Small and middle-market companies aspiring to land national accounts may have advantages over larger competitors by offering more flexibility, greater efficiencies, better service and faster turnaround.
But often that’s not enough to win the business of the biggest and best brands, and the benefits that smaller organizations bring to the negotiation can be offset by downsides such as lack of buying power, fewer resources and limited national and international licenses.
Benefits of client profit sharing
One breakthrough strategy for attracting and retaining major clients is to share profits with them. Client profit sharing can do the following:
■ Turn a customer into a partner with common goals.
■ Increase client engagement and loyalty.
■ Lower the cost of doing business.
■ Increase revenue and net income.
■ Drive information sharing and entry into new markets.
■ Spur innovation and developing new products.
■ Bring products and services to market quicker.
■ Grow referrals to potential clients.
There are several critical factors for analyzing client profit sharing viability.
First, the supplier should assess the opportunity not just from its own position of strength and financial interest, but also from the combined competitive advantages that both companies bring to the market. The assumption of profit should, however, be backed by mutual due diligence.
At the same time, there should be adequate margin in the individual profit to insulate the supplier from breaking even or losing money in the case of unanticipated cost increases. The shared profit model should also be competitive overall with the supplier’s lower-volume business, so the incentive to fulfill orders or provide services is equal.
The price of the product or service for which profit is being shared should be set at fair market value. The price shouldn’t be raised just to retain the supplier’s usual margin before the split at the potential expense of losing business to overpricing.
Forging a custom contract
Another benefit to profit sharing is forging a custom contract that safeguards the supplier and client in a way that typical agreements usually don’t. By detailing specific rules of engagement that include regulatory compliance, the interests of both partners are best represented and protected, and the doors to opportunity open wider.
Ongoing evaluation is essential to stakeholder satisfaction. Profit sharing agreements usually renew annually, but continuous appraisal is vital to optimum performance. Uphold deliverables and discuss modifications that can improve outcomes. Likewise, monitor the commitments of your partner to ensure equity and goal achievement. It takes two to make it work, but only one to break it.
Opportunities abound
Whether you’re a service company or manufacturer, prospects for creative client partnering abound. When two businesses merge their unique competencies, the synergies can result in mutual benefits well beyond a one-way transaction. Reciprocity is the key to endurance.
If you’re a small or midsize enterprise looking to push through the barriers for doing business with national firms, proposing profit sharing could be the attention-grabber that gets you in the door. Even if the concept doesn’t materialize, the points you get for trying may be high enough to turn the heads of decision-makers.
If nothing else, it shows potential or current client that your company is innovative, nimble and genuine about being more than a supplier. With a business commitment of any type, these are the ideologies of a lasting, productive relationship.
Eric Lofquist is co-owner, president and CEO of Magnus International Group Inc., an award-winning sustainable global products company. He is a regional and national EY Entrepreneur Of The Year™ whose business has ranked No. 1 on the Weatherhead 100. Contact him at (216) 592-8355, ext. 223 or [email protected]. For more information, visit www.magnusig.com.
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