Exclusivity Agreements with Suppliers For E-Com and FBA – Everything You Need to Know
An exclusivity agreement is exactly what it claims to be: an agreement between two or more parties to trade exclusively with one another. In E-commerce and Amazon FBA, the product supplier agrees to supply only to the vendor, and the vendor agrees to only source that particular product from the supplier; there can also be exclusivity with a distributor for particularly large businesses.
If suppliers and vendors make exclusive ‘deals’, it prevents other vendors from using that supplier, and if the product is rare it limits the ability of other vendors to compete in that space. It also prevents other suppliers from sourcing products for that vendor. So, the question is: Is this allowed?
The answer is, yes. Looking at it from the perspective of the federal trade commission (FTC), exclusivity agreements are lawful as they encourage healthy competition in the market.
They become unlawful when a vendor tries to monopolize the market by obtaining exclusive supply contracts with multiple suppliers, preventing newcomers from being able to compete. These contracts are what’s called an ‘exclusionary tactic’ in violation of Section 2 of the Sherman Act.
The world of E-commerce, dropshipping, Amazon selling, and other forms of online retailing is becoming more and more competitive. Exclusive distribution agreements help keep the market competition healthy and encourage strong trade relationships. There are many benefits for an E-commerce business with this type of deal.
Benefits of Exclusivity Agreements
You might be able to think of some advantages off the top of your head, but let’s break down the main benefits.
Reduce the Volume of Competition
This might look like it could be an exclusionary tactic, which could violate Section 2 of the Sherman Act, but it depends on how you do it.
It’s perfectly fine to make an exclusivity contract with any supplier, and by doing so, it naturally reduces the volume of competition, even if it’s just in a small way. This is especially beneficial to you if you’ve found a supplier who sources a unique product that no other supplier offers.
This means you have access to a product that none of your competitors can sell. They can copy your product and manufacture it in a different way, but they’ll never have that exact product. If you have a design patent that will prevent them from copying your product design all together, but that’s a story for another day.
Build a Unique Brand
The best thing about having a product that only you produce is that you can build your whole brand around it. This is probably one of the strongest selling points you can have, and it’s very rare that you get an opportunity like this, so if you do find a unique product that has demand, use it to create a behemoth of a business. Don’t forget to build that moat too, by getting a patent to protect your business from copycats taking your piece of the market.
Get Better Deals and Reduce Your Margins
When you have an exclusive deal with a manufacturer, you commit to longer-term contracts, which make sourcing products cheaper. If the supplier is reliable, then it reduces the potential for inventory or order errors.
You should consider your inventory forecasting here too as the bigger the orders you can make, the cheaper it’ll be for inventory.
More Efficient Inventory Management
When you have a regular supplier you can rely on, it makes inventory management more straightforward as you aren’t having to deal with multiple suppliers. Having said that, we usually recommend you have multiple suppliers because they can act as a safety net in case your main supplier isn’t able to deliver the goods for whatever reason. If your main supplier is particularly reliable, then it reduces your need for other suppliers of the same product.
Having a regular supplier also helps with your inventory forecasting because you know your suppliers’ lead times – how long it takes to receive the products at your warehouse from your supplier – and therefore your production cycles.
As you can see, there are benefits to exclusivity agreements not just in inventory management but also in the growth of your business. But there’s still more to consider.
Considerations for Exclusivity Agreements
When committing to an agreement of this nature, it’s important you understand what you’re actually committing to.
They Are Legally Binding Contracts
When you commit to exclusivity with a supplier, you’re all in.
You’ll be required to sign a contract that’s legally binding to prevent you or the supplier from breaking the terms and making side deals with other parties.
It could also be in the contract that you have to order a minimum amount of inventory regularly to make the contract worthwhile for the supplier. This is why you should have your inventory forecasting down before you step into one of these types of deals so, at an absolute minimum, you know how much inventory you will be ordering and how often.
If you break the terms of the contract at any point, you could lose the supplier or worse – face penalty fees. Make sure you’re able to commit to the contract fully.
They Can Limit You
It’s likely the exclusivity applies both ways in the agreement, meaning you may have to avoid sourcing the same product from a different supplier. If you find a new supplier who manufactures the product cheaper halfway through your contract, then you may not be able to break the contract and move to the other supplier, especially if the terms restrict you and you have a fixed contract. Make sure the supplier is the best possible option before signing.
The Supplier Has to Be Reliable
You have to be sure that the supplier is able to deliver on the contract, not only on the exclusivity but also on quality of service.
You could even have a minimum quality of service agreement in the contract. Just as you agree to make a minimum amount of orders, they should agree to deliver a minimum level of service. The products are kept to a certain quality standard, and the products are delivered to your warehouses on time.
This is a lot of information to take in. You should go and consider whether an exclusivity agreement is right for your business at this time.
Ask yourself: “Have I found that reliable supplier?”, “Are the products as cheap as I can get them?”, “Does my product have enough demand to make an exclusivity agreement worth it?”.
When it comes time to make the agreement, ensure you read back through the consideration points section of this article to help you negotiate the right terms for a win-win deal.
If you’re reading this article because you’re in the process of trying to increase your business value, you can see what your business is worth right now with our free valuation tool.