* The Business of Software

A former community discussing the business of software, from the smallest shareware operation to Microsoft. A part of Joel on Software.

We're closed, folks!

Links:

» Business of Software FAQ
» The Business of Software Conference (held every fall, usually in Boston)
» Forum guidelines (Please read before posting!)

Moderators:

Andy Brice
Successful Software

Doug Nebeker ("Doug")

Jonathan Matthews
Creator of DeepTrawl, CloudTrawl, and LeapDoc

Nicholas Hebb
BreezeTree Software

Bob Walsh
host, Startup Success Podcast author of The Web Startup Success Guide and Micro-ISV: From Vision To Reality

Patrick McKenzie
Bingo Card Creator

Payment terms for retailers

I'm starting to get a bit of interest from retailers/wholesalers in various countries, and its time to get my act together wrt to distribution contracts etc. I'm pretty much clueless about how it all works - what the normal terms are for these sorts of deals etc.

One example from the last few days - a retailer/wholesaler in continental Europe, from a country in which I haven't made any direct sales myself. This outfit used to distribute my main competitor, until it was taken over some 9 months ago. He has contacted me, informing me that he has reserved my domain name within his country (i.e. my domain name, his country suffix - slightly presumtious if you ask me), wants to translate/mirror my site, translate the manual etc. Wants exclusive rights to his country, 40% discount and payment terms quarterly (so - I provide him the keys, he gives me the money every 3 months). I responded that we might be interested in principal, but we prefer keys are bought up-front - especially for that level of discount - and that exclusivity would be subject to sales performance/periodic review. He seemed quite unhappy about this - first berating me for talking about business at the beginning of my reply (cultural thing?), then talking about gentleman's agreements being good enough etc.
I'd write that sort of thing off as a one-off, but there have been a few cases like this - people want exclusive rights, and suggesting some sort of contract seems to be taken as a personal insult.

So I guess the question is - am I playing this all wrong from a business perspective, or should I just stick to my guns? This guy was doing about $2.5k a month of the competitor, so not huge but a few more sellers in this range wouldn't hurt right now. Is there some sort of cultural/business practice guide I can read? Is it normal to offer terms (3 months, at that) to companies a long way away that you've never heard of? Terms just sounds like a headache to me - not least the idea that he would be back and forth for each new key, how to collect the cash etc etc.
Anon123 Send private email
Wednesday, November 06, 2013
 
 
We have resellers which is easy - they buy licenses from you for a discount on behalf of their customers.

But distributors are different.  All resellers in the country need to go through the distributor.  That means if you get direct sales to your website from his country, he is still owed his cut.

I don't do distributorships, except in one case, because the distributor can sit back and not do much.  So you definitely want to have a way to review and/or revoke.
Doug Send private email
Wednesday, November 06, 2013
 
 
I got exactly the same offers from some resellers (with every other detail including reserving my website name with .eu suffix), and in an exact same way they got extremely unhappy as soon as I offered to state the minimum sales amount in the contract in return to providing exclusive sales rights throughout the Europe. I find it just ridiculous, and treat it as a scam.
Isso Send private email
Wednesday, November 06, 2013
 
 
"I find it just ridiculous, and treat it as a scam."

I'd like to think so as well, but in my case the people that have contacted me are genuine resellers in a very small niche, and were resellers of my competitor. There's not many around, and the fact that they all seem to ask for the same exclusivity and lengthy terms, and feel affronted at anything other than a gentleman's agreement makes me wonder if I am approaching things wrong. On the other hand, some of these guys don't sell any other software and maybe they think the terms they got from the competitor (which were along these lines) are the way it is normally done? The point is - I myself am not sure how it is normally done!

@doug - there's no way a distributor is getting a chunk of sales that go directly through my site!
Anon123 Send private email
Thursday, November 07, 2013
 
 
General life note:

Gentleman's agreements are between people who have pre-existing and long standing relationships.

You *never* create a Gentleman's agreement with someone you don't know.

Someone you don't know claiming to be offended by your suggestion of a written agreement is trying to play you. What's wrong with having a written record of what you agree to ? Why is that offensive ? It's business.
koan Send private email
Thursday, November 07, 2013
 
 
@koan

My thoughts exactly.
Anon123 Send private email
Thursday, November 07, 2013
 
 
Based on what has been posted here, this is how I break it down:
"my domain name, his country suffix"
-meaningless, unless you somehow never registered yourdomain.com.
Especially outside of the country you are based in or the country that supplies a majority of your business.  First sign this isn't a Grade A distributor.

"used to distribute my main competitor, until it was taken over some 9 months ago"
I assume it was your main competitor that was taken over instead of the distributor, if not, it doesn't matter, this distributor lost the rights to distribute an established, successful product, which is your second sign this isn't a Grade A distributor.  Regardless of who currently owns your competitor, this distributor wasn't doing a good enough job to keep the contract.

"payment terms quarterly"
This makes sense for physical goods where the distributor also inventories product and the average age of inventory plus the payment terms they extend to their customers is three months or more.  Otherwise, the distributor is borrowing money from you interest-free.  For software, this is nuts.  Third sign this is a distributor you don't want to do business with.

"talking about gentleman's agreements being good enough "
That is a sign they aren't gentlemen.  You absolutely need a contract with performance requirements in exchange for exclusivity.  I'll spare you the details, but in my industry much time and money is spent breaking old exclusivity contracts that didn't include terms such as maintaining minimum market share, minimum marketing efforts, minimum level of support provided, and so on.  There is no way you should offer exclusivity to this distributor, even if you think they could provide $250,000/month in revenue.

If this distributor is capable of standing between you and potential customers in the distributor's market area, you could set them up as a non-exclusive reseller as long as you get paid before you hand over a license key.  Offer a percentage referral fee (so the distributor doesn't undercut your pricing) that you can live with, even if you end up providing customer support (because any support from the distributor is out of your control).  A gentleman's agreement might be good enough for that, and this distributor might surprise you by selling some licenses for you in spite of not getting the terms they wanted.  After all, 30% of anything is better than 0% of whatever your competitors are selling.
Howard Ness Send private email
Thursday, November 07, 2013
 
 
Thanks Howard - that's more or less my thinking, although for point one, the competitor has not been available for sale since it was taken over. It is still being revamped by the new owners, and due for re-release very soon. Bad move if you ask me, that has been a gift to us.

I have responded that we won't budge on payment upfront for keys. If he really thinks he can do $2-4k a month, of which he'd get 40%, then it's hard to see why he wouldn't go for it. He hasn't responded, so perhaps he doesn't.

Exclusivity is a thorny one all round - I think I will go with a policy of none from now one. We already have one "reseller" on an informal exclusive basis (small country) who has sold precisely zero copies in 5 months. Won't be doing that again.
Anon123 Send private email
Thursday, November 07, 2013
 
 
They sound like they would be a big hassle to deal with. Reserving a variant of your domain before they even contacted you seems creepy to me. You absolutely want something agreed in writing. Unless you are desparate for sales, I would suggest sticking to your guns. Be very wary of exclusivity - they all talk a good game, but most don't deliver.
Andy Brice Send private email
Friday, November 08, 2013
 
 
@Andy - my thoughts exactly. If I've managed to send this guy into a hissy fit by suggesting a contract and/or wording my email in a culturally insensitive manner, then I could probably do without this relationship.
Anon123 Send private email
Friday, November 08, 2013
 
 
Your post said:
"...first berating me for talking about business at the beginning of my reply (cultural thing?), then talking about gentleman's agreements being good enough etc. ..."

I don't care for this person...

How utterly obnoxious -- he approaches you with a business suggestion that includes terms, then berates you for replying with terms?"  Hello?

If you know they are an established reseller then it may not be a "scam" per Se, but it definitely sounds like an attempt at manipulation.  He wants to pretend like what he's asking you for is so common it's rude and shocking that you're not just giving him your product.  Nice try.

Why would you commit exclusivity to him with no guarantee of volume?  Same with the licenses.  If he won't buy them in advance it's either because he doesn't have the money or doesn't really believe he can make the sales. 

And back to the exclusivity -- what benefit is it to YOU that he have exclusive rights to sell your software in his country if he won't guarantee you any results.  He wants you to relinquish your rights to sell your own product with no assurance that he will sell it and no re-visitation of the terms?  Ridiculous.

40% is a healthy cut.  I suggest you sell the licenses with the percent going up based on the quantity he buys. 

BUT ALSO I would have the agreement say that he can't sell the product for less than your published price so he doesn't undercut you like someone else mentioned.

You don't want to be so rigid you can't do business but he has approached you with a very one sided proposition that is all in his favor and your requests are perfectly reasonable.

BTW what does HE have to lose?  Can he find a competitor of yours to give him better terms?  If not, it seems the cut could be less than 40% and it's still all profit for him once the book is translated.  Everything else he's got seems to be just taken from your effort.

One last thing -- this guy is really getting on my nerves, LOL, but:
Who is he to dictate the percentage and terms.  Perhaps YOU have a "cultural thing" where you need to be asked how much you're willing to pay as opposed to having a stranger tell you how to run your business.  Just saying.

OK, one last LAST thing - -gentleman's' agreement?  Nonsense.  A gentleman would welcome a contract in writing so the other party would be comfortable to move forward with confidence.
Emily Jones Send private email
Saturday, November 09, 2013
 
 
Thanks Emily - I think you have articulated my approximate thoughts. Although it'd be great to have another reseller in a new country, I'm not sure I can be bothered with this guy. I just wondered in my original post whether I was way wide of the mark in asking for up-front payment etc - credit terms for a small company far away sounds like a headache to me.

I did respond and offer the same discount on half the number of licenses (25) and the response was:

"I do not know if I understand your terms well. I should pay around $1800 and then put a few more weeks on the web page and manual of XX. Then write a two page article in the most widely read XX magazine in XX?
...I really like your product but at this time and under such conditions I do not see opportunities for cooperation with you unless you propose something else."

Bear in mind that I suggested/asked for none of the things he mentions - website/manual/article, although that might be the kind of thing he would want to do as a reseller to sell more copies and get his 40%. I think there is a cognitive dissonance going on here - this guy contact me, after all.
Anon123 Send private email
Sunday, November 10, 2013
 
 
"cognitive dissonance going on here"
More likely, using intimidation as a negotiating tactic.  Which probably worked for him once in the past.
Howard Ness Send private email
Monday, November 11, 2013
 
 
Well the way he phrases things definitely sounds "foreign" so it's possible he comes across more strident than he intends to simply due to the language barrier.

If you are not selling anything in his country and have no intention to proactively seek out someone else, I might try something like this (assuming it works for how you license):

If he can't buy the licenses in advance at a discount, then you will give him exclusivity for a trial period and he can buy them as he sells them.  Maybe even give him as long as a year (since you're not planning to go elsewhere).  That gives him time to recoup from his marketing investment.

But the discount, per year, is graduating like:
10% for the first X sales
20% for the next X sales
40% for the rest

I have sold software as a reseller for companies before and they all did graduating discounts like that.

If he has been as successful selling your competitor's software as he claims then this arrangement should look very attractive to him.

And it is your company's policy to have an agreement in writing to ensure there are no misunderstandings.  (Though it's probably not easily enforceable across countries either way.)

Of course you can also just decide to go find someone else in his country (and other countries) to sell your software.  I don't know how one goes about that.
Emily Jones Send private email
Tuesday, November 12, 2013
 
 

This topic is archived. No further replies will be accepted.

Other recent topics Other recent topics
 
Powered by FogBugz