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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

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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

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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

http://www.businesscounselorinstitute.org/

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].

mailto:[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


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).


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).


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.


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.


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.


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.


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.


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:


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.


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


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).


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).


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).


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.


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).


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).


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).


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


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


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


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).


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.


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


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).


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


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


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

https://seproject.org/product-development-and-commercialization/

https://seproject.org/product-development-and-commercialization/

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