Co-Opetition - Adam M. Brandenburger [81]
1. Contracts with Customers
You and your customers are partners in creating value, but it’s not all cooperation. There’s an inevitable battle when it comes to dividing the pie. When your customers press you for price concessions, that’s competition, not cooperation.
In the Players chapter, we talked about bringing in more customers as a way of shifting the balance of power in your favor. You may even want to pay people to play, as LIN Broadcasting did with BellSouth. In the Added Values chapter, we saw how restricting supply worked to limit the added values of customers. That’s one reason why Nintendo and DeBeers have been so successful.
In this section, we look at how to use rules to change the game with your customers. Because rules alter the balance of power, you can use them to restructure negotiations to your benefit. Of course, your customers will also be trying to change the rules to put themselves in a stronger position. The battle to establish the rules is the battle before the battle. The question of whose rules will rule is something we’ll come back to at the end of the chapter. But the immediate goal is to develop a clear understanding of how rules change the game.
We’ll begin with the “most-favored-customer clause.” Such clauses are widely used, but their full implications are not widely appreciated.
Most-Favored-Customer Clauses
A most-favored-customer clause (MFC) is a contractual arrangement between company and customer that guarantees the customer the best price the company gives to anyone. The MFC prevents a company from treating different customers differently in negotiations. Other common names for this rule are “most-favored-nation clause” and “best-price provision.”2
MFCs are very common in business-to-business contracts. We’ve seen them in businesses ranging from aspartame to aluminum cans to auto parts to fiber optics to building control equipment. Customers often like the price insurance feature. With an MFC in place, the customer is guaranteed never to be at a cost disadvantage vis-à-vis any competitors who buy from the same supplier.
MFCs sound like a good deal for your customers, but what do they do for you? To find out, let’s revisit the Card Game from the Game Theory chapter.
The Card Game Continues Adam and twenty-six of his M.B.A. students are again playing a card game. As before, Adam holds twenty-six black cards, and each student holds a red card. The dean is still agreeing to pay $100 to anyone who turns in a pair of cards, one black and one red. Once again it’s a negotiation game between Adam and the students, like the first version of the Card Game in the Game Theory chapter.
This time, though, there’s a new feature. Just before the game begins, one student, Tarun, announces that he has to leave for a job interview. No problem. Adam promises Tarun that he’ll get the best deal given to any of the other students—Adam gives Tarun an MFC. Tarun figures he now has the best deal of all, and he doesn’t even have to work for it. Off he goes.
Even though Tarun will get the best deal, he might be surprised at what that deal turns out to be. Adam’s contract with Tarun is going to make Adam a much tougher negotiator with each of the other students. Let’s look at the first of these negotiations. If the student pushes for an extra dollar, that costs Adam a dollar right now. But the concession also costs Adam another dollar, since he has to give the same price to Tarun. Whenever Adam makes a new concession of a dollar to the student, it costs him two dollars.3 The bargaining is no longer symmetric. Adam will push twice as hard as the student does. He’ll be a braver, more aggressive