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Pricing Strategy
More Than Low Price-More Than Just Price
by Will Lindquist
It’s really important to focus on the hard proposal questions: technical qualifications, management and performance. Yeah, but you can’t ignore what constitutes a winning and profitable price. Often companies only focus on the lowest price, or the lowest cost multiplier possible, or even the lowest cost talent possible – just to win. Sometimes you have to be involved with the answers to those questions, but you can’t stop there. You also have to find out what issues around your proposed price will make your proposal the customer’s choice. Some of those directly affect the total dollar amount. Others involve presentation and pre-analysis of the cost proposal so that the proposed amount is both believable and perhaps puts a shadow of doubt in the customer’s mind about any competitor’s lower-priced proposal.
Real pricing strategy involves creating company response to at least 12 pricing approach points.
1. Customer perceived risk assessment. Is there a customer risk associated with price? If the contract is firm fixed price, perhaps not. If it’s anything else, how do we assure the customer that he won’t have to experience cost overruns or that he won’t have to settle for less product or service to stay within budget?
2. Your real risk assessment. What is the real likelihood that costs will be different than those priced in the proposal? What are the upside and downside limits to possible cost?
3. Return on investment analysis. What is the expected profit on the project compared with the resources that will have to be dedicated to it over it’s duration?
4. Cost to hire/retrain/promote technical team. What are the recruiting costs associated with finding adequate staff to perform? Is there a possibility that staff cannot be found? What salaries will you have to offer to find or retain them? Can you afford them?
5. Cost impact on corporate indirect rates (short and long term). Will the increase in business dilute the corporate indirect rates, causing them to fall? Will the costs of start up or staff retention add significantly to indirect costs (recruiting costs, for example)? How much will they add? What effect with the changes have on the cost of the project?
6. Additions/reductions in support staff requirements. Will the growth in business require the addition to additional support or management personnel? Will this positively or negatively affect indirect rates?
7. Additional facilities or resource equipment. What added facilities or equipment will be added by the project? Will you have to make additional investments of dollars? How about the additional investments of employee time required?
8. Customer’s winning price. What price does the customer expect to pay for the project? What did it cost last time? How does that differ from your price? Can you explain the variance in the proposal.
9. Competitors’ likely price. What is your competition likely to offer? Have they done this job before? What was their price then? Is there a technology change that will affect price? Explain it in the proposal. Is experience a real determinant of price? Explain that.
10. Customer funding issues. Does the customer have the funds required to perform the entire program? Is funding annual, special appropriation, scraped up year-end funds? What are the risks that future years will not be fully funded? It would be a shame to make a big investment expecting 5 years of work and get only 1.
11. Additional capital investments & expenditures. If additional capital investment is required, will there be timing issues? Will program risks affect the investments?
12. Profitability. What is the anticipated profit? If there is a substantial time involved, are profits realized earlier or later in the program? If the answer is later or if profit is low, is the program worth it?
No matter what the solicitation says, price is always the most important determinant of who will win. Preparing an effective price proposal is much more complicated than simply filling out the spreadsheets. We recommend focus on four organic elements of presenting a compliant, competitive and profitable price to achieve the desired result – a win.
The Easy One:
The price proposal must be compliant with all of the provisions of the solicitation. It must be compliant while not violating your disclosed accounting practices or altering your business strategy by quoting a price that has an impact elsewhere on another program. Compliance sounds simple and not very interesting. Sometimes though, just being compliant without impacts elsewhere in the organization requires creativity. Just getting it right the first time presents a professional image. If you’re just compliant, the customer can believe that doing business with your organization will at least be easy, with few problems.
Your price must be presented in such a way that, at the same time, it’s believable and demonstrates competent company practices and business dealings. Don’t look like an amateur. Once again, the customer needs to know that it will be easy to do business with you after award.
You need to work hard to make the price proposal easy for the evaluator or pricing analyst to assess. If there are conclusions evaluators will have to draw from your proposal, you do the analysis for them, draw the conclusions that leads them to your solution. State those conclusions in the proposal. This eliminates the risk they could analyze the wrong numbers and extract the wrong conclusions in their evaluation.
The program should be profitable when it’s awarded. Programs can get into enough trouble after you win. Even if your proposed price was very low to get the business, it needs to be profitable long term to be worth doing. Spend the time to ensure projects are intentionally profitable. I’ve never seen “cost ought to go down” happen, never!
The U. S. Government has complex pricing requirements. It is possible to unravel the mystery and complexity of it all and shape the pricing strategy into believable, sound, and competitive winning proposals. Careful pricing can be the difference between success and failure. Remember, the only thing that’s worse than having no business is having business that you lose money on.
About the Author
Will Lindquist, President of The Management Link Incorporated, is a sought-after expert in the field of business management. He has a broad background and experience in business strategy, finance, and operations with both large and small corporations such as L-3 Communications, Orbimage, and Fleishman-Hillard. Will approaches every problem with an appreciation for the bottom line and how to grow his clients’ businesses. He brings both strategic and tactical know-how, focusing on financial considerations, business development, and operational excellence. His solutions are practical as well as innovative. Contact Will at Will@TheManagementLink.com . You can find out more about The Management Link at www.TheManagementLink.com.
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