How to win on price without losing money

Most companies think that the best way to win on price is to figure out what price your competitors will bid and try to come in below that. But that’s just believing the lie. It also doesn't point you towards any viable bid strategies other than lowering costs and hoping the customer lets you get away with it without destroying your past performance record. It sets you up to bid less for the same amount of work, and either make little or no profit, or to actually lose money.

When it’s up to you to figure out the right approach and the right resources, then the most effective way to lower your price is to best understand how to limit the scope of the work. Bidding based on lower expectations reduces your price far more effectively than bidding lower rates. Bidding a lower price that results from a reduced set of expectations is much better than bidding a lower price against the same expectations.

But how do you bid based on a lower set of expectations? To achieve this, you have to understand what must be included and what the customer is willing to do without. You need to know what results the customer must have, as opposed to what they would like to have. The challenge isn’t to shave pennies off your rates. The challenge is to understand what your customer is willing to accept. The hard work that you need to do to win on price is understanding the customer's expectations and preferences, and the scope of work, not understanding what your competitors' rates are or how to bid less than them without losing money.

When the customer tells you exactly what to bid and everyone will be bidding the exact same thing, then the best way to win on price is to have a lower overhead. With a low overhead, you can bid the exact same thing as a competitor with the exact same profit margin, but do it for a lower price. The hard part in this scenario isn't knowing your competitors' prices and being able to bid under them and get away with it. The hard part is reducing your overhead. Instead of trying to reduce overhead by cutting back a little, we recommend going for a ridiculously low overhead by doing things radically different. Instead of trimming, try eliminating entire categories of expenses. Outsource. Go virtual. Do without things that everyone else has.

With the trend towards Low Price Technically Acceptable (LPTA) evaluation criteria, you can expect customers to start specifying every little thing in order to make sure that contractors deliver as promised at the lowest possible price. As they do so, your overhead rates will become more important for all types of procurements. The trend towards LPTA requires the commoditization of everything, whether it makes sense or not. The winners will be the ones who bid the lowest acceptable set of expectations and have the lowest overhead.

In addition to the two types of procurements we've considered, you also need to be extra careful when you are the incumbent. As the incumbent, salary growth over the life of the contract can make your staff more expensive than the staff that your competitors will bid (who are merely qualified). If the value of their experience will not be evaluated, then you may need to replace some of your staff in order to be price competitive for the recompete. To avoid this, you need to be close enough to your customer to change the staffing specifications, define price reasonableness, and better yet change the scope of work. In some ways, this is just a variation of the need to understand the customer's expectations. But as the incumbent, you may be better positioned to change those expectations.

For both types of procurements, another important factor is to restructure your proposal process so that pricing starts before your proposal is written. This requires you to be able to articulate what you will be proposing before it is written, and to be able to change it based on your pricing evaluation, before it is converted into a narrative response. If you design your offering by writing about it and then price it, not only will you run out of time and not be able to do the best job of calculating the lowest prices, but you also will not have time to change your approaches if you find they cost too much. You need a process that defines your offering before you start writing about it. 

If winning on price is more about understanding customer expectations and having enough time to get creative with your prices and approaches, you need to modify your pre-RFP business development, capture, and post-RFP proposal processes to reflect that winning on price is not about shaving pennies from a spreadsheet at the last possible moment. The right process will not only increase your ability to win, it will increase your ability to win at an acceptable profit margin, while preserving your ability to perform without destroying your past performance record. This, in turn, increases your future win rates. If you've ever wondered why some companies seem to consistently win, this is their secret.