If you opt for choice number two, here is an example of the language you can use:
You: "Mr. Prospect, thanks again for taking the time to speak with me today. I've certainly enjoyed our conversation. Based on what you are currently doing, it seems that our product is not a good fit for you. However, I hope our conversation reinforced what a great job your current vendor is doing for you.
"While there may not be anything I can provide you that would make a measurable difference in comparison to what you are doing now, maybe there's another way we can work together. In your line of work, I'm sure you run across other people who have shared similar challenges that you have, and who might be looking for a better solution. If you know someone who is always looking out for ways to do things better and who you feel could benefit from our product, would you be comfortable referring them to me?"