Dan attended a small liberal-arts college. In his third year, Dan was unable to register for a course he wanted, so he started looking for alternatives. His college required all students to take an art course, and Dan found a textiles course that fit his schedule. In this course, Dan discovered a talent for designing and producing clothing. He liked all aspects of men’s fashions, but especially casual clothing to be worn outdoors.

While still in the textiles course, Dan developed and produced several prototypes of cotton Henley-type insulated hooded sweaters. The response from Dan’s friends was positive: they bought everything he made.

Dan continued producing sweaters while finishing his degree, taking on the tasks of design, draping, cutting, piecing, sewing and finishing; procurement and sales. His college offered students free production space and a sewing machine that helped Dan to produce sweaters. As word spread on the small campus, Dan sold every item he produced.

Dan’s pricing was based on a simple cost-plus per item approach:

Cost of materials per sweater
(Cotton, fleece lining material, buttons, zippers, thread, trim) $7.50
Rental of sewing machines and production space
per each sweater made $2.50
Cost of sewing time to make each sweater $18.00
Custom wood hanger (Dan’s Dad makes these)
per each sweater $2.00
Advertising (Dan has a website) $1.00
Delivery $3.50
$34.50 cost per sweater

Dan sold each sweater for $70.00. He found he could make about ten sweaters a month. Dan enjoyed the money he earned and he was learning a lot about designing and making clothing.

After college, Dan decided to formally continue his business. He bought a used sewing machine for $150 and he rented production space for $850 per month. He bought most of his material on his corporate American Express card with a 15% APR. He produced about 200 sweaters per month. He paid taxes at a rate of 22%.

After 18 months in business, Dan took some sweaters to a fashion show in New York for new designers. At the show, Dan was approached by two representatives from Macy’s, who asked him if he could bring his designs to the Macy’s buyers group meeting in New York in two weeks.

At the Macy’s meeting, the buyers said they wanted to feature Dan’s sweaters in 500 Macy’s stores, 30 Bloomingdale’s stores and online.

Macy’s offered Dan the following deal:

• Macy’s offered to pay Dan $210,000 per year for an agreement spanning three years.
• Macy’s offered to Dan free of charge as part of the agreement, design space, computers and networks, sewing machines, materials, and the services of tailors and drapers to assist him in his work.
• Macy’s would purchase upfront the rights to all of Dan’s designs, going back to his college days, for $100,000.
• Macy’s intends to produce sweaters from Dan’s designs at an offshore manufacturer at a total cost of $11.00 per sweater. Macy’s buyers thought the price point of $70.00 would remain the same.
• Dan would be required to produce 10 new designs for Macy’s every year. After the expiration of the three-year agreement, both sides would be free to re-evaluate the agreement, but Macy’s would continue to own the original designs they purchased from Dan and those from the years of the agreement.
• This is an exclusive agreement. Dan would not be able to design or sell clothing outside of this agreement.

Dan asked the Macy’s buyers for a week to consider their offer and return with any counter proposals he wished to make. Macy’s agreed. If Dan turned to you for advice, what would you tell him about how to approach these upcoming negotiations with Macy’s?