Exclusivity (Advantages and Disadvantages)

Question: What are the advantages and disadvantages of giving exclusivity to my product to one distributor?

A: There is no simple answer as I would need to know about your specific situation.  What I can tell you from experience is giving exclusivity has great rewards and can also have a great downside.  If you have a Business Plan and the best case scenario falls into line with the required margins and volume an exclusive arrangement offers, it would be well worth taking a hard look.

Volumes are the key driving point to signing an exclusive agreement.  With volumes you can order greater volumes of raw materials and reduce your product cost and that will enable you to attain greater margins.

You need to consider no fault returns where your distributor can return any item for any reason. You need to have an agreement that you can turn returned items around as a replacement with the same warrantee.  What about documentation, sales brochures, training and buddy calls? Can you give your distributor the files to have them print their own sales materials? Do you have minimum quantities to justify the exclusivity and what length is the contract?  What if the distributor goes out of business or does not order the minimum required quantities, do you have written in your contract escape clauses?

Does your exclusivity give the distributor exclusive access to specific SIC codes, geographic territories and advertising?

Can you build other like products and private label them to other distributors in the same territory as your exclusive distributor?

Can you OEM the product to a company that wants to build your product into theirs and sell as a package?

What about price protection and when you come out with a product that will obsolete the current product?  Do you have stipulations in the contract that preclude your distributor from shipping them back to you and wait for the new product? You need to make sure that you have a strategy to sell all current inventory before you introduce a product that will obsolete the old product.

Generally speaking, exclusivity contracts are not good for the long term unless you are giving an exclusivity to a smaller country with minimum and quantifiable demographics.

Depending on the quantities and how your product is manufactured you may negotiate an up front cost to allow you to manufacturer as an example 100,000 injection molds for your product and usually an injection mold could exceed $100,000 so you will need the cash to negotiate a price for large quantities.  If your distributor buys in that is a good sign that your distributor is serious about selling your product in the quantities that they have agreed to for exclusivity.

There are many answers/solutions to your question depending on the type of product or service, price of the product, size of the market, seasonality, shelf life, warranty and support, sales support and documentation.