issue in that the exporter cannot dictate what a distributor should purchase to his own account, yet must ensure he is ahead of the business in terms of production and shipping planning. The less reactive the exporter is in the supply of product, the more proactive he can be promoting in-market sales effort.


Market visits
Whilst there are no set rules with regard to frequency, the exporter must ensure regular market visits are undertaken. Nothing can replace ‘seeing is believing’ and benefits both agent and distributor arrangements. Recognising that making visits are costly both in time and expense, the exporter must be clear on setting specific market visit objectives which could include a number from the following list: The bottom line must be that the visit must generate future business.

• To present new products, advertising plans and promotions
•To review sales performance - achievement against current plans and programmes
•To provide feedback on company and general distributor performances i.e. comparisons with other markets
•To resolve administrative problems arising from communication restraints
•To concentrate the distributor’s focus onto the exporter’s products
•To motivate by resolving any distributor problems in generating business and ensure the visit is not perceived as wasting the distributor’s time
•To review status of distributor’s overall business
•To review skills and training needs of distributor team and provides solutions
•To generate business and goodwill.
•To plan annual (or other periods) sales and marketing programmes
•To set action plans to counter deviations from plan and to handle new objectives
In summary, the main dilemma for any exporter is how much does he need to know about the sale of his products in each market and how can he find out? This requires the setting of practicable performance measurements, agreeing formal methods for regular reporting and the actual checking in-market to see what is being done.

Written 4th April 2011 by Dick Brentnall - S&H LLP Associate/ Trainer

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Managing Agents & Distributors

Introduction to Export Marketing and Sales

Improving Export Sales Performance

Incoterms 2010