Incentivising distributors – key contractual considerations

Distributors and resellers (Distributors) are often independent agents who enter into an agreement to offer and sell a product or service for another business.  Given that many Distributors work externally to the main business, and directly affect its revenue, it can be practical to implement methods to help motivate the agent to achieve a certain result.  This article discusses the benefits of incentivising Distributors and provides an overview of various incentive methods that could be used.

Why incentivise Distributors?

Distributors are often on the front line selling a company’s product or service (Offerings).  They know their local market and customer needs.  Incentivising Distributors helps to promote positive behaviours that increase sales volume and overall company growth.

Incentive programs should aim to promote the following behaviours amongst Distributors:

• increased overall sales volume;
• reduction in old inventory;
• acceleration of new product adoption;
• increased market penetration through referrals;
• increased sales for high margin products; and
• improvement in overall marketing and brand recognition.

Incentive programs could be implemented so that the Distributor can achieve the reward once they attain certain mutually agreed upon goals and key performance indicators (KPIs).  Allowing the Distributor to have visibility of KPIs being tracked ensures they are aware of what must be done to achieve a reward.  It is also effective to escalate the incentives, so the more a Distributor sells, the greater the reward.

Types of incentives

A variety of methods may be used to incentivise Distributors to increase productivity, sales and brand recognition.  These are summarised as:

• Distributor incentive program;
• customer incentive program;
• vacations;
• gamification;
• training incentives; and
• non-monetary rewards.

Distributor incentive program

Monetising sales is an extremely effective way to incentivise Distributors and drive Offerings through the sales channels.  This type of program allows the Distributor to receive money back in return for meeting specified purchase conditions.  It is effective at inducing a desired behaviour, such as increasing the volume of sales made by the Distributor.

An example may be to reward the Distributor with a cash value in exchange for meeting a particular dollar value in sales.  Alternatively, the Distributor could receive a percentage of all sales they make.  Bonuses in exchange for meeting certain KPIs can also drive overall business sales.

• Sales Performance Index Funding Formular (SPIFFs) are a type of sales incentive, where the individual Distributor receives a reward based on a percentage of the sale.
• Channel rebates are also useful and reward a Distributor based on the order frequency or size, usually for a specific product.

Distributors who receive a small, immediate bonus for closing a sale are likely to be inspired to reach their sales goals.

Customer incentive program

A customer incentive program is something that could be offered directly to clients who purchase Offerings.  This type of program incentivises Distributors as it encourages traction with consumers.  The customer rebate program ideally attracts more interest from consumers, meaning it is easier for Distributors to explain the Offerings and how customers can achieve rewards.  As a result of the reward program, consumers are more likely to want to engage and it makes achieving sales easier for the Distributor.

A customer incentive program could include:

• a rebate;
• a discount on future products;
• prepaid incentive or gift cards;
• VIP access to particular service features;
• customer loyalty gifts; and
• referral incentives.

Vacations

It may be an option for a company to offer rewards to Distributors in the forms of vacations, such as a one (1) night stay in a local hotel, or a weekend getaway, in exchange for achieving a certain goal.  A company may set regular vacation rewards that are “up for grabs” by Distributors, meaning there are regular times of the year that these prizes are available.

These types of incentives often boost motivation and encourage Distributors to get creative in their sales techniques, to achieve the desired KPI.  The vacation may be offered in exchange for meeting certain KPIs or may be “purchased” by the Distributor in exchange for points earned through competitions, discussed below.

Gamification

Salespersons are often competitive, so hosting contests can induce fun and break the monotonous pattern.  Presenting contests are likely to encourage Distributors to work harder to achieve a greater volume of sales, so that they earn more points toward the competition.  Distributors may be awarded points in the contests, which can be redeemable for cash or other prizes offered by the company, such as vacations, an Offering or tickets to an event.

A company could vary the types of competitions held and change the KPI targets as relevant.  For example, one contest may relate to a certain dollar value achieved in sales, whereas another may reward the Distributor who has achieved the highest number of new customers.

Training incentives

If it is important for Distributors to be knowledgeable about a particular Offering, ensure they have the support they need to sell such a product to end-users.  It may be appropriate for the company to offer incentives for completing training programs, quizzes, attending conferences and trade shows, and gaining certification in a particular area.

Non-monetary rewards

In addition to the proposed incentives above, a company could offer non-monetary rewards for Distributors.

Some examples of non-monetary rewards that may be offered to Distributors include:

• featuring the Distributor on the company website or newsletter;
• inviting the Distributor to a special event relating to the company’s business or industry;
• sending a personal thank you letter to the Distributor;
• giving the Distributor a physical gift; and
• hosting an awards event to recognise Distributor performance.

Measuring performance and ensuring accountability of Distributors

In order to obtain a benefit from an incentive program, it is important that the business measures the performance of the Distributor.  This should be done by identifying relevant KPIs and tracking them in a measurable format.  The client should have access to the KPIs and receive feedback on such, so they can monitor performance and know what needs to be done to meet a particular goal.

Takeaways

Incentivising Distributors can help to increase productivity, revenue, market penetration and brand recognition.  These incentive programs and tips are provided as general advice only and may not be appropriate for your particular company structure.  This article has not considered how the incentive programs could impact on the company’s revenue or tax requirements.

Links and further references

Cases

Workplace Safety Australia v Simple OHS Solutions Pty Ltd [2015] NSWCA 84

Further information about incentivising Distributors

If you need advice on incentivising Distributors, implementing incentive programs, or addressing related contractual issues, contact us for a confidential and obligation-free discussion:

Disclaimer

This article contains general commentary only.  You should not rely on the commentary as legal advice.  Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.

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