Exclusive Contracts – The Plus Side

Sometimes a buyer or seller can benefit from an exclusive contract. This is true for product and service agreements alike. The former are covered here.

Here are some examples where exclusivity is of value to the seller:

  1. High Development or Specialization Costs. Does the seller need to develop specific functions for the customer that are unlikely to interest anyone else? If so, the seller has two choices:
    1. Gain exclusivity as a supplier, at least for a period of time, so that the cost of development or specialization is more likely to produce an adequate return on investment; or
    2. Charge a one time development fee, often called a Non-Recurring Engineering fee (NRE). The buyer would have to develop the new features covered by the NRE is the work is not performed by the seller. The buyer would take on an expense (and it may be more expensive for the buyer to perform the work), and it would also assume the risk of failure inherent in a development effort.
  2. High Cost of Sales. If the item in question has a long sales cycle, requiring significant effort and expenditure on the seller’s part, exclusivity should be sought. It is the investment in time and money that the seller must recoup. Its only alternative would be to charge a much higher price. The buyer may accept a period of exclusivity in place of a higher per unit cost.

With any of the above exclusivity choices, the buyer is likely to seek mutual exclusivity, Risk of Exclusive Agreementsand the seller will have to consider it carefully.

There are also times when seeking an exclusive buyer might make sense for the seller. Has the seller lost interest in selling the particular product? Having the buyer re-sell it as part of a strategic alliance provides a path to the market at a low cost. Giving the buyer/re-seller exclusivity is worthwhile, as no sales would be made without the arrangement. (More information on strategic alliances is available here.)

It is likely that the issue of mutual exclusivity will come up in this case as well.

There are reasons that a buyer would agree to an exclusive contract with one seller, and there are reasons a seller might agree to sell exclusively to one buyer. In any case exclusivity should have a price – it is not something that should be given lightly or cheaply. See how Effective Agreements can help with these and other complex contract issues on our website.

Posted in Business Practices, Uncategorized

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