Do you understand the purpose of both of these clauses? Here is a simple, practical explanation to keep them straight.
Let’s start with the similarities.
- They are both price comparison clauses.
- The price comparisons are meant to help assure that customers receive the most competitive pricing from a supplier.
- They both typically require an obligation to reduce prices in the event of a significant price differential with the comparison material and rarely will allow a price increase.
Now for the differences.
Benchmarking is an external comparison of prices with competitors of the supplier. The purpose of benchmarking is for a customer to validate that their prices, in long term contracts, will continue to be competitive, especially in a market where the prices of products or services typically decrease over time. An example would be in the technology market where prices of products and services decrease as new technology rapidly replaces existing technology.
MFC (sometimes referred to as “Most Favored Nation”, Preferred Customer or price warranty) is an internal comparison of prices with other customers of the supplier. MFC imposes an obligation on the supplier to provide the customer the best price the company gives to any other customer for the product or service.
It’s not as simple as just comparing prices of commodities or services. There are other factors which are a part of the pricing equation. A supplier bases their pricing to customers on factors such as quantities or volumes, service level metrics, type of customer (e.g., government or commercial, reseller or end user), geography, scope of service, up front investments or transition costs to name a few. These factors need to be taken into consideration when performing a benchmarking or MFC analysis.
Below is a chart which provides a summary of the two clauses to help provide clarity.
I encourage others to share their tips and experience related to MFC and Benchmarking.
Coming up next: An explanatory guide to the important components of a benchmarking clause and why they are important.
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