An Exclusive Agreement: Will It Drive Your Education Sales Goal?
2 Dec, 2016
Looking for a Way to Sell To the K-12 Market?
It’s widely acknowledged (and covered deeply on STS) that distribution – finding a pathway into the education market – is the bane of many entrepreneurs who are trying to bring impactful products to K-12 schools. Often, the founder/inventor thinks he’s created a product that will change the face of education. Or, he may have created a widget that will he believes will make every teacher’s life easier. But the challenge remains, how will he get the product into the buyer’s hands?
In a related article you'll find here on STS titled "Selling To Schools With Independent Reps and Resellers" I covered many K-12 channel options, including employing a direct sales force, using resellers, hiring independent reps or creating a relationship with a distributor that has a solid track record in the school market. Now, we’ll focus on the big challenge: structuring agreements with channel partners and decisions you may need to make regarding exclusivity.
Exclusive K-12 Distribution Deals: The Give and Get Evaluation
Like any business deal, the question of exclusivity really boils down to a “give and get” evaluation. What will you get, and what will you give up? Usually, if you relinquish control of your sales process to a third party, regardless of whether that group is a large organization, like the big education publishers Pearson or McGraw-Hill, a regionally-focused reseller, or even an independent rep, there are definite “gets” you can ask for. In order to determine if the “gets” are worth the “gives,” consider your end goals and the some of the possible gets and gives. Let me cite a few examples based on my experience.
Some “gets” of an exclusive K-12 sales agreement
Faster ramp-up for sales. Established players are positioned to offer their customers new products, so you need to carefully consider whether the distributor's customer dovetails with your ideal buyer. If not, you won’t derive the benefit you hope for, and exclusivity could be a costly mistake.
Time to build your own K-12 sales organization. A quick infusion of resources is by far the most common "get" that newcomers to the education market expect from exclusive distribution agreements. Early stage companies, looking for cash, want established third parties to promote and sell their product because the validation (and resources) that come with a distribution deal establishes the value of their offering to potential investors. Having a sales channel makes it more likely that you will be able to secure the funds you'll need to build a sales organization and regain control. If this is your logic, make sure you have a long-term plan for how and when you want to make the move.
Potential buyer for your education product or company. Be careful if you expect to get a buyer by way of an exclusive deal, because sometimes this strategy works, and other times it backfires. I know of situations when there was an exclusive distribution agreement and the products integrated well – so much so, that the distributor decided to buy the product outright. In other situations, the distribution relationship was strong and lucrative for several years, but then the distributor abruptly dropped the line. The influx of sales on which the developer depended came to an end. The developer's product was so closely aligned and promoted so well by the distributor that when they dropped the line, everyone was surprised to learn they hadn’t owned it! The publisher was left without a sales channel, a disruption from which there was no opportunity for recovery.
Cash infusion. Some entrepreneurs enter into questionable contracts with established distributors because they are afraid to hold out for the right offer and because they need a “guarantee.” The guarantee is the amount of money someone is willing to pay up-front for exclusive distribution rights. And when the fit is wrong but the cash is right, what is the typical result? What I've seen is false-starts to the sales effort that set the publisher/developer back a full year with market development plans, a missed purchasing cycle, and a painful restart for the distribution hunt. In other words, it's "back to go" and they use all the cash from the guarantee to stay afloat while restarting sales. So, make sure if you do any exclusive deals that there is enough cash to show good faith on the part of the distributor but also enough cash to protect you if the arrangement doesn’t work out.
Some “gives” in exclusive education market deals
Loss of control over your own sales. If you’re looking for investment capital to enter the K-12 market, keep in mind that most investors are very cautious, and they hate to see a company give up control of sales and marketing with an exclusive deal. Investors want assurance that you know how to sell your own product to the schools and that you are free to do so. Think about this not only in terms of your first product, but consider your overall plan and determine how the choice to give up control might impact the success of your future products.
Broken relationships with K-12 customers. If you have a product that requires complex integration, you’ve got a shot at maintaining your customer relationships even in an exclusive sales agreement. But, that’s not always the case. I've seen situations when the developer doesn't know who their customers are beyond the information on institutional purchase orders. This particular issue, losing control of customers, can be a big “give” if you decide to change your channel strategy later. The customer relationship is one of the biggest assets any company has. If you don’t structure agreements carefully you’ll give up more value than you realize. It's not just the potential revenue you might give up, think about the value of getting product feedback directly from your customers. If you move a step away, you’ll hear their feedback through the filter of your distributor, if at all.
Missed opportunities to find your best K-12 channel partners. By contracting with a single partner to build out your education business and by excluding others, you miss the chance to evaluate options for building your sales and marketing capacity. The exclusive partner may be particularly strong in one area of the school market but weaker in others. That may be a segment of buyers (like curriculum administrators) or a geography (a single state or a region). It’s unusual to find the perfect partner who can sell to all your potential markets. Consider trying several before zeroing in on one, like dating before marriage.
Having your eggs in more than one basket. Think about having one client that accounts for almost all your business and what you must give up to keep that client happy and engaged. Think about what you have to do to stay top of mind with that client, and what happens if the client’s interest shifts to another provider. The same scenario may unfold if you have an exclusive channel relationship. If you’re thinking that your answer to your K-12 sales woes is to put your product into the book bag of a big education publisher, like Pearson or McGraw-Hill, be prepared to figure out when and how your product will be the first one pulled out of their bag, what their reps will need to know about your product versus the myriad of others they sell, and why they would care about selling yours. Also think about how branding and marketing will be done to leverage your brand and theirs: not impossible - but not easy!
Exclusive Deal? Here's One More "Get": A K-12 Channel Consultant
In conclusion, there are some scenarios when an exclusive distribution relationship makes sense, but not many, and not without a price. Be sure when you’re evaluating a channel opportunity, weighing the gives and the gets, that you’ve got a third party listening, someone with business savvy and background with building partnerships. Better yet, seek counsel from someone who understands the K-12 sales channel "lay of the land" and knows the education market — someone who supports you and provides sage advice. Having this "get" — expert help — means you will more likely see the "gets" of your sales agreements and less likely to be surprised by the "gives." Proceed with caution!
Farimah Schuerman is Managing Partner at Academic Business Advisors. She specializes in the business of educational technology and has helped hundreds of education companies bring new products to market while providing guidance for sales, marketing, product development and many other pivotal areas. She is active in many education industry professional associations.