Once a firm decides to enter a new international market, they need to determine how. The best way to enter a new market in which a firm has no prior (or recent) experience is to go through a channel (indirect) partner. Working with an international channel partner offers many benefits, has a few downsides, and presents its own set of challenges. Nonetheless, entering a new international market via an indirect channel partner is the best course of action until that firm can take the time to thoroughly understand the market and develop a direct sales force.
There are many positive benefits to working with an international channel partner. The primary benefit is that it is much cheaper than having a direct sales force. Another major benefit is that the partner can localize and market the firm’s products locally in the actual country on their behalf. A partner may also help to increase sales by bundling a firm’s products with additional features or services (known as a Value-Added Reseller, or VAR). In addition, a channel partner can introduce the firm to a slew of new customers to whom they would not have had access otherwise. Finally, a channel partner can be instrumental in helping firms navigate cumbersome governmental and regulatory frameworks. Several US-based medical device firms that I have worked with have told me that it is the ability to open governmental doors in which they see the greatest value of international channel partners. This ability is especially true in countries like China where the government continues to play a central role in the economy.
On the flip side, there are a few downsides to working with an international channel partner. The biggest one is that they keep firms further away from the customer. By selling to end-users through third-party channel partners, firms are not directly interacting with them and thus, have more limited access to crucial market research data and on-the-ground intelligence such as customer buying habits and needs, and optimal price points (it can be up to the partner as to whether or not they wish to share that information). A major US-based medical device firm that I have worked with mentioned that because they solely rely upon channel partners in a few Middle Eastern countries, they don’t always have access to the most up-to-date market research and thus, sometimes have to rely heavily upon historical data. Another downside is that many products and services often require sales people with a high degree of specialization or deep industry knowledge in order to understand the customer’s needs and thus, be able to sell to them—something many channel partners are unwilling to invest in. One financial services firm that I have worked with mentioned that the most successful sales people are often able to diagnose the customer’s pain points and offer mitigating solutions by speaking to the customer in industry-specific jargon.
There are several challenges in managing international channel partners when entering a new foreign market. The first one is ensuring an alignment between the way products and services are sold and the way they are purchased. For example, if affluent customers in Vietnam see high-end watches as exclusive, then the firm producing those watches needs to ensure that the partners only permit those watches to be sold in exclusive, high-end shops where those affluent customers would purchase them—and not in mass merchandise where houses. Another challenge is that, in their own self-interest, distributors can sometimes over-represent themselves. When I worked in health care IT, one of our distributors tried to bypass our firm (the parent firm) and negotiate arrangements directly with a major medical device firm—even though they were just a distributor of our products. Finally, another challenge is consistently staying on top of channel partners’ minds. Most third-party channel partners distribute several companies’ products and while they obviously want to sell as many products as possible, other firms’ products may offer them more value (e.g., higher margins per product, the opportunity to improve relations with a particular governmental institution, etc.). It is in the firm’s interest to ensure that the partners don’t solely focus on other products, but their products as well.
Overall, while there are a few downsides and challenges to utilizing an international channel partner, the upsides outweigh the downsides and it is a much more cost-effective option (from a cost of sales vantage point, this goes very well with finance!). Once a firm has established a small market presence in the new country, has a better understanding of the market and sees huge growth potential, then they should determine exactly when to reduce–but not eliminate–dependence upon these third-party channel partners and establish a direct sales force located in that country.