Financial Modelling for Bids

Submitting bids to requests for proposals (RFPs) can be daunting, not least because of the concealed nature of pricing up bids. A crucial aspect of your proposal, the cost-estimate, allows the buyer to assess the viability of your proposal from a financial perspective and as such, putting forward a clear, competitive quote is essential. Nonetheless, organisations must also ensure that the estimate adequately covers the work due to be carried out, to avoid cutting themselves short.

Developing a bid pricing strategy can be an easy way to take the stress out of submitting RFPs, through creating a rationalised and structured process to draw up bid costs. Below we explore the most common bid pricing strategies.

Things to Consider when pricing a Tender

Price is one of the key variables in the marketing mix. With this in mind, businesses must find the fine line between attracting prospective clients with competitive pricing, whilst ensuring that they are still making a profit on the goods or services provided. To this extent, the cost of producing the goods or services should set the lowest parameter for pricing, whilst consumer perception and demand allow for higher cost parameters.

Generally speaking, there are three common pricing models that companies use to set an appropriate price for their products and services.These are cost-based pricing, value-based pricing, and competitive pricing.

In a pricing model, the input is price and the output is the assumed profitability. In simple terms:

Units × Price= Revenue

Revenue –Expenses = Profit

However, there are also a number of other considerations which can complicate the process of developing an effective pricing model. This includes competitors, production costs, customer demand, industry needs, profit margins – and much more. Because of this, pricing models can be very complex and more often than not, businesses fail to follow any implemented strategies – particularly when looking to price competitively.

As a starting point, we would always recommend that businesses undertake a pricing analysis to determine:

1. The true cost of your supplies: including all the fixed and variable costs associated with producing your product or service

2. Target market perception of your supplies: to evaluate what consumers are willing to pay for your product or services

3. Competitor pricing: to understand the direct and indirect alternatives available to your product or services and what consumers are currently paying for them.

Cost-Based Pricing

Cost-based pricing models are one of the most common methods of pricing up bids and a good starting point – particularly for SMEs or inexperienced bidders. Cost-based models are those which consider all the costs associated with creating the product or service along with your percentage mark-up (sometimes referred to as ‘cost-plus pricing’).

This cost model is popular as they can easily be broken down and rationalised to prospective clients. They can also be easily adapted to reflect any fluctuating costs within your supply chain, with organisations able to justify price increases to clients as being reflective of the current marketplace.

Value-based Pricing

Value-based pricing is an approach whereby organisations price products or services based on what consumers are willing to pay for the product– rather than what it is necessarily worth. As such, value-based pricing is often higher than cost-based pricing and is affected by demand and the availability of alternative solutions.

Value-based pricing typically offer businesses the most profitability.

Competitive Pricing

Competitive - or competitor-based – pricing models are those which utilise the pricing structures of competing companies to arrive at a suitable price-point. When using this pricing strategy, an organisation must assess several competitors – including service/product offering and pricing – and must then identify where they sit within the competitive marketplace.

Following from this, the organisation can then make a logical call on whether to price above the competition (for example, if their product offering is more extensive than that of their competitors), price at the same level, or price below competitors (sometimes used to undercut competing organisations and steal market-share).

Competitive pricing is particularly popular amongst start-ups whereby key stakeholders have little existing company data to work with in order to develop their own internal pricing strategy.

Understanding Tender Evaluation Criteria

Beyond just assessing the level of profitability desired by your organisation, bid pricing strategies must be geared towards the buyer to ensure that your organisation has the ability win the bid in the first place. To this extent, organisations must be considerate of the tender evaluation criteria that buyers use to assess bids within the appraisal phase. In many RFPs an evaluation criterion will be included, but if not, buyers typically assess proposals using a  MEAT matrix – the most economically advantageous tender. This considers the price of your proposed goods or services and the quality of the information and solution that you have provided.

Typically, pricing is weighted by awarding the lowest priced proposal maximum points and the highest priced proposal the lowest. All other proposals are then awarded scores in relation to the parameters set by the lowest and highest priced bids. Because of this, organisations must always be mindful of competitor pricing before submitting bids, to ensure that pricing is not significantly above other tenders.

Final Thoughts

RFPs are great opportunities to secure new business and extend your client base, and as such should not be feared. Nonetheless, cost is a crucial aspect of your proposal that must be carefully considered to ensure competitivity, whilst still delivering profit to your business.

Few SMEs properly realise the benefits of a bid pricing strategy and moreover, often lack the in-house expertise to implement one in the first place.

At Athena, our bid experts can help your business to understand the best pricing strategy for your business, including how to best place yourself within your industry marketplace. Our expertise allows us to assist you when it comes to utilising proper bid pricing practises that will deliver. We can guide you in reviewing your existing bid management processes and help you to design and implement a focussed strategy that’s aligned with your organisational goals.

For further advice or an initial consultation please get in touch atinfo@athena-commercial.co.uk.