In competitive tenders, pricing strategies are crucial for organizations to ensure a balance between remaining cost-competitive and ensuring a sufficient profit margin. To develop a winning bid, organizations must understand their costs, the marketplace, and the value they bring to a potential client. Fixed and non-negotiable pricing in many invitations dictate that pricing should be a one-shot proposal, placing greater emphasis on initial strategic pricing considerations.
As buyers are seeking the most economically advantageous tender (MEAT) which can determine whether you win the bid. To ensure that your pricing strategy will win you the tender, you need to understand different strategies out there. Some examples of different pricing strategies include cost-plus pricing, value-based pricing, and economies of scale.
Understanding Tender Pricing Fundamentals:
In competitive tenders, companies must master the calculation of precise pricing to stand a chance of winning contracts. An understanding of the direct and indirect costs involved, adjusting for economies of scale, and devising a strategy that aligns with the tender's evaluation criteria are critical for a successful bid.
Core Components of Tender Pricing
Tender pricing is a delicate balance of value and costs, where firms aim to maximize profit while remaining competitive. Costs are broadly categorized as direct costs, including labor, materials, and equipment directly tied to the project, and indirect costs, which encompass overhead such as administration and utilities. Economies of scale can significantly affect pricing; as the quantity of work increases, the cost per unit of output may decrease, offering a competitive edge. Profit is the reward for undertaking the project, often reflected as a margin atop the costs. It's calculated by adding a marked-up percentage to the total costs, known as cost-plus pricing.
Aligning with Evaluation Criteria and Contract Goals
Successful tender pricing goes beyond cost calculation; it involves aligning the bid with the tender's evaluation criteria and the overall contract goals. An understanding of value-based pricing can enable a firm to tailor their bid more effectively. The tender response must articulate how the proposed prices support the client's objectives, while a competitive analysis ensures the proposed fees are in line with industry standards.
Firms should also take into consideration the long-term relationship with the client, as winning a tender may open the door to future opportunities. By presenting a pricing strategy that encapsulates cost efficiency, quality, and alignment with the client's goals, companies position themselves as valuable partners rather than mere service providers.
Cost-plus pricing is a common pricing strategy that considers all costs (direct and indirect) and adds a margin to produce a selling price. Value-based pricing is another strategy that prices your products and services in line with what customers are willing to pay. However, it may be too low, so you should review your costs and overheads. Economies of scale is a pricing strategy most commonly used in mass operations, where the more your company produces, the more you can lower your costs.
- MEAT is the most economically advantageous tender strategy, which combines price and quality. Buyers look for the lowest price (70% price and 30% quality) and the highest quality (30% price and 70% quality). MEAT makes the tendering process fair and transparent, ensuring that suppliers don't win the bid on pricing alone. When submitting your tender response, it is important to consider your pricing carefully, as most invitations to tenders (ITTs) state that your pricing is fixed and non-negotiable. If you want to change your pricing after winning the bid, your only option is to decline the offer.
To decide on a price for your products and services, read the specifications thoroughly and carefully. Your pricing should only cover what the buyer has asked for. If you include extra costs in your price, you have less chance of winning the bid. However, there are exceptions, such as if the buyer is looking for added value in the evaluation criteria. If you don't agree with the buyer's specifications or evaluation criteria, this tender might not be right for you.
Process of winning a tender
The process of pricing a winning tender is crucial in the public sector, where 70% of customers feel quality matters. Tender documents should be clear about what making, saving, and happiness means, and the score weighting in the specification can help determine what the customer really thinks. To ensure that pricing is a part of the win strategy, ask yourself a few key questions:
1. Do you want to be cheapest or have a balanced quality/price offering? If balancing quality and value, where is the point of highest value to the customer? An example of this is future savings on another area of their budget or a massive improvement in outcomes.
2. Do you have the ability to be price competitive? This could be because of an innovative technology, a supply arrangement, or an ability to operate at lower margin/overhead levels. If you don't have a plan to undercut your competitors, don't try. You may need to make changes in your own organization before trying to compete on price.
3. What are the implications of your low-price offer to the customer? If it looks "too good to be true," you will need to clearly explain why it is credible and safe. If it will lead to big job losses or service shutdowns, ask if the customer can accept that.
4. Create strong relationships with cost modelers. If they are invested in the tender, they will become positive actors; if not, they will be the opposite. Show consideration to their needs and learn their busy times (month and year end) and plan to minimize the impact of bid work at these points. It is vital to work well with the cost modelers. Key executives will most likely listen to them, especially if you are an external consultant, so their buy-in to the bid strategy will be critical.
5. Follow the specification. There will be a financial envelope in the bid documents. Some customers let you exceed it (variant bids) if this is justified. Most do not. You do not want to have worked to produce a 40,000-word written submission only to find it won't be assessed because the price is too high.
6. Risk assess at key points and have a process for Go/No Go. When you receive the tender documents and see the price envelope, do an initial affordability analysis. Don't be afraid to hear "we can't do it" at this point; it is a call to explore new service models and approaches that might reduce costs significantly.
7. Around the middle of the bid, have an idea of the risks, costs, and if any gaps can be closed. The financial analysis at this point will help you refine the service model and provide a sense of the risks involved. Don't be afraid to have a robust debate at this point; it is better to test the viability at this point than at the end.
8. Have a planned sign off session. Ensure the key decision makers are on the call as when the people who can advise. Record the decision clearly and unambiguously.
9. Know your own costs early in the tender, and preferably before. Factor in pay, non-pay (estate costs, insurance, equipment), consumables, and any corporate overhead associated with delivery. Whatever you deliver there will be a full cost cycle associated with it.
Tenders usually include a Financial Modelling Template (FMT) that may require you to split your costs in a different way to your usual financial reporting.
Navigating Contract Management and Financial Risk
In summary, contract management is a complex process that requires careful planning and execution. It involves understanding the financial risks associated with winning a contract, such as TUPE costs, contract penalties, and presentation of costs. A sensitivity analysis can help manage these risks by identifying the best, middle, and worst-case scenarios and projecting each one forward for the contract term.
Providing clear presentation of costs is crucial for customers who have to justify decisions to the public, an inquisitive board, or shareholders. Most templates ask for breakdowns of overhead costs and margins, but this may not accurately reflect the amount of service or product being provided. If the margin or overhead is too small, it may lead to increased risk of business failure or approaching the customer for more funding.
Strategic Pricing and Business Development's Role
Business development expertise is essential when pricing contracts, as they will be focused on the customer and the entire bid, making them sensitive to presentation issues. Putting some overhead or margin in costs can help "de-risk" the contract, but be careful not to do so.
For supply framework tenders, cost in sales resources can be a significant risk. For example, a multi-billion-pound framework in IT was won without a plan to use the framework or resource assigned to sell capacity. To manage this risk, it is recommended to start planning with the sales team at bid kick off.
Bid Planning and Financial Justification
Amortizing bid costs involves taking the cost of bidding and spreading it out over the contract, which helps justify hiring contractors and specialists. It is important to know how much it costs to bid and work it out to avoid surprises.
Investing time in your service or production model is also essential, as operational and service leads often have a range of ideas about how to make things better. The role of Business Development (BD) in this process is critical, as they can help overcome reluctance to share ideas due to hierarchy, profession, confidence, and culture.
Service modelling can be challenging, but having finance involved can help overcome these issues by testing assumptions, focusing on ideas that often get ignored, and identifying "whys." Having a good accountant and spreadsheet driver can help with partnership bids.
Watching margin on margin is crucial, as many bids require partnerships and sub-contracts. A simple approach to modeling the cost can lead to sub-contractor margin being added to the overall cost. To avoid this problem, use innovative modelling and partnership approaches or remove the sub-contractors margin when calculating your own margin.
Conclusion
Lastly, it is important not to let finance de-risk without your knowledge. If trust between finance and business development teams is low, they may add little bits of margin to salaries, overhead costs, etc., increasing the overall price to a point where it can become uncompetitive. If there is a good relationship with finance, any "de-risking" should be an agreed approach. If there is a poor relationship, keep a close eye on the cost model and benchmark key information.