How to avoid revenue commitment traps and gain complete control at the negotiating table

A detailed Review of Interval, Attainment and Term Revenue Commitments

After negotiating hundreds of contracts, from dozens of carriers, for clients ranging from global 50 to $50M/year in revenue, I feel I have a unique perspective on this topic.  In my experience, I have found that revenue commitments, are to a large extent, arbitrary.  Although contrary to popular belief, I regularly find that companies who spend $1M/year will get better rates than companies who spends $10M/year with that same vendor. (I will explain why and how to avoid this phenomenon in another post).


Revenue Commitments Are Designed To:
  • Generate predictable revenue streams for carriers
  • Insure that the clients are captive customers
  • Defend current revenues from would be competitors
  • Create significant negotiating advantages at contract renewals
  • Increase margins over time

 

 

  • MARC – Minimum Annual Revenue Commitment
  • Take Or Pay – Either Use A Minimum Amount Or Pay For It Anyway.
  • MMRC – Minimum Monthly Revenue Commitment
  • MAC – Minimum Annual Commitment
  • ARC – Annual Revenue Commitment



The table below demonstrates the one of the most negative aspects of an annual commitment.

Year 1 Year 2 Year 3 Totals
Monthly Spend $100,000 $100,000 $100,000 $300,000
Annual Spend $1,200,000 $1,200,000 $1,200,000 $3,600,000
% Of Annual Commitment 60% 60% 60%  
Annual Committed Spend $720,000 $720,000 $720,000 $2,160,000
Number Of Spend Months Required Each Year To Satisfy Commitment 8 8 8
Number Of Months Remaining Before Auto-Renewal At The End Of The Term     2-3

In this case, the customer has already spent more than the aggregate committed dollar amount by month 21. Since the customer still has the 3rd year commit to satisfy, the customer is stuck for the duration.  During year 3, the customer will still have to give the carrier an additional $720K to satisfy the 3rd year annual commitment.  In effect, the real commitment ends up being $3.12M. ($2.4M for years 1 and 2 + $720k for year 3)  Unfortunately, most of the agreements we see before renegotiating have a 30-60 day auto-renewal clause. By the time your company has satisfied the commitment, there is only 2-3 months left to do anything about it. Since the incumbent knows it can take 4-6 months to move a large data network to another carrier, the customer no longer has any leverage in the form of a credible alternative.  Advantage: (Vendor)


 


 

In this example, the 60% revenue commitments remains the same however, we have removed the annual minimum requirement.

Year 1 Year 2 Year 3 Totals
Monthly Spend $100,000 $100,000 $100,000 $300,000
Annual Spend $1,200,000 $1,200,000 $1,200,000 $3,600,000
Total Committed Spend Over 3 years (60%) $2,160,000
Cumulative Spend $1,200,000 $1,200,000 $1,200,000 $3,600,000
Number Of Spend Months Required To Satisfy Entire Commitment 22 
Number of Months Before Renewal With No Revenue Commitment        14

By taking this approach, the customer satisfies the total $2.1M commitment in month 22 of 36.  This means that the customer no longer has any obligation to the carrier, but the carrier is obligated to keep the current rates and terms in place for the next 14 months.   The customer is in complete control at this point.  Figuratively speaking, the Sword of Damocles is transferred from over the head of the customer to that of the carrier.  Negotiating from a position of complete control enables our clients to get better SLAs, terms and pricing than companies with a less favorable negotiating position.  Advantage: (Customer)

Related posts:

Leave A Comment

Social Media Icons Powered by Acurax Web Design Company
Visit Us On LinkedinVisit Us On TwitterVisit Us On FacebookVisit Us On Google Plus