August 22, 2013
How to Use Value Based Pricing for Proposal Profit Maximization

This article is a guest post from Greg Eyres, Director and Principle Consultant of InforValue, a company based in Australia that provides proposal pricing advice and services. Greg has 20 years of experience in the finance and IT industries pricing bids and developing responses for proposals.

Over the past 5 years, an exponential explosion has occurred in the number of request for proposal (RFP) opportunities available to small and medium-sized businesses. Yet many companies still don’t see the RFP process as a proper avenue for acquiring new clients or generating more revenue. There is a growing fear associated with submitting worthy and competitive responses that prevents companies from investing resources in these opportunities. Most of that fear emerges when it comes time to determine a bid price, as the concealed nature of the bidding process can persuade businesses that utilizing deep discounts is the only way to win out over competitors. However, you don’t have to hit the big red panic button when it comes time to price your RFP submissions. 

pricing strategy

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What Exactly is a Request For Proposal?

Before we delve into the process of pricing RFPs, let’s properly define them. An RFP can have many different names – RFT (Request for Tender), RFQ (Request for Quotation), EOI (Expression of Interest) – but the process is essentially the same. A company or agency publishes an invitation for vendors to make a proposal for the supply of goods and/or services. Any competition for the relevant contract must be conducted in response to the request. There is a concrete deadline for all submissions, after which an evaluation team assesses the various responses and decides who will be awarded the contract.  

While responding to RFPs can be a bit daunting for vendors due to the blind nature of the competition, the right pricing strategy can turn an RFP into a game-changing opportunity. The fundamentals of an effective pricing strategy are as relevant here as they are in any market, but a few specific points are critical to developing an attractive proposal with a bid price that will still improve your margins. As such, let’s take a look at a few of the best tactics for structuring and pricing submissions to RFPs.

1. Timing Is Everything

When I first started working on pricing bids for RFPs in the IT industry some 20 years ago, there could be as much as 6 months to respond depending on the magnitude of the request. Nowadays, it’s fairly common to see a hefty RFP with a deadline requiring a response within four weeks. Talk about pressure!

Well, even long ago when there was half a year to develop a big proposal, pricing was always done at the last minute. The technical solution was pulled and tweaked right up until the last possible moment and then thrown over the fence to the pricing team. Up until that point, we never even saw the thing.

value-based pricing

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Doesn’t sound like such a great job right? How can we possibly determine what a saleable, profitable and deliverable price is when we have half a day to evaluate the project and come up with a number? Even worse, some executive has determined that the price is too high an hour before the submission is due and wants to slash the bid by 15%. On what basis has this been determined? What evidence is there to support this discount? Since it’s far too late to confirm or deny these numbers, the bid goes in with a price that no one can confidently support or justify.

The lesson from this: pricing must be top of mind as soon as you consider responding to an RFP. In order to price your proposal effectively, your pricing strategy needs to be included in every step of the development process, from the qualification stage to the final moments before submitting your bid. The bid price is an exchange rate that must support the services offered in your response, so don’t deliver a Rolls-Royce solution and price it like a VW Beetle just to win the business.

2. Your Client is King

Furthermore, in order to justify the price of your proposal, you must make sure that the client’s needs are the focus of your decision making. What the client wants should drive the technical solution, the pricing, the way your response is structured, and how the services are delivered. All too often, service providers get so bogged down in the technical details contained in the RFP documentation that they forget exactly what problem the client is trying to solve.

You must take a holistic view of the client’s request to develop a solution that includes the services and features that will provide value to the client. In fact, what you really need to analyze is what the client is buying versus what you are selling. I know this sounds simple and obvious, but it’s important that you ask yourself this question very early on in the process.

value metric

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 I learned this firsthand with a very large IT outsourcing RFP. A large financial institution was looking to outsource some back-end data processing, and at face value, it looked like our client was simply trying to find cheaper labor locally or overseas to reduce operating costs. However, the bid team I was on determined that this wasn’t the case. What they actually wanted was to remain at the forefront of technology to ensure they could process transactions as quickly as possible, both now and in the future. So, we gave them access to a web portal that displayed the processing times of a substantial amount of companies both within the industry and outside the industry. This is exactly what they wanted to see to ensure they were at the front of the pack. The cost to our organisation to implement the portal was inconsequential, and we went on to win the RFP.

3. Focus on the Right Value Metrics, Not Populating Your Pricing Schedules

Anyone who has ever been involved in a large RFP has probably felt the need to flee to higher ground when they see the spreadsheets for the first time. Particularly when doing work for government proposals. The most horrific one I ever saw was an enormous spreadsheet with 30+ tabs and literally thousands and thousands of rows. Unfortunately, a vast majority of organisations believe that the primary role of a pricing analyst is to fill out spreadsheets like these based on arbitrary internal cost allocations (Sorry, my little rant!).

Anyways, you still have this convoluted and incredibly complicated spreadsheet sitting in front you that you have to fill in. What are you going to do? I know you want me to say there’s a magic formula for populating all the cells, but there is no silver bullet. You still have to fill in the pricing schedule (the price sheet listing all the items that may be purchased from the vendor) in its prescribed format, but that shouldn’t dictate how you think about your pricing.

pricing strategy

 Photo Credit: gonzalo_ar

The reason you want to look at pricing in a different light is so you can put yourself in a position to demonstrate the additional value you can provide to your client. You have to focus on the problem that caused them to use the RFP process in the first place and find the value metric that provides the solution.

A bid manager recently told me an interesting story that brings this point home. The US Air Force is the biggest outsourcer of services in the world. They put out an RFP to maintain their fighter jets in foreign countries, and the successful bidder offered a unique solution to win the proposal, based on two simple questions: What is the true value the Air Force is seeking, and what business are they in?

Well, when their jets are on the ground, they clearly can’t perform the tasks the Air Force needs them to do, and it’s imperative that they’re on the ground for as short a time as possible. The successful bidder knew this and developed and priced the solution accordingly.

The price was not presented as a price per part or a price per number of service hours. Rather, the price was presented as a price per number of hours in the air. This was brilliant pricing along a value metric that truly meant something to the client, and ensured that the service provider delivered value to the client by minimizing the amount of time the jets spent on the ground. The vendor had to implement some pretty amazing inventory management and distribution systems to deliver that solution, but they really hit the client’s value sweet-spot and could thus price accordingly.

price management

Photo Credit: HooLengSiong

Summary:  Don’t Fear RFPs – Embrace the Opportunity and Price Value

Pricing is a powerful weapon in your RFP arsenal, but in order to use it to your advantage, you need to think outside the box. Creating a bid price for your response is more than adding up your operating costs, deciding on a profit margin, and hoping for the best. Find out what the client truly needs so you can develop a solution that provides the greatest value, and include pricing in every step of the process to ensure you can confidently justify the exchange rate for your services.

To learn more about pricing specifics, check out our Pricing Strategy ebook, our Pricing Page Bootcamp, or learn more about our price optimization software. We're here to help!


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