Distribution Strategy for Medical Device Companies Fails When Capital Equipment Goes Through a Distributor

Distribution strategy for medical device companies comes down to one decision, which is whether to sell direct or sell through a distributor. The right answer changes with what you're selling.

Three guests on The State of MedTech covered the trade-off. One covered what direct sales cost, one covered why capital equipment struggles through a distributor, and one covered how to choose a distributor.

Key Takeaways

• Daniel Hawkins of Avail Medsystems says 20% to 25% of every sales dollar in large and mid-cap medtech goes to direct distribution costs, a figure drawn from about 30 years in the industry.
• A distributor rep earns the same commission on a fast-selling disposable as on a capital sale, which is why I don't recommend distributors for capital equipment in the United States.
• Tom O'Neill of Cognivue says distributors can still add value as a lead generation channel, paid for leads and then paid more for leads that close.
• Belal Al-Khatib says a startup entering a market like Saudi Arabia will have to use distributors, because investing directly in one market costs too much.
• Al-Khatib says specialization beats size, so an orthopedic company wants a distributor focused on orthopedics and not one with a large diagnostic imaging business.

Direct Distribution Costs Eat 20 to 25 Percent of Every Sales Dollar

Direct sales is an expensive way to reach buyers, and Daniel Hawkins puts a number on it. He says 20 to 25 percent of every sales dollar in large and mid-cap medtech goes to direct distribution costs, and some companies spend more.

I interviewed Daniel Hawkins, CEO of Avail Medsystems, on an episode about why surgical telepresence is the future of medical sales. He explained why he left Shockwave in 2017 to start Avail:

"A significant portion, between 20 and 25%, of every sales dollar in medtech, large and mid-cap medtech on the public side, and even higher in some other company, is spent in direct distribution costs."

That figure comes from his own experience, and he didn't cite a source, though he has spent about 30 years in the industry.

He said the reps behind it are crushingly good at what they do, but they can't get everywhere they need to be. They spend a lot of time in cars and waiting for procedures.

He added that those reps can't be doubled, tripled, or quadrupled to grow the top line.

Hawkins said the model has barely changed since the first medical device companies. The industry trained customers to expect a rep in the room, and early profitability paid for it.

As profitability gets squeezed, the number of facilities to serve goes up, but the headcount has to stay the same. For the hiring side of the direct model, I wrote about what founders get wrong when hiring their first sales reps.

Why Does a Distribution Strategy Fail When Capital Equipment Goes Through a Distributor?

A distribution strategy that routes capital equipment through a distributor usually underperforms, because a distributor's incentives point toward whatever sells fastest and pays the same commission. Capital equipment rarely wins that comparison.

Tom O'Neill, CEO of Cognivue, and I discussed this on an episode about medical device sales leadership. He'd just described changing his reps' compensation so that 24 and 36-month contracts paid out more than a 12-month contract.

The incentive worked. He said they sold more capital on 36-month contracts in four months than in the previous four years.

I connected that to distributors, and I said that in the United States, at least:

"I don't recommend people using distributors for selling capital equipment, because the incentive isn't that strong."

The logic comes down to the choice a distributor rep faces. They can spend a long time trying to sell one piece of capital equipment, or they can sell a low-cost disposable implant in high volume and make the same money.

A rep paid on commission picks the faster product.

O'Neill agreed. He said capital isn't a great model for a distributor or a distributor rep, because they're looking for consumption and disposables.

The conversation also covered payment terms. Distributors are sometimes paid net 90 or net 120 by hospitals, which makes taking on capital a big risk to their business.

I made the same point about large partners on another episode. When I've seen a medtech company in the United States use a large device company as its distributor, it never goes well, because your product competes with everything else in the rep's bag.

Distributors Can Still Add Value as a Lead Generation Channel

Distributors don't have to sell capital equipment to be useful. O'Neill says you can use them as a lead generation channel, paid for leads and then paid more for leads that close.

He offered the alternative on the same episode:

"I think you can use distributors as a lead gen model. So pay them for leads, and then pay them for a lead that closes."

I asked how to agree on a cost per lead, which most people don't know how to calculate. He said it depends on the price of the product, and that this can work whether it's a SaaS model, a subscription, a per-device sale, or capital.

A lead that closes is the valuable one, he said, and a bare lead isn't. The supplier has to profile what a successful customer looks like, because a distributor rep who doesn't know what to look for just puts names in.

A bare name doesn't interest him, because he could put inside sales on it or buy a list.

What matters is a warm or hot lead that the distributor has already qualified. O'Neill's reps close it, and a closed deal gives the distributor a bigger incentive.

That ties back to his view of reps. Salespeople are performance and compensation driven, he said, so the incentive you put in front of them decides what they do.

I agreed with him. The more sophisticated we get at selling, the better the results, which is part of why I started my company.

Startups Default to Distributors in New Markets and Should Choose Specialists

In a new international market, a startup usually has to use distributors, because investing directly in one market costs too much. Choose a specialist over a big name, because a distributor carrying a hundred brands has little reason to push yours.

I interviewed Belal Al-Khatib, a sales leader with experience across Europe, the Middle East, and Africa, on an episode about selling capital equipment in Europe. I asked whether a startup should go direct or use distributors, and he answered:

"If you are a startup, you're going to have to go distribution, because it would be too costly to be able to invest in that one single market."

For a market like Saudi Arabia, he said, a product that needs heavy clinical support should have one or two people in the region. Otherwise he'd work through distributors and push them to introduce the technology to the right places.

To find good distributors, he said to ask regional managers at multinational companies who they use. Then go one level deeper and ask whether the distributor is specialized in what you do.

The old assumption was that the bigger the distributor, the more it had to offer, and he said that's shifting. He explained what to look for on the same episode:

"If you're an orthopedic company, you want somebody who's focused on orthopedics, not someone who has a large diagnostic imaging business in the capital world."

A broader distributor is less willing to focus on the smaller parts of its business, because they don't generate enough profit.

He added that a well-connected KOL will tell you who the good and bad distributors are. I wrote about how to find key opinion leaders by targeting several micro-influencers.

What Does This Mean for Medtech Founders?

In my experience working with medtech founders, distribution strategy gets treated as a single decision when it really depends on two things, what you're selling and how far along the company is.

In the United States, I'd keep capital equipment direct, because distributor incentives work against it. Disposables and early international expansion can make financial sense through distributors, provided the distributor is specialized and not broad.

Hawkins's number is a reminder that direct sales carry their own cost. Plan for both models, and decide market by market.

The other mistake is assuming a bigger distributor is a better one. Al-Khatib called that the primary mistake he sees, and he said niche distributors often deliver value in a much better way.

To find them, skip the big general shows. He said specialized distributors exhibit at the national meeting of the relevant specialty society, such as a neurosurgery society.

If you do use distributors, ask how specialized each one is in your category before you ask anything else. Define what a qualified customer looks like before you sign anyone, and pay for leads that close.

The four disciplines of medical device marketing strategy cover the groundwork that should happen before either model gets built out.

Frequently Asked Questions

What is a distribution strategy for a medical device company?

A distribution strategy is the plan for how a company gets its product in front of buyers, either through a direct sales force or through third-party distributors.

The right model depends on product type and stage. In the United States, capital equipment generally favors direct sales, while disposables and new international markets often favor distributors.

Should a medical device startup use distributors or sell direct?

Startups usually have to use distributors in new international markets, because building direct infrastructure market by market costs too much early on. Al-Khatib said a startup entering a market like Saudi Arabia will have to go distribution.

Where a product needs heavy clinical support, he'd add one or two people on the ground to train and support.

Why do distributors struggle to sell capital equipment?

A distributor rep can earn the same commission selling a low-cost, high-volume disposable as selling one piece of capital equipment. The disposable is faster, so the rep favors it.

Distributors are also sometimes paid net 90 or net 120 by hospitals, which makes capital a bigger risk to their business.

What should a medical device distribution agreement cover?

The guests didn't discuss contract clauses, but they described what to build into the relationship. O'Neill pays distributors for leads and then for leads that close, and he defines what a qualified customer looks like.

Al-Khatib looks for specialization and for a distributor who can open doors and who understands the clinical value.

Where Should You Go From Here?

If you're doing this yourself. Read the market engineering framework to see how distribution decisions fit into the commercial sequence before launch. Then listen to The State of MedTech for more conversations with sales leaders.

If you want it engineered with you. MarketCraft takes on a small number of medtech teams each quarter, starting with The Market Engineering Audit. It checks whether your gap sits upstream in the category or downstream in sales.

Listen to the Full Conversations

• Why Surgical Telepresence Is the Future of Medical Sales with Daniel Hawkins, CEO of Avail Medsystems
• Medical Device Sales Leadership Lessons from Tom O'Neill, CEO of Cognivue
• How to Sell Capital Equipment in Europe with Belal Al-Khatib

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About the Author

Omar Khateeb is the founder of MarketCraft and host of The State of MedTech, the number one podcast in the medtech industry. He works with medtech founders and commercial leaders on market engineering, commercialization strategy, and revenue growth.

Visit marketcraft.ai or subscribe to The State of MedTech for weekly conversations with the people building the future of medical devices.