What is commercial contracting? – Part 2: Understanding the Market

29 October 2021



The second key factor which will shape contractual negotiations is the nature of the market and market conditions into which the product or service is to be sold. The strength of the businesses’ position in the market as well in the strength of the customer’s position in that market will also define the room for negotiation.

From a technology perspective, it is important to understand how the product or service distinguishes itself from the competitors. A product with a greater reputation, consistent performance, or higher level of innovation, will usually result in a stronger negotiating position. However, this is not always the case…

New entrants to the market, start-up companies and developing businesses seeking to establish their market position are more likely to have a weaker negotiating position as compared to a more established competitor. Understanding competitors and their products will also help to define the strength of a company’s negotiating position. In general, customers may be more reluctant to accept the risks associated with a new product or technology.  To establish itself or a product in the market, a business may have to accept a greater degree of contractual risk, for example, disadvantageous pricing and payment terms or greater liability.

The customer’s position in the market will also have an impact on the negotiating position. In general, the more established the customer and greater their reputation, the better its buying power and negotiating position.  Larger and more established customers are also more likely to expect to contract on their standard terms. To gain the customer as a reference customer, the business may have to contract on the customer terms and accept a greater degree of contractual risk.

The strength of the customer’s negotiating power will be a key to shaping both the contract document and the negotiations. Sales teams and the business’ strategy experts will provide good insights into these factors which will influence negotiations.