Creating Profit Through Alliances - business models for collaboration E-book | Page 68

Distribution agreement

profit. Where it concerns services, or products with a
service component, there may be a direct contract
relationship between the supplier and the buyer, for
instance when selling insurances or supplying
photocopier equipment on the basis of a certain price
per print. In such cases, the distributor's reward is
paid retroactively by the supplier.
There are different methods to determine that
reward:
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In many cases, a distribution agreement contains a
reward in the form of margin that the distributor can
achieve on reselling the product. In the simplest
scenario the distributor works with a fixed purchasing
and fixed sales price, but there are several variants.
In most cases, the distributor is free to determine the
sales price. In Europe and the US this is often even a
statutory requirement in order to prevent cartel
formation; local exceptions are books, cars or
medicine. This allows the distributor to determine a
premium price depending on his marketing, sales
efforts or distribution, or to offer discounts under
certain conditions. This is the optimum mechanism
from the perspective of value enhancement.
In the sale of products, the difference between
purchase and sales price will define the distributor's
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A fixed sum per type of product
A fixed percentage of the turnover
A percentage of the difference between the
sales price and a purchasing price to be
determined by the supplier
Or a combination of the methods above.

To the extent that the reward is more related to the
sales price, operations will lean more towards the
margin than the turnover. This can tempt a distributor
to neglect less lucrative sales opportunities. For a
supplier this may mean a decline in his market share
or production capacity utilisation. That is why a
reward as a percentage of the turnover can be
effective. However, if this takes the form of a fixed
commission per product, a minimum sales price will
need to be set.
In other cases, the supplier will pursue some sort of
policy in determining the purchasing price. This could
be by offering volume discounts per order, by
introducing purchasing discounts depending on the
annual volume, or by introducing a bonus scheme
that accumulates benefits with each individual sale.
In a network of comparable distributors, another
option is to introduce a competitive element: the best
selling distributor is entitled to a sum of money or
some prize like a holiday trip.