We’d like you to sign this exclusivity contract. Wait, what?!
12 May 2023 - Frans Vanhaelewijck
For some contracts, I have been asked to enter into an exclusivity agreement. The customer really favors the product and doesn’t like that a similar solution is offered to the competition. Often, they feel that they’ve taught you how to design the solution and they claim some form of ‘ownership’. It’s not uncommon, and I’ve been asked to sign such agreements a few times in the past.
In one way, you are flattered and think “They really like our product”, and “We can ask for more money.”
But a few seconds later, you start to see the implications: Once you sign an exclusivity agreement, it seems like you can no longer sell your product.
Luckily, there are many variations of exclusivity.
First of all, you have to define the scope of the exclusivity agreement. Is it:
- a core product,
- a set of features,
- exclusivity in terms of a specific sector, or
- for a specific geography?
If your customer is a pharmaceutical company but you can sell your software to a food company, there won’t be any competition from the food industry crossing over to the pharmaceutical company.
The next limitation you may want to negotiate is geography. “Ok, Mr. Customer, I will not sell this software in country X. Or, I will not sell it in Europe, but I can still sell it in the US.”
Another dimension is time exclusivity. “Ok, Mr. Customer, I give you exclusivity, but only for 12 months.” That’s enough time for you to get ahead of the competition and build out a really good service into your operation.
How to price for exclusivity?
Of course, when people ask for exclusivity, there’s a price to pay. They’re essentially taking away your opportunity to sell your software to other companies, and that costs money.
Pricing this is a separate issue altogether and is really case dependent. You should try to estimate the geography, sector, and time window for which you’re granting exclusivity, along with the expected number of deals that you’ll make. Consider not only the number of deals but also the profit that you’ll earn from them. You can try to negotiate a compensation for the lost revenue, but they’ll quickly push you back to calculate lost profit instead.
Additionally, you’ll want to calculate the potential impact to your brand and reputation. Once you’re regarded in the market as an exclusive supplier of Company X, other companies may not be so receptive to talking with you. Essentially, as far as they are concerned, you become an exclusive subcontractor of their competitor, which should involve additional costs.
There are many aspects to consider with exclusivity; it’s not a black-and-white issue. And, of course, if you enter into an exclusivity agreement, the customer must pay a price.