Wait, They want what? How I came to accept procurement’s clever clause

20 Aug 2024 - Frans Vanhaelewijck

What is a "Most Favored Customer" clause? ^{Image by
kues1 on Freepik}

The first time I came across a “Most Favored Customer” clause in a contract proposal, I was totally confused. I had no clue what it was about. It usually looks something like this:

“Vendor agrees not to treat any customer (including (names)’s Affiliates), better than (name) , and agrees that (name) will be afforded prices, warranties, benefits and other terms that are no less favorable than those offered to Vendor’s other similarly situated customers.”

Wait, what?

My first reaction was sheer amazement: are they actually writing into the contract that they want special treatment? Not only do these big companies expect the best service you can provide, but now they also want it at the best price? And if any other customer somehow gets a better deal, they automatically get it too? I couldn’t help but think, “How do they even dare to ask for that?”

The Lazy Procurement Tactic

I’ve come to see this as a bit of a lazy move by your customer’s procurement team. With this clause, you’re legally bound to offer the best price so that no one can boast to your CEO/CIO/CxO on the golf course that they got a better deal. But in reality, things are usually more complicated than that.

Can You Say No?

For your customer, getting rid of this clause is usually tough since it often requires both legal and purchasing approval. The poor procurement soul you’re talking to will likely have to go back to legal if you push for a dramatic change to the standard contract — and we all know how unlikely it is that such a change will be approved. While some negotiation is always possible, I’ve found it’s hard to fully remove it. But as we’ll discuss later, verifying this clause is typically difficult, and you have the advantage of making it even more so. Ultimately, you’re in a stronger position.

However, if you do end up agreeing to it after some back-and-forth, make sure the deal is worth it. This can also be your chance to justify a higher price. Plus, it gives you one more point to negotiate over. Even if you know you’ll eventually agree to it, it’s another lever to use in the bigger negotiation.

What do you do in practice?

I regularly come across this clause in master service agreements and contracts. And after going through the whole process—negotiating, pushing back, throwing up my hands—I end up agreeing every single time. Why? Because when the contract value is high enough, it starts to make sense to offer that kind of preferential treatment, at least on paper. After my initial shock at the sheer audacity of MFCs, I’ve come to terms with it. It’s just something legal teams in big corporations do. Over time, I’ve realized that it’s not as big of an issue as I first thought because:

These customers are so important and big that they’ll squeeze you anyway if they face budget cuts, management changes, or any other shifts. They don’t need a clause to push for discounts when extending your MSA. The Most Favored Customer clause usually isn’t my main concern.
How can they even verify this? Each of these customers has such strict confidentiality clauses that I, as the vendor, can’t show one customer’s contract to another. In all my experience, I’ve never been confronted with this situation, but if it ever did happen, I’m confident I could wiggle my way out. Even if CEOs start comparing notes, the actual work agreements are usually so different that comparing prices wouldn’t make sense anyway.
Every 100k deal is different and specific. It’s not like there’s a standard price list that makes comparing different offers easy. As your company grows and your product matures, your contract values will increase as well. But keep in mind, this applies to high-value deals like these. For smaller ticket prices, you won’t want to negotiate contracts like this.

If your prices are listed on a pricing table on your website, you typically can’t agree to these clauses. Website prices are usually set so low that you can’t afford to spend time negotiating over them, let alone pay a legal professional to work on it.

These MFC clauses are meant for contracts where each customer has a unique price and terms. You can explain to new prospects that earlier customers received better deals because they invested time and took a risk when your product was less mature. This allows you to exclude existing customers from the MFC clause without having to name them—something you’re likely not permitted to do anyway.

In conclusion, don’t be as shocked as I was when you first come across this in a contract proposal. Take a moment, breathe, and remember that there’s more to this story than meets the eye. This is just one of many elements you’ll need to discuss in the negotiation, but deep down, you’ll know you’ll most likely agree to it. And keep in mind that the poor procurement soul at your customer is just doing their job, following the playbook. I hope my experience gives you some perspective when you eventually face it.