Let’s start our discussion of pricing versus budget by saying that it is extremely beneficial to know your customer’s budget. And often, their budget will help shape yours. But, almost as important as knowing your customer’s budget is having some knowledge about the prices being offered by your competitors, or at the very least, industry standard pricing models. You probably have some ideas about all of these considerations, but let’s take a look at how you can gain an advantage from pricing know-how.
1. Choosing your approach
In many situations, where industry factors demand that you and your competitors necessarily have the same basic costs, same expectations for labor, and so forth, it is not unlikely that you will arrive at virtually equal prices. This is to be expected, and the task accordingly becomes compelling your audience that yours is the best company for the job, based on expertise and history. This is referred to as a cost-based approach to pricing.
But, in many other cases, if you are receiving a request for proposal (RFP), some other company is also receiving it – even if it’s a competitor you are unaware of. On some occasions, you will receive something called a competitive RFP. What this amounts to is an invitation to make your customer an offer they can’t refuse.
Competitive bidding means that you perform some business reconnaissance and learn all that there is to know about your customer, and perhaps just as importantly, your competition. As the old saying goes “knowledge is power” and the better you understand your customer’s budget, the more effective your proposals will be.
2. Know your costs
If you’ve been in business for long, you’ve probably handled every possible size and scale of project that you might receive an RFP for, thus rendering you keenly aware of all the costs involved in the day-to-day operation of your business. Before you begin to assign pricing, though, you need to have a firm grasp of all the costs involved in the fulfillment of the given RFP.
To arrive at the most accurate pricing possible, you may want to perform a comprehensive cost analysis of everything it will take to deliver your customer’s needs. This is especially true if the RFP calls for auxiliary functions or uncommon tasks – you’re best cost estimates for those things may be completely outdated, or simply nonexistent. In short, look at your costs from all angles (materials, labor, and all other sales-column considerations) before the proposal is even drafted. You want to make sure that, above all else, your actual costs are covered.
3. Understand your goals
Every business exists to make return on investment (ROI). Once you’ve assessed your costs, have a look at your business goals. Can you realistically fulfill the terms of the proposal and still meet your own goals? Doing so is crucial – and a surprising number of businesses get it wrong. If your cost analysis precludes you from realizing any ROI from the RFP under fair market rates, you will find yourself faced with a few tough questions:
- Can I reduce costs to realize profit without compromising the project?
- Can I succeed in compelling the customer to spend more than they might be expecting?
- Is there room enough in the customer budget to chance asking a price well above the competition?
As you can tell, if costs are a concern, you can still succeed with the right proposal; it’s simply a matter of asking the right questions in order to find the right solutions.
4. Learn the customer’s budget
On rare occasions, you’ll be either directly informed or otherwise made aware of your customer’s budget. But in the vast majority of RFP engagements, you’ll be relatively in the dark when it comes to how much money your customer has to spend. The foremost consideration is that most customers will be aiming to spend the minimum while receiving the highest quality of work. This is business 101, of course.
If you’ve done similar work for the customer in the past, you can learn from that experience. It’s not always easy to gather this kind of business intelligence, but the more you are able to learn about your customer’s budget, the more you’ll be able to edge ahead of the competition when drafting your proposal.
5. Know your competition
Another valuable resource is the knowledge of your competition – specifically, their pricing. You won’t always know what companies have received the same RFP as you; and in many cases, even those you are aware of may be keeping a tight lid on their pricing structure. In any case, it’s safe to assume that your most able competitors are operating within many of the same parameters as you are, typically in accordance with established market practices that you are also aware of.
You can draw from past experiences with competitors, too. If you’ve been undercut by a competitor in the past, you can look at driving down your prices to remain competitive as long as the project remains profitable to you. You might be surprised what a little bit of rudimentary internet research will provide. Perhaps your competitor has been involved in a publicly disclosed project similar in scope to the RFP you are competing for. In this case, the amount of money paid to the competitor may be a matter of public record. The best advice is to engage in some level of research to gain an advantage wherever possible.
6. When to pass
All this analysis and reconnaissance can sometimes lead you to a startling conclusion: needing to decline an RFP. Don’t feel bad, this is natural. Here are some warning signs that you might not want to expend the resources in bidding for a project:
- Some potential customers are just cheapskates. Case in point: if you can establish that an RFP comes from a business with a track record of awarding work to inexperienced, second-rate companies that provide services for half what you need, you may want to pass.
- If you receive a proposal from an organization that has a long history of using the services of a competitor, and that competitor is also receiving the RFP in good standing, you may be receiving an empty offer.
- If the requirements outlined in the RFP are far off-base or totally alien to industry standard practices, you might think twice before sending in a proposal.
That being said, most RFPs will not be wasting your time. The important takeaway when it comes to “when to pass” is to not let your company be priced out of business to keep pace with would-be customers and competitors engaged in unfair practices.
The pricing game recap
So, pricing and budget are huge concerns both for you and your customers. The better you understand all sides of the equation, the better off you will be. When you draft a proposal that is confidently profitable to you, and meets you customer’s budget, you free yourself to focus on all the other important steps in the proposal process. It’s also always great to know your competition inside and out, so that you never miss a chance to gain a competitive advantage when it comes to pricing. By putting some thought and effort into this aspect of business intelligence, you’ll take command of your proposals, driving them onward and upward, toward increased wins.
How is your approach to pricing working for you?