Most favored customer: Overview, definition, and example
What is a most favored customer?
A "most favored customer" (MFC) is a term used in business agreements to describe a customer who is guaranteed the best terms, prices, or discounts available. This status ensures that the customer receives the most favorable conditions in comparison to other customers, often in the context of pricing, service, or delivery terms. A most favored customer clause is typically included in contracts to ensure that a specific customer benefits from the lowest available price or most advantageous terms, particularly when the seller or supplier offers better terms to other customers.
Why is a most favored customer important?
The concept of the most favored customer is important because it fosters loyalty and encourages long-term business relationships by guaranteeing that a key customer will always receive the best possible deal. For companies, offering MFC status can be a competitive advantage, ensuring that important customers are incentivized to continue doing business. For the customer, MFC status ensures that they will not be disadvantaged if the company later offers better terms to others, which can help maintain trust and satisfaction. However, MFC clauses also require businesses to be vigilant in managing pricing and terms to avoid unintentional breaches of the agreement.
Understanding most favored customer through an example
Imagine a company that sells software licenses to various businesses. One of its largest customers, Company A, negotiates a most favored customer clause into their agreement. This clause ensures that if the software vendor offers better pricing, additional features, or discounts to any other customer during the term of the contract, Company A will receive the same or better terms. For instance, if the vendor later agrees to offer a new customer a 15% discount, Company A will also receive that 15% discount, ensuring they are never at a disadvantage compared to other customers.
In another example, a manufacturer agrees to supply raw materials to a large retailer. The retailer negotiates an MFC clause that guarantees they will always receive the lowest price available, even if the manufacturer offers lower prices to other buyers. This can be particularly advantageous when the retailer plans to make large-scale purchases and wants to ensure they are paying the best possible price.
Example of a most favored customer clause
Here’s an example of how a most favored customer clause might appear in a contract:
“The Seller agrees that during the term of this Agreement, the Buyer shall be entitled to the most favorable pricing and terms offered to any other customer of the Seller. If the Seller offers more favorable terms or prices to another customer during the term, the Buyer shall automatically receive those same terms or prices.”
Conclusion
The most favored customer status is a powerful tool used in business relationships to guarantee that a key customer always receives the best possible terms. By offering this status, companies can secure valuable and long-term relationships with their most important clients, ensuring customer loyalty and satisfaction. For businesses, however, offering MFC terms requires careful management of pricing strategies and customer agreements to ensure fairness and avoid potential conflicts. Understanding the benefits and challenges of a most favored customer clause is crucial for both businesses and their customers to maintain trust and competitive advantage.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.