In public sector procurements, the concepts of “price to win” and “price to execute” represent two distinct approaches to bidding and project execution. While I advocate strongly for using a “price-to-win” approach, there are limitations. There are times when companies price too low and run into challenges during program execution, which can lead to missed deadlines, customers needed to spend more money than anticipated, and long-term past performance issues that can impact future procurement responses. Ultimately, companies should be modeling both a “price to win” and “price to execute” to better understand their competitive position and potential risks.
Price-to-Win Approach
The “price-to-win” approach involves setting a bid price that is most likely to win the contract, considering competitive pressures, customer expectations, and market conditions. This approach focuses on the external factors influencing the procurement process.
Key Aspects:
1. Competitive Analysis: Understanding the competitive landscape is crucial. This involves analyzing past bidding patterns, understanding competitors’ strengths and weaknesses, and estimating their likely bid prices.
2. Customer Insight: Gaining insights into the customer’s priorities, budget constraints, and decision-making criteria helps tailor the bid to meet their expectations. This may involve customizing the solution to align with the customer’s strategic goals.
3. Market Conditions: Considering market dynamics, such as economic conditions and industry trends, can influence the price-to-win. Being aware of these factors helps in setting a competitive yet realistic bid.
Advantages:
• Increased Win Rate: By focusing on what it takes to win, companies can increase their chances of securing contracts.
• Market Positioning: Successfully winning bids can enhance market presence and reputation, leading to more opportunities.
• Revenue Generation: Winning contracts creates the backlog that leads to revenue, which is essential for business growth.
Risks:
• Financial Viability: Aggressive pricing to win may result in lower margins, impacting profitability.
• Quality Compromise: There is a risk of underestimating project costs, leading to compromises in quality and delivery.
Price to Execute Approach
The “price to execute” approach focuses on accurately estimating the costs required to deliver the project successfully. This approach prioritizes internal factors such as resource requirements, project complexity, and risk management.
Key Aspects of Price to Execute:
1. Cost Estimation: Detailed estimation of all project costs, including materials, labor, equipment, and overheads. This ensures the bid covers all necessary expenses.
2. Resource Planning: Assessing resource availability and allocation properly to create the highest likelihood of executing the project efficiently.
3. Risk Management: Identifying potential risks and incorporating mitigation strategies into the bid price to prevent unforeseen costs.
Advantages:
• Financial Sustainability: Validates that the project is financially viable, with adequate margins to cover costs and generate profit.
• Quality Assurance: Accurate pricing allows for the allocation of sufficient resources, maintaining high standards of quality.
• Risk Mitigation: Incorporating risk management into the pricing reduces the likelihood of cost overruns and project delays.
Risks:
• Competitiveness: Higher bid prices may reduce the chances of winning contracts in a competitive environment.
• Market Perception: Being perceived as expensive could impact the company’s reputation and future bidding opportunities.
Balancing Price to Win and Price to Execute
The optimal strategy in public sector procurements may require balancing both price to win and price to execute approaches. Companies must consider both external and internal factors to develop a competitive yet realistic bid.
Strategies for Balance:
1. Comprehensive Analysis: Conduct both competitive analysis and detailed cost estimation to find a middle ground that meets customer expectations while ensuring project viability.
2. Value Proposition: Emphasize unique value propositions, such as superior quality, innovative solutions, and past performance, to justify a higher price if necessary.
3. Customer Communication: Engage with customers to understand their priorities and constraints, enabling a bid that aligns with their needs while covering execution costs.
4. Flexible Pricing Models: If allowed, consider offering flexible pricing models, such as phased payments or performance-based incentives, to align customer and vendor interests.
Both the price to win and price to execute approaches have their pros and cons when trying to win public sector procurements. A balanced approach that integrates competitive pricing with accurate cost estimation can provide reasonable assurances that companies can win and execute contracts while maintaining financial sustainability and delivering high-quality results. By strategically navigating these approaches, companies can enhance their competitiveness and achieve long-term success in the public sector. Contact us to learn more!
