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Exclusivity negotiation cheat sheet

by David Chen

 

As a product marketer who sources your products from China, some time to time, you may come across product models that may have exclusive distribution opportunities where you can become the only one in your market who sells the unique model.Before the negotiation, you need to ask yourself a few questions.

Are you sure you are dealing with a supplier who has complete control over the model in question?

Compared to other customer who may also be as interested as you are to enter into an exclusivity agreement, what are your competitive edge in distributing? Why should the supplier award the exclusivity agreement to you instead of others?

What is your estimation of sales volume per month/quarter/annum?  How long do you think the sales can grow to that level?

How confident are you in the estimation. How profitable it is?

When you negotiate with the supplier about exclusivity, both parties should know the key elements that you should discuss with each other.

Territory
What territory does the exclusivity should cover? You should select the territory in which you have the best ability to sell. It is not wise to cover a large territory because the counter party will require a higher target sales volume and it is more difficult to prove that you have the unique ability to take of the territory that distinguish yourself from others.

Models
What are the models covered by the agreement. Usually, the portfolio of models that are very close to one another should all be included. Similar to the territory consideration, the more models are included the high sales pressure it is.

Purchase Quantity Per Month/Quarter/AnumPropose a purchase quantity attractive enough and at the same time you can handle. Make the supplier believe that if somebody else was telling him of a much higher target, he was bragging and only you are making an honest target, as a marketer who is capable of making the best selling in the territory in question.

Prices
How are the prices determined.
Possible formulas are: fixed price plus a long notice period, discount of price list, discount off manufacture recommended retail price.

Term of Contract
Exclusivity agreement should have a long term nature, in the order of 3-5 years. However there should be conditions that can terminate it, such as material breach of obligation by either of the party, notice in advance, the distributor not meeting the purchase target etc.

Deposit
Some suppliers may require deposit to be advanced. If at the end of the period the minimum sales target is not reached, the deposit is taken by the supplier as a penalty.

An exclusivity agreement won’t be entered into very quickly because there are more parameters to considered by both sides than a simple sales transaction. The key consideration is usually based on estimation. There will be back and forth. Agreement will be arrived at when the supplier is convinced that if he doesn’t award an exclusivity agreement to you, no one will be able to does the same good job as you will to promote his product in your territory.


David Chen is the co-founder and account manager at Sourcing Spectrum, a sourcing agency dedicated to helping overseas clients manage sources in China. Tips and information can be found at www.sourcingspectrum.com/blog.

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