Exclusivity Agreements

Pricing is very important in any negotiation but Terms and Conditions can be equally important as well.  For example, as mentioned in my article on Capacity Management, the amount of supply that you provide to a customer is as equally important as the price you offer.  There are other Terms and Conditions such as time commitments to produce and deliver products or services, other service-level agreements, and so forth that all affect your profitability.

But one condition I do not agree with is Buyer’s Exclusivity.  Putting on my hat as a purchaser for a moment, our lawyers would often want exclusivity agreements in just about any major purchase.  It is in their playbook to demand the seller cannot offer their software to others in the industry if we buy their software.  There may be benefits for exclusivity clauses in certain cases but when it comes to marketing, pricing, or revenue management solutions I have a different point of view.  What some may not understand is that exclusivity clauses can be quite detrimental to their own company.  Lawyers and upper management think they are protecting their company but in fact, they may be harming the company and industry that they work in.  I often had to lobby internally to get them to drop those exclusivity demands.

I am not in favor of exclusivity agreements, either as a buyer of software or technology, or as a seller of software or technology.  There is a saying that a chain is only as strong as its weakest link.  The same can be said for pricing, that is the worst thing that you want is a stupid competitor.  You could have the best pricing strategy and best technology but if your competition does not then customers will drift to them because they are giving their products or services away due to lack of knowledge.  In other words, they are destroying the market.  The best thing for the industry is if all players in the market have the same knowledge and technology.  The market is only as strong as the stupidest competitor!

Putting on my seller’s hat again, If exclusivity becomes a major sticking point, then follow these steps:

1. Discuss with your business contacts in the client’s company and get them to talk to their lawyers.  This will often work if your business contacts are higher up in the company. 
2. Always try to limit the exclusions.  There are several ways to do this.
   1. If, for example, you are dealing with a trucking company then limit the exclusivity only to trucking companies. Not airlines, shipping lines or warehouses, etc.
   2. Negotiate a period such as one year or two years, not indefinitely.
   3. Implement geographic exclusions such as in the UK only, or in the US east coast only, or Western Japan only, but not globally.
   4. There are “silence agreements” that can be discussed as an alternative (Non-Disclosure Agreements or NDA).  This means that you cannot mention you are working with Company ABC to other potential clients in the industry.  And you should limit that NDA by time.
   5. You can even try to limit the exclusion to software running on specific operating systems or hardware.
   6. Other, other, other.  Whatever you can think of to limit the exclusions.

3. You should know your walking away point.  This may be a deal-breaker, but it may benefit you in the long run.  Today’s exclusivity agreement can become tomorrow’s nightmare when trying to sell to other companies.  Do not get addicted to a short-term revenue drug at the expense of your long-term revenue growth.

Take-aways

Exclusivity clauses can be harmful to the industry and to the client’s own business.  Having competitors that lack the same technological knowledge may result in decisions that damage the market.   Educate your potential customers that exclusions are harmful to their industry.

If unavoidable, exclusions should be limited.  Always limit any exclusivity clauses any way possible based on time, industry, geography, operating system, hardware, etc.  And know your walking away point to protect your future revenue growth.