Best distribution contract terms
Based on more than two decades negotiating distribution agreements for doing business in Japan with resellers, distributors and trading companies, I recommend the following list of best-practice distribution contract terms:
- Transfer fees calculated on net revenue, not on your head-office price-list.
- Transfer fees to include not only product sales but any support, maintenance and ongoing consulting provided with your products.
- Floor or minimum price.
- Price-list with a schedule of maximum discounts.
- Restriction on the use of sub-distributors or the total percentage retained by sub-distributors (especially if they are subsidiaries of your distributor).
- Guaranteed minimum transfer fees paid quarterly.
- Monthly submission of exact in-progress sales forecasts and monthly (at minimum) review of those sales forecasts.
- Terms to make sure you do not take the full hit of any adverse exchange-rate fluctuations.
- Direct access to key customers, thus allowing direct product feedback to occur, because you do not want precious and valuable feedback going through the unnecessary filter of your distributor’s management chain.
- Direct access into a secured zone of the distributor’s CRM to allow you 24/7 up-to-date account and forecast data irrespective of time-zone differences.
- Minimum level of advertising required to properly promote your product (such as, at least 5 magazine advertisements per month, a dedicated website, etc.).
- Minimum staffing level required to properly promote your product (such as, a full-time salesperson, full-time marketing person etc.) and preferably name them in the agreement.
- Minimum performance criteria with clearly stated terms for termination for non-performance.
- Minimum performance terms required to keep any exclusivity.
- Protection against being used as a loss-leader (e.g. minimum prices etc.).
- Protection against your distributor quietly developing a competitive product to your product (while of course using your product to build their future customer base!).
A last comment: In addition to skilled contract negotiations at the outset, a Japanese distributor relationship needs close and local monitoring if it is to produce consistent revenue and profits and not degrade into a frustrating mess with a very negative effect on your Japanese market brand image. In fact, to properly support a distributor you will probably need to set up a Japanese office and very often it will need almost as many local staff to support the distributor as to sell direct. I suggest that before starting any distribution contract negotiation, you carefully consider the real benefits of setting up a Japanese subsidiary company or office to do direct sales in Japan. Only after eliminating the direct sales option would I consider committing to a distributor-only strategy.