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than whether that customer has an MFC is whether your other customers have MFCs—that’s what makes you a tiger. The customer may not like that fact, but there’s nothing he can do about it. He has no control over whether your other customers have MFCs; all he controls is whether he has an MFC. And if other customers have MFCs, thereby putting him in a weaker position, he might as well accept an MFC and get the insurance protection it offers. When he does so, that reinforces everyone else’s incentive to take an MFC.

Despite the great advantages of MFCs, sellers shouldn’t think of them as a panacea. One drawback of giving out MFCs is that doing so makes it harder to keep your customers. Suppose a competitor attempts to steal a customer away with a low price. To keep the customer, you’ll probably have to meet the competitor’s price. But matching the low price sets a precedent among your other customers, who may then expect the same break. If those other customers have MFCs, they’ll not only expect the same break—they’ll get it. In that case, holding on to the first customer may well be too expensive. You have to let him go.

That’s exactly what your rival may be counting on. Knowing that your customers have MFCs, he might be all the more tempted to go after them in the first place. So if your concern is losing customers to a rival, giving them MFCs may be a bad idea.

A second drawback is that it becomes more expensive to go after a rival’s customer with a low price. You have to give the same deal to all your existing customers, and that’s unlikely to be worth it.

Of course, for these same two reasons, it’s to your benefit when a rival gives MFCs to his customers, but that’s not under your control.

Most-Favored-Customer Clause:

The Seller’s Perspective

PROS

1. Makes you a tougher negotiator.

2. Reduces your customers’ incentive to bargain.

CONS

1. Makes it easier for a rival to target one of your customers.

2. Makes it harder for you to target one of your rival’s customers.

Most-Favored-Customer Clause:

The Customer’s Perspective

PROS

1. Allows you to benefit from any better deal subsequently offered to other customers.

2. Ensures that you’re not at a cost disadvantage relative to rivals.

3. Eliminates the risk of looking bad if other customers strike better deals.

CON

1. When others have MFCs, it’s harder for you to get a “special” deal.

We’ve seen that the main effect of MFCs on the seller-customer relationship is to shift the balance of power in favor of the seller. We’ve also seen that giving out MFCs isn’t without risk; doing so makes you more vulnerable to competition from rivals. If poaching of your customers is your main concern, you want to look for a different type of rule to change the game.

Meet-the-Competition Clauses

A rival comes after your customers. What can you do? One way to make it harder for him to steal your customers is to employ a meet-the-competition clause (MCC). An MCC is a contractual arrangement between company and customer that gives the company an option to retain the customer’s business by meeting any rival bids. Of course, an MCC doesn’t force you to meet the competition. It simply rewards you, if you do so, with the assurance of the customer’s continued business.

There are several different names for a meet-the-competition clause; sometimes it’s called a “last-look provision”; other times it goes under the name “meet-or-release clause.” These are just different names for an MCC. Whatever the name, MCCs are most often found in commodity businesses.

I’ve Met the Competition and … To understand how MCCs work, put yourself in the position of a typical commodity producer. You don’t have much bargaining power and you regularly get forced down on price. That seems ironic because your product is an essential input. The problem, of course, is that you’re not the only producer.

There are some saving graces. The commodity is expensive to transport, which gives you some added value wherever you’re the one best located