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A Big Customer Wants Exclusivity. Now What?

Some smart responses to a really tough question.
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Not only does every rose (think customer, not garden) have its full complement of thorns, but it seems that the prettier and larger the rose, the stickier and more challenging its thorns can be.

If there’s one situation that particularly makes me nuts, it’s the case of the 800-pound gorilla buyer who’s an early and crucial customer and whose demands and requirements would drive a saint insane. If you’re starting a business and you haven’t seen this particular movie yet, trust me, it’s just a matter of time.

Even though we all say that what start-ups need more than anything else is paying customers, the fact is that one or two big customers don’t make a business and, worse, can actually reduce your chances of success in the long run. Too much dependence on one big customer can

•    divert your attention from the real prize, which is to diversify your business among a broad spectrum of customers

•    drive you nuts with customization requests that consume scarce resources and make your base product less appealing to the larger population of “regular” customers

•    put substantial and unwarranted downward pressure on your pricing, reducing the critical early operating margins that are essential to survival. You need healthy margins as early as possible to give you some breathing room and to offset the mistakes you’re sure to make.

How you negotiate with and respond to these “big dogs” can impact your business for years to come. The outcomes of these negotiations can be critical to

•    your ability to fully and fairly price your products and services

•    your ability to grow and expand your business according to your best interests

•    your ability to secure additional customers, who will often be direct competitors of the initial customers.

One reason a lot of the conversation about these issues is so painfully broad is that there are too many variables for any one approach to cover even the majority of the most typical cases. I understand that one size doesn’t fit all, so I want to give you some ideas for handling just one of the most important and recurring demands that large initial customers can make. It’s likely to raise its ugly head sooner or later, regardless of your industry, product, service, offering, or other circumstances.

It’s the demand for exclusivity, and it’s a killer. You can dodge this bullet with a set of reasonable explanations as to why it’s actually not in the customer’s best interests to insist on exclusivity. If you do this well enough, it may actually sound like you’re doing the customer a favor. This needs to be an ongoing topic of discussion and reinforced regularly with the customer.

My suggestions reflect specific arguments that have consistently worked for me in industries as diverse as automotive, insurance, hospitality and technology. These haven’t exactly worked overnight, and not without some concessions, but in the long run they get the job done.

So you might say: I can’t work exclusively with you because:

•    it’s important to both of us that the information, research, evaluations, prices, data, analysis, etc. (we’ll call this “material” from now on) that we are relying upon for you and supplying to you be independent of your organization

•    it’s important to both of us that the material be objective and neutral and that the outcomes and results derived from it are fair and unbiased

•    it’s important to both of us that we quickly develop an industry standard

•    it’s important to both of us that we have enough customers and scale to make the research and development investments that we could not afford on behalf of a single customer

•    it’s important to both of us that we grow quickly enough that we can begin to bring our costs down

•    it’s important to both of us that, in order to service your requirements nationally, we have other customers in geographies where your business alone would not support a roll-out

Some of these approaches will help and some may not apply at all. Don’t try to use every argument all at once. Negotiations can often be wars of attrition, and you always want to save a fresh argument for next time. But if you work through each of them and try to determine how similar ideas might help support your position, you’ll get a much better outcome than you would going in blind.

And sometimes you just have to take what you can get now and hope that you can get what you want down the road. See how these arguments work for you, but be careful not to throw the baby out with the bathwater.

Last updated: Jun 11, 2013

HOWARD TULLMAN | Columnist

Howard A. Tullman is the CEO of 1871--Where Digital Startups Get Their Start, and is also the General Managing Partner of G2T3V, LLC and of Chicago High Tech Investment Partners. He is a member of the Chicago NEXT & Cultural Affairs Councils and the Illinois Innovation & Arts Councils; an adjunct professor at Kellogg; and an advisor to many start-ups. He is the former Chairman and CEO of Tribeca Flashpoint Media Arts Academy. Over the last 45 years he has successfully founded more than a dozen high-tech companies. @tullman

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.



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