How to set the right price and pricing strategy that puts you in a position to not only win, but also achieve your profitability targets
Your company receives an RFP for a Govt. contract, and the clock starts ticking. In 30 days you want to be in a position to deliver a strong proposal, a bid that will help you win, but not at the expense of winning a deal that you can’t make money on. It’s a balancing act - to win, but not to win at all costs. You’ve done similar work before but not this, not exactly what the Govt. is asking for.
How can you be confident that your proposal will be competitive enough to win but priced where you can deliver the project profitably? How confident can you be in your proposal at all?
Typically, the first gauge is to determine the Price-to-Win. This is an outside-in perspective, given competitors, partners, the customer, and any other insights you might have, to help determine the highest price point for which you still believe you have a good chance of winning.
However, if you want to submit your bid with confidence, you need to understand what it takes to deliver the project, the specific risks that can derail execution, and to what degree of confidence can the project be delivered within the estimate. The goal is to give decision-makers not just a single point cost estimate, but instead the risk-adjusted cost, meaning what is the probability that I can deliver this project within a certain cost and equally what is the probability that I will earn a certain revenue.
The graph below shows a rolled-up summary of what executives should be able to see for every proposal.
In this case, it shows that with a 50% probability we can deliver this project with a 48% margin or better compared to the price-to-win target. However, due to several larger risks (both cost and revenue risks), there is a 20% risk that we will either break-even or even lose money on this bid.
Obviously, the context is key here and the follow-up questions will naturally be: What are those risks? Where does the underlying uncertainty lie? Are there things we can do to mitigate any of the risks? This drives good productive conversations that help determine the exact price point and negotiation strategy to take.
Using this type of approach, also means that project-centric companies can define pricing policies that e.g. dictate that a VP approval is needed for bids where there is less than 50% probability to deliver a 15% margin or if there is less than 90% probability to break-even.
You might ask yourself, how do you build an estimate that captures the appropriate uncertainty that makes up the risk-adjusted cost? There are 5 complementary ways in which we recommend you do that. You may choose to do some or all of them.
3-point estimating - capture estimates as a range with best-case, worst-case, and most likely, instead of just a single estimate
Risk register - capture risks that can impact your estimate given both a probability and cost impact
Confidence scoring - estimates are given a confidence score based on the source that was used to estimate it. Meaning the confidence is a lot higher if you received a quote from a supplier for the exact item, compared to an engineer estimating what it cost to design a new part
Independent cost estimates (ICE) - an independent person provides an alternative overall estimate looking at it from more of an outsiders perspective
Overall performance risk - a project is given an overall performance risk dependent on the perceived risk, which impacts the slope of the risk-adjusted cost
For more details about the individual methods for capturing uncertainty and how to use methods such as Monte Carlo Analysis to aggregate the results into an overall risk-adjusted cost, check out Part 2 and Part 3 of this blog series - Bid with Confidence. These blogs will be published in early July.