Where exclusive agreements are warranted, care must be taken in how they are created. Exclusivity clauses can be expensive to either party if the relationship is not structured properly.
There are several types of agreement where exclusivity comes up. These include distributor contracts and Original Equipment Manufacturer contracts (OEM) to name a couple. Each brings its own justification for exclusivity. Let’s look at the issue from both sides.
For simplicity’s sake, the party providing the product is the “provider”, while the party doing the final sale to the end user customer is the “seller”. In sales and marketing agreements the parties may fill both roles, but please don’t get tangled up in that differentiation. Typically, the seller is selling into a particular territory or market segment.
Assume you are the seller in a distribution arrangement.
- You will incur significant costs adding the provider’s product to your sales suite – creating marketing collateral, training your sales force, etc.
- Once you start selling the product you do not want to find that the provider has engaged so many partners that the market is overcrowded.
- Depending on the way the agreement is written you may be the exclusive distributor (meaning the provider can continue to sell the product where you do) or the sole distributor (even the provider cannot compete with you in your territory or segment.) Be sure to get what you need.
So, as the seller you have an incentive to be the exclusive, if not the sole distributor of the product in your territory or market segment.
If you are the provider you may not want to be dependent on this distributor for all of your sales in given territory or market segment, especially if it does not perform. For the provider:
- Any exclusivity should have a price, and it should be a pretty high one
- There should be a way to end the exclusivity if the seller does not sell the forecast amount, or even if it fails to create the collateral and train its sales force in time
- There should probably be a time limit on the exclusivity so you can re-consider its value after a period.
- There are legal implications around exclusivity – be sure to check with your attorney!
Exclusive agreements cut both ways. If you are the provider, there should be a high cost for exclusivity. If you are the seller, you may need to have exclusivity to realize your ROI. Both parties need to watch for the pitfalls.