Why Exclusivity is a Four-Letter Word

The larger company in a partnership often assumes because of their size and potential impact on your business that they have the right to exclusivity. They’re wrong.

In the course of negotiations, prospective partners often ask for some kind of exclusivity. This generally takes the form of an exclusive technology license for what may as well be eternity plus a year, or an exclusive right to resell your product in an overly broad territory; say, the world.

It’s particularly common when the other party is the much larger of the two.

Why it’s a bad idea

The dangling carrots of access to new markets, brand halo effects, larger sales teams and the promise of a sharp uptick in revenue can lead to weak negotiation and hasty decision-making. The potential of a game-changing partnership can be intoxicating. But potential is no guarantee.

Just because they could be a great partner does not mean they will, and it’s your job to protect against the downside.

From small and early stage to established, hundred million-dollar leaders, I’ve witnessed what happens when hopeful software companies cave to a larger player’s demands for exclusivity. More often than not, they find themselves a year or more down the road with nothing to show for their trouble save a sizable opportunity cost.

Closing yourself off from many partners that may deliver results in order to appease one that could is bad business and the recipe of many a failed partner program.

Viable alternatives

So what if lack of exclusivity appears to be a deal-breaker? There are alternatives. By providing a partner with preferred status in specific industries, customer segments or product categories, or a well-defined “protected” territory, both parties get what is reasonable and appropriate at an early stage. You secure the high-potential partnership, and they secure the right to make their mark and margin within a defined space.

Preferred status, as well, should not come without conditions. If the partner fails to deliver on revenue or other stated objectives in the trial period of the agreement, their status should be forfeit. Meanwhile, you’ve contained and managed your opportunity cost by confining the failed partnership within the boundaries you set out in the partnership agreement.

If you really must

And yet there are those times when not even preferred status will satisfy a prospective partner’s demands. Then what? The only sensible fallback1 is to offer exclusivity tied to significant revenue or strategic outcomes — ones that would make the risk well worth taking, and with quarterly (or shorter) performance objectives and associated penalties for missing them.

This is still a high-risk scenario. Further, the conditions you require may be so onerous as to drive away your potential partner. But if they aren’t willing to stand behind the partnership — by putting their performance where their mouth is — is it a deal you’d want to do anyway?

  1. Strictly speaking and outside the confines of a channel partnership or strategic alliance, there are other paths to exclusivity: the formation of a joint venture or an acquisition. ↩︎