Exclusivity: Always Requested, Given Carefully

Quick Summary: There can be positive benefits in agreeing to exclusivity and some significant downsides as well.

Abstract:

Using personal relationships as a model, it is not uncommon for channel partners to request, or even demand, exclusivity.  In some cases, it may be warranted.  However, think through the implications carefully and make sure that fair and reasonable bi-directional accommodations are present and enforceable.

For most of us, we expect exclusivity in our personal relationships, both given and received.  However, exclusivity in business relationships, defined as working with one and only one partner, is not as common.  Take, for example, products in retail stores.  In most cases, identical products at different prices are available in many different stores.  Consumer appeal and differentiation, when it exists, is derived from other factors besides the product itself.  When negotiating with distribution channel partners, it is not uncommon for them to request exclusivity in the earliest stages of partnership discussions.  Furthermore, they may view exclusivity as a one-way commitment in which you agree only to work with them, and they do nothing exclusive in return or guarantee satisfactory results.

This request, from their perspective, is both reasonable and logical.  After all, they are making a resource investment in you and requesting an exclusive arrangement is a method of protecting that investment.  Not only will they be investing their time in introducing your product or service to their organization, they will also be risking their reputation with their customers.  Both of these issues are also opportunity costs. While agreeing to work with you, they are not working with someone else.  In virtually all cases, the channel partner will have other products or services to sell.  If they are not successful with yours, they may view it as a minor inconvenience, not a potentially fatal situation as it probably will be for you.  If you agree to an exclusive arrangement, your future revenue success is totally in their hands.  If they do not embrace the product or service, actively market it, and deliver the results you expect for any number of reasons, you will have no alternative.  Hand-shake agreements and promises of best efforts simply cannot prevent lower than expected performance from occurring.

The channel partner may have a unique position and be the best bet for reaching prospects but perhaps not.  They may be well positioned with prospects of a certain size, market segment, or region but may not have relationships with other prospects.  Their request for exclusivity may be based on their knowledge that they are not the best choice for you in certain, or perhaps, all markets.  They may be viewing your product as nothing more than a new arrow in their product portfolio quiver to differentiate themselves from their competitors with no real plan to actively sell it.

Ideally, politely but firmly rejecting any initial requests for exclusivity is the best course of action indicating that the issue is not negotiable.  However, it may not be possible to take such a hard line position due to your small size and newness, coupled with their larger size and dominant position.  They may terminate discussions or even threaten to work with one of your competitors if you do not agree to their exclusivity terms.  An alternative approach is to use Quid Pro Quo logic (i.e. “something for something”) argument.  Unfortunately, logic is not persuasive.  Large established firms are likely to overvalue themselves and undervalue you.  Suggesting limiting terms that only would have an impact if the channel partner does not meet expectations can play to their confidence (“ego’) while providing you with some protection.  This can be accomplished by asking for limiting terms and recourse if their performance does not meet mutually agreed expectations.  Some suggested conditions that you may want to ask for in an agreement are:

  • Limited duration, extendable by mutual consent or cancellable by either party with some notice period
  • Restricted to a region, market segment, or perhaps even certain customers
  • Minimum quantity commitments with a “take or pay” clause in which the channel partner agrees to sell some dollar amount or pay the company the gross margin equivalent of the expected sales
  • Bi-directional exclusivity in which the channel partner agrees not to resell similar products
  • Provisions that require certain levels of activity such as proposal generation, bid response, prospect trials or demonstrations

Another approach is to appeal to their egos and their envisioned success following the logic that “if you are as successful as we are confident you will be, neither of us will need to consider other alternatives.”  Following up this approach with the suggestion of a “dating period” in which both companies work together to help insure that both parties can meet each other’s expectations may be an effective way of delaying or eliminating the entire exclusivity discussion.

In addition to requesting exclusivity, channel partners can also request other terms such as right of first refusal, most favored nations pricing, non-compete, and non-solicit clauses for other partners or customers.  Treat those clauses the same way as you treat exclusivity. Reject them or ask for something in return.

Always keep in mind that partnerships are not like fine wine. They do not necessarily get better with age.  If the relationship begins with a rocky start, chances are that it will not magically improve.  Partnership “divorces” are always tough on both parties.  Avoid starting the relationship if there is any question about the equally beneficial long-term results.

 

Article Number : 5.050302   

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