This is the second post out of a series of three posts about distribution channel deals. In my previous post I explained what are distribution channels and why they are so powerful. On this post I’ll elaborate on the different types of distribution deals and how they are structured. I’ll explaining the three archetypes of deals from the customer’s perspective and the marketing perspective.
In regular distribution deals the distributor is responsible for the interaction with the customer, at least until the purchase is made. This means that it’s the distributor who needs to make the sale and collect the payment. Afterwards, it’s usually the product provider who is responsible for customer service and any future interaction with the customer. Although, sometimes it’s also the distributor who’s in charge of that.
Such deals are mostly common when selling tangible products (e.g. a mobile phones store selling iPhones). However, there are also examples of non-tangible products (e.g. software). A good one would be Microsoft’s deal with any retail store that sells a PC with a Microsoft operating system or an Office Package. In this case, it’s the store’s responsibility to sell the product, but after the purchase has been done, the customer interacts directly with Microsoft.
In licensing deals you allow the distributor to offer your service or product directly to its customers. Therefore, it’s the distributors’ responsibility to provide customer service, take care of payment collections or have any other interaction with the customer. The Yahoo-Google search engine deal is a great example. In this deal, Yahoo is paying Google for using Google’s search engine, but the end users are only interacting with Yahoo’s user interface.
In affiliate marketing deals, the distributor sends prospects to your direction. In this type of deals, it’s the responsibility of the company who provides the service or product to deal with the end users and take care of collecting payments, customer service, etc. Amazon Associate program is a great example of an affiliate marketing deal. This program allows any website owner to refer its users to any product on Amazon’s website and earn cash if a purchase was made following the reference. The purchase itself is done on Amazon’s website, and Amazon is responsible for any interaction with the customer. Usually, affiliate marketing deals are open to anyone who wants to join the program. However, there are cases where you may decide that you want to make an affiliate marketing deal only with a specific partner. Usually, you’ll do so in order to protect your brand, since in affiliate marketing deals that are open to everyone, you can’t control how third parties market your product or service.
In white labelling deals, the distributor markets the product or service under his own brand name, and there’s no sign that there’s another company behind it. It’s called ‘white labelling’ since the company that makes the product delivers it to the distributor with a white-label that allows the distributor to put his own branding on it. Naturally, such deals are always licensing deals, since no one knows that there’s another company behind the product. An example for such a deal is the Yahoo-Google search engine deal that was described above.
The biggest disadvantage of white-labelling deals is that you’re not creating a brand and don’t have any contact with the end users. Thus, the distributor has nothing to lose if one of your competitors offers him a better technology, service or financial terms. Hence, white labelling deals mostly make sense when you already have a product or service that is sold directly to the end users under your own brand, and only looking for additional ways to grow your revenues.
In this type of deals, the service or product will be branded under of the distributors’ branding, but the company that provides the technology behind it gets a small “Powered by [company’s name]” recognition. A great example is Yodlee, which offers other financial service providers (e.g. eTrade and Mint.com) a system to aggregate users’ personal financial information from many resources. Any company that uses Yodlee’s services needs to include a “Powered by Yodlee” banner in web pages that use their system. From the customer interaction perspective, ‘Powered by’ deals are always licensing deals.
In this case, the product is fully branded under the name of the company that creates the product or service. Such deals can either be regular distribution deals where some sells the product in their own store (online or offline), or it can be an affiliate marketing deal, where prospects are directed to the service or product providers’ website (like with the Amazon Associate program).
As you can see, different types of distribution channel deals suit different situations. In my next post I’ll describe the four most common financial models of distribution channel deals.