When Should You Allow Exclusivity in Deals? – Both Sides of the Table

Feb 12, 2018 by

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In business deals, there is a common misconception that the only real negotiation aspect is price. While price is certainly important, there are other aspects that will have a huge effect on how good or bad the deal is for you. One of these crucial elements is an exclusivity agreement. And whether you are the vendor or the distributor, you need to understand when and how to allow exclusivity agreements. If you don’t, you could miss out on major opportunities and money. You can learn more about exclusivity agreement examples on TemplatesAssitant.com

Exclusivity 101

When talking about exclusivity, it typically revolves around one party allowing another party to sell or distribute their goods exclusively. This means that other competitors cannot carry the same product, only one can. An exclusivity example is if the maker of a new type of soap negotiated with a large department store and they decided that this particular department store would be the only ones allowed to carry the soap. In exchange for the exclusivity, the department store gave the soap maker a better price on their goods.

Knowing When You Should Allow Exclusivity in Deals

When it comes to exclusive deals, there is no such thing as “one size fits all.” Each deal is unique, as it is happening between two different entities about different prices, products, arrangements, timing, and market realities.

For instance, while the example above provides a basic overview of an exclusive arrangement, it is difficult to tell who the deal was better for without doing some further research. It is possible that you will be on both sides of the table at some point. Therefore, look at it from all angles. First, the vendor or the manufacturer:

As a Vendor

So you have a hot new product and you want to get it to as many people as possible, so they can buy it and boost your bottom line. However, you might be wondering if you should offer it to all stores in your market or just one. But why would you offer any stores an exclusivity agreement?

Pricing Nightmare: Avoiding a Race to the Bottom

The first issue that you could run into if you don’t have a special agreement is what is called the “race to the bottom.” This refers to the cut-throat nature of businesses to reduce their prices in order to win more business.

For instance, say your product has a recommended sales price of $50. One store might decide to offer a sale for $40. Then the other, in competition, lowers theirs to $35. This continues, until they’ve slashed their prices so much that they’re offering it at $10 each…which, for the sake of this example, is what they paid you for the merchandise in the first place.

You might be thinking that it’s fine because it means that more people will buy the product. And as long as the stores keep on buying from you then your profit is protected. However, at this point they will no longer be making any money from your product. They will have no incentive to carry it. And they’ll stop ordering. Now your product is dead and your business is bankrupt.

This is a precise situation where exclusivity can help. Exclusivity can actually lead to higher prices and profits. When allowing other to license, sell, or otherwise represent your product or service, make sure that a minimum advertised price is enforced. Tell your negotiating partners that this is the only way you can accept an exclusivity agreement because otherwise there is no advantage for you to be locked into one store.

Timelines

If the distributor wants to carry your product with exclusivity for a longer period of time, you need to strongly consider if this is an advantage. You might negotiate for higher prices if they want this, or for minimum orders over that period.

When Your Lawyer Takes a Look

A lot of business is done on a handshake. But when it comes to specific deals like an exclusivity agreement, you don’t want to take any risks. Make sure that you have a specialized lawyer look over the terms to make sure you’re getting what’s fairly yours.

As a Distributor

As a distributor, it can be very advantageous for you to have an exclusivity agreement. It means that you don’t have to worry about competition, so you can charge higher prices and spend less on marketing and advertising. However, there are still things that should be in place before you agree to exclusivity agreements:

Pricing

Make sure that you negotiate great prices, regardless of if you have exclusivity. After all, if your profit is taken away by paying too much for wholesale, it can defeat the purpose of being the only store that can carry it.

Timelines

Beware of short term exclusivity agreements. There should be certain additions to the deal if you are going to agree to it. For instance, if you sell a certain number of units and thus bring a certain amount of revenue to the vendor, then you should write it in the deal that you get to maintain exclusivity.

Demand

There is nothing worse than a product wasting space and dollars in your store that doesn’t even drive sales. Before you get excited about potential exclusive arrangements make sure that the product is in high demand right now. Do some researching online for similar products or problems that are being solved and decide if you really want to carry the product.

If you are in the business world, you know how important it is to negotiate for what you want. However, this is often easier said than done. If you need to talk about exclusivity in your deals, make sure it is on your terms. It can be great sometimes, but not all the team. Be sure to evaluate all the facts before making your final decision. That way, you can avoid losing money or leverage in the deal and come out of it for the better.

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