Distributor Localization

For many years the most common business model to reach global markets was to work through local distributors. In exchange for a relatively large percentage of local-market sales, distributors would localize products and handle all sales and marketing. This model has the following advantages for product developers:

• Easy market entry. Since local partners with good market knowledge handle the localization, sales and marketing, there is little up-front cost to developers.
• Simpler legal structure. Developers do not need to set up offices or subsidiaries in local markets where sales potential may not justify greater investment.

These advantages were particularly attractive when product development tended to involve less need for up-front internationalization and when product life-cycles tended to be longer. However, market entry through distributors has a number of disadvantages:

• Isolation of internationalization and localization. When distributors handle localization there is a natural tendency for internationalization to be ignored since the developer does not see the advantage of an investment in internationalization. This disconnect results in down-stream problems and decreased quality, impacting brand perception.
• Lack of international brand control. Distributors will generally build their own brand over that of their partners since they need to cultivate their own business interests. Developers working through local distributors thus find that their brands are often represented inconsistently between markets or even in ways that are harmful to overall strategies.
• Decreased revenue. The flip side of lower market entry costs is lower market potential. Developers localizing through distributors often get a fraction of the revenue they could earn by selling their products directly in local markets. Of course, direct market presence is associated with higher direct costs, so potential revenues must be balanced against market costs.

Although the global market has swung away from distributorship as a localization market, distributors are still an attractive option for companies that lack the resources to establish direct presence or for companies entering smaller markets that may not justify a direct investment.