201 Reading: Price in the Competitive Bid
What role does the price play in the competitive bid process? The answer to this question can vary significantly, but in every case, the marketer has a specific goal: to minimize the role of price in the proposal. To understand what this means, let’s consider two different scenarios.
Scenario 1: The value proposition of all solutions is identical; there is absolutely no differentiation between the products, companies, or brands. In such a case, suppliers can only compete on price. Each proposal must slash prices to the lowest possible level in hopes of coming in below the other bids.
Scenario 2: Each solution is differentiated in every element of the marketing mix. Price is different for each solution and is based on the value provided by the product, the service and relationship commitments, the brand, and the expected customer experience.
Consider both scenarios. If you are hoping to set the highest possible price, which one would you prefer? Clearly, scenario 2 provides much greater flexibility in pricing, because the marketer can use price as one of several tools to differentiate the proposal and maximize the value, rather than having only the option to drop price.
There are two primary reasons why businesses don’t want to compete on price alone in a competitive bid situation.
- Price is not a sustainable competitive advantage. Competitors can copy prices more easily than any other element of the marketing mix. When a strong competitor sees weaker companies competing only on price, it can lower prices temporarily and drive others out of the market.
- Low prices can jeopardize a company’s ability to profitably deliver sustained value. When the price is very low, there’s a risk of cutting into profits or needing to reduce service in order to cut costs. Both create risk for the business over the long term.
The best approach to pricing in a competitive bid situation is to be disciplined about optimizing the full marketing mix. Practically, companies generally use one of two approaches to arrive at the package that provides the greatest value in a competitive bid situation. In situations where price is not the dominant decision factor, the marketer can craft a proposal that best addresses the customer’s business goals and needs. Then price can be set at an appropriate level to support the unique value offered in the proposal. In this case, price supports a differentiated proposal that provides unique value.
Sometimes price is unavoidably the dominant consideration. In fact, in some government bid processes, the buying organization is required to select the bid with the lowest total cost. In other situations, the company knows how competitors are pricing and has an indication of where it must price in order to be competitive. In this case the price becomes somewhat fixed, and the marketer must determine which proposal offers the highest possible value at that price. It requires discipline to be realistic about costs and trade-offs, else there is risk of underpricing. A disciplined approach enables the marketer to create a proposal that maximizes value, rather than ignoring the pricing realities and submitting an uncompetitive proposal.