The ongoing discussion of Game Theory based on the book Co-opetition.
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 contractural 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 different names for an MCC, sometimes it’s called a “Last Look” provision, other times its known as “Meet or Release” clause. Having MCCs with your customers can help you sustain a higher price. Normally an elevated price would invite your competitor to undercut you. If you have an MCC in place, a rival can’t come in and take your customer away simply by undercutting your price. If he tried, you could then come back with a lower price and keep the business. The back and forth could go on until it wouldn’t be worth your rivals effort to steal your customer.. The only one to benefit would be the customer.
You can see the strength of your position by stepping into your rival’s shoes. he runs a risk anytime he cuts price to go after your business. Remember the Eight Costs of Bidding ?
1-He’s unlikey to succeed, so there are better uses of his time.
2-When he wins the business, the price is often so low he loses money.
3-You can retaliate and he ends up trading a high margin customer for a low margin customer.
4-Win or lose, he helps establish a lower price, his existing customers will then want a better deal.
5-He’ll set a bad precedent because new customers will use the low price as a benchmark.
6-You will also use the low price he helped create as a benchmark.
7-It doesn’t help him to give his customers competitors a better cost position.
8-He shouldn’t destroy your glass house – if you are a little vulnerable, you’ll be less likely to go after his accounts.
Despite this list of reasons, a rival might still try, in hope of gaining new business. But when you have MCCs, that justification is much weaker.
Putting in MCCs changes the game in a way that is clearly a win for you. As for rivals, while its true they have less chance to take market share from you, there is, perhaps surprisingly, a win element here too. Your higher prices set a good precedent, they give rivals some room to raise prices to their own customers – because with your higher profits – you have more to lose. That’s the glass house effect again.
As for customers, why do they go along with MCCs? Even without a formal MCC, it is generally accepted that customers don’t leave their suppliers without giving them a last chance to bid. It may be that they are focused on the short term and in return for a price break today, they’re willing to accept less bargaining power tomorrow. In some cases it may be they don’t thoroughly understand the rule’s implications.
Whatever the reasons, MCCs do offer benefits to customers. This is because MCCs assure providers of a long term relationship with customers, even in the absence of long term contracts. With this assurance, providers are more willing to invest in serving the customers better. This partnership orientation can lead to a long term win for the customer.
If you are a rival provider, remember that asking for an MCC is a way of getting paid to play. If your competitor’s customer wants you to bid, but won’t pay you to play in cash, ask for an MCC. If one of your existing customers has solicited fresh bids for his business, forcing you to come down on price – ask for an MCC in the new contract. The customer may consider this a small concession to make in light of the price concessions you made. Since having the MCC will take the guess work out of future pricing, you won’t have to lower your price pre-emptively. If another provider underbids you, you’ll now have the chance to respond. And as pointed out earlier, others will have much less incentive to underbid you.
Like “Most Favored Customer” clauses, “Meet the Competition” clauses are not fool proof. They create vulnerability if you face a rival whose main objective in life appears to be hurting you, rather than doing well for them self. Normally if a rival comes in with a lower price, he’d better be prepared to deliver. If you have an MCC however, your rival can make a low bid, fully expecting that you will match it and he won’t have to make good on his offer. He can lower your profits without having to put himself on the line. This strategy may not be in your rival’s self interest, but you can’t assume that your rivals will always see their self interest the way you do.
Meet the Competition Clause
1. Reduces the incentive for competitors to bid.
2. Takes the guess work out of bidding- you know what bid you have to beat.
3. Lets you decide whether to keep the customer.
1. Allows a competitor to bid without having to deliver.
Next Time – Negotiation Tactics