A tool such as the Negotiating Matrix is useful for any type of negotiation that involves compromise on the part of the negotiating parties to realize a desired outcome. An example of an application outside of M&A negotiations would be working with a distributor. These negotiations often are approached from a perspective of distrust of the other party. The distributor is concerned with building a credible business that the manufacturer may then opt to take direct. The manufacturer is concerned that they do not have meaningful insight and control of their customers. Ultimately, the issue is “who owns the customer.”
Let’s say a manufacturer and a distributor are negotiating a new distribution agreement or a renewal. There are often things the manufacturer wants that are different from the distributor’s priorities. For instance, for companies with a “razor/razor blade” model, the manufacturer wants to have details about the installed base of their “razors” sold to a distributor so they can understand the effectiveness of the placements plus visibility of the distributor’s commercial practices. On the other hand, the distributor is concerned that the financial rewards for such a model come down-stream, after substantial effort to build the base razor business.
After all of that investment, the distributor is concerned that the manufacturer may take the business direct. The distributor may also be worried about priority allocation of razors, access to training and support, and discounts. Typically, each party can “give” on these “wants” but success is best achieved when the relationship is solidly founded and long-term in nature.
Negotiating with a ‘Razor/Razor Blade’ Business Model
In a razor/razor blade business model, contract length is typically the main negotiating point between the parties. Distributors “want” a longer contract term to enable them to realize the value of their up-front investment in placing razors to participate in the upside of the annuity of the razor blade usage. Manufacturers want a shorter term contract in case the distributor is not meeting objectives with placing these razors or they are not realizing the desired usage of razor blades per razor.
Clearly, the intent of both parties is aligned – to maximize the placement of razors. The challenge is in the implementation. Both parties must look to other aspects of the relationship to identify “wants” and determine what they can “give” that is of value. Distributors can give manufacturers visibility of their end-user installed base if the contract is of sufficient length to reward the distributor for making investments in training and end-user support and there is clarity on the distributor’s ownership of the installed base. Manufacturers can give priority status to new instruments manufactured and premium pricing as long as the distributor is growing the average razor blade usage on each razor or ARUPU (average razor blade usage per unit).
A thoughtful solution to meeting each party’s “wants” can occur when manufacturers stop treating all distributors the same and classify them on the basis of their achievement, openness, and investment in supporting end users.
In a recent negotiation, a distributor wanted extra discounting on the manufacturer’s razors. The distributor had been increasing its purchases from the manufacturer but growth in ARUPU was lagging the overall growth in their revenue and well below other top performing distributors. This typically means a misplaced focus on razor placements rather than razor blade growth on the installed base. Rather than give the distributor the extra discount, the manufacturer proposed a rebate based on the distributor’s performance in increasing ARUPU. This keeps the distributor focused on the total value of the installed base rather than on just placement of razors.
In another negotiation with a distributor of a large geography who used sub-dealers, the “want” was for additional discounts on razors. Again, this distributor was focused on the economics of the razor placement rather than the value of the razor blade. The manufacturer agreed to give the discount on the condition that the manufacturer would support the upcoming training of sub-dealers. At that training the manufacturer was effective in demonstrating the value proposition of an ARUPU focus to the sub-dealers.
The Bottom Line
The Negotiating Matrix is a useful tool for all types of negotiations. Even though both parties may have the same “want,” what the other party can “give” may not be obvious. Use the tool to help you understand each party’s wants and try to assess the ability to give on key points. Focus on what matters and ensure the other party’s wants are effectively addressed to the extent that you can while at the same time ensuring that your wants are sufficiently protected.