The 4 types of Distribution Agreements
An overview of 4 types of distribution agreements.
In order to expand their product market, some businesses appoint established and independent distributors in the markets they want to access instead of directly selling to customers in these markets. The parties agree that the distributor would purchase a product from the supplier and sell it to customers at a price determined by the distributor. In addition to expanding the product market, the supplier passes on the risks of expansion to the distributor as well as the product marketing and some of the post-sale support services. The way the relationship between the supplier and the distributor works is governed by a ‘Distribution Agreement’. This article will look at the 4 types of ‘Distributor Agreements’.
Types of Distribution Agreements
There are four types of Distribution Agreements:
1. Exclusive Distribution
2. Sole Distribution
3. Non-exclusive Distribution
4. Selective Distribution
The first type of distribution agreement is ‘Exclusive Distribution’. Under an Exclusive Distribution agreement, the supplier appoints one distributor in a defined territory that has the exclusive right to sell the products of the supplier. Under an Exclusive Distribution agreement, the supplier cannot sell directly to customers in that territory either. In other words, if company A (a supplier) enters into an ‘Exclusive Distribution’ agreement with company B (a distributor) in a specified territory, then company B is the only company that can sell to customers in that territory. Company A cannot appoint other distributors in that territory nor sell directly to customers.
Exclusive Distribution agreements are commonly used when a company is expanding into new territories. The appointed distributor takes on the risks associated with entering a new market, knowing that they are the only ones that can benefit from the product in the market. The supplier appoints the distributor knowing that they will be motivated to sell the product and they can threaten withdrawal of exclusivity if targets are not achieved.
The second type of distribution agreement is ‘Sole Distribution’. Under a Sole Distribution agreement, the supplier appoints one distributor in a defined territory. Unlike an Exclusive Distribution agreement, under a Sole Distribution agreement, the supplier reserves the right to sell to customers in that territory. For example, if company C (a supplier) appoints company D (a distributor) under a Sole Distribution agreement, then company D is the only distributor but it is not the only source for customers as they can purchase directly from company C. A Sole Distribution agreement would allow the supplier to promote the product and retain relations with existing customers in the territory while the distributor gets the advantages of exclusivity.
The third type of distribution agreement is ‘Non-Exclusive Distribution’. Under a Non-Exclusive Distribution agreement the supplier can appoint as many distributors as they see fit within a specified territory. Accordingly, due to the increased competition within the territory, the terms of the agreement are less onerous than ‘Exclusive Distribution’ and ‘Sole Distribution’ agreements.
The final type of distribution agreement is ‘Selective Distribution’. Selective Distribution is a special type of distribution used when the product requires special treatment such as enhanced service, expert advice at sale and special after sale support. Suppliers would create a network of distributors that meet certain criteria in order to be able to deal with the product. Under Selective Distribution agreements distributors can only sell the product to end-users and other authorised members of the network. In practical terms, company E (manufacturer) would set certain criteria for distribution and appoint companies F, G and H as authorised distributors within the network. Company G can only sell the product to end-users and companies F and H only. It cannot sell to a company I which is an unauthorised retailer.
In general, the most suitable distribution agreement will depend on the preferred set up for the relevant market and the status of the supplier within that market. If the supplier is completely new to the market, then an Exclusive Distribution agreement would be more desirable. If the company has an existence within the market and would like to expand its reach, then a Sole Distribution agreement would be more suitable. If the product requires specific treatment, then a Selective Distribution network would be beneficial. Finally, if the supplier’s needs would be better met through competition of distributors, then the best agreement would be a Non-Exclusive agreement.