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The Pricing Game: Should RFPs Be Deep-Sixed?
October 16, 2008
By Reed K. Holden
Smart pricing organizations know that not all requests for proposals (RFPs)—or their even nastier cousins, requests for information (RFIs)—are created equal. Some are genuine attempts to identify the best vendor for a project. But many RFPs, like verbal contracts, are not worth the paper they are on.
Many RFPs, in fact, are little more than attempts by customers to extract lower prices on high-value products and services. This article will help you distinguish between legitimate RFPs and swindles designed to get you to drop your prices.
The first thing to do is calculate your RFP conversion rate. In other words, what percentage of RFPs do you win? If you don't know, don't feel alone. Very few organizations do. But it's a critical metric, so if you don't know, please find out.
Out of 100 RFPs completed, the average company wins 10% to 20%. If it's as much as 40%, few companies can match you. With the exception of some sectors (e.g., government) in which RFPs are standard operating procedure, companies should take a close look at the resources they are dedicating to them. In many cases, the resources can be better used elsewhere. For some companies, responding to RFPs is a complete waste of time.
Procurement professionals have learned the value of playing poker with their customers, and RFPs is one of their best moves. Their agenda is twofold: First, they want to bluff suppliers about their true intentions. They do this by disguising the fact that they almost certainly have a preferred vendor it would take a tsunami to dislodge.
There are some customers where you simply don't have a chance of winning the business. Maybe you don't have a relationship with the right people. Maybe the existing vendor is too embedded. Maybe you have a product that is higher priced than the other competitors. In any of these cases, you are wasting your time.
Accept that your company is on the list of suppliers as a "rabbit." A rabbit is included not because you are a serious contender for the business, but to drive the preferred competitors' prices down. If you're a rabbit, your chance of winning is zero, so why waste the time? Let your competitors do that. The time you free up can be used to do a better job of marketing or responding selectively to the RFPs that may have promise.
They might also exaggerate the amount of business at stake, which is done to set up the second part of the bluff: They want the bidding vendors to start a price war. For the unfortunate vendors responding to the RFP, it's usually a losing proposition. Even if you lower your prices sufficiently to get the business, it's a Pyrrhic victory because you usually can't serve the company profitability. In fact, everyone loses. The net result of the price war is the commoditization of what in many cases are high-value offerings.
The second bluff is more difficult to manage, especially when the RFP comes from a satisfied customer you have been serving as a primary vendor. Suddenly, the customer has decided to put your business out to bid. It’s useful to consider what probably happened deep within the bowels of your customer. Nine out of 10 times, the procurement professional representing your customer has persuaded the end customer you have been serving that there’s a process that can lower the company's costs.
That process begins with an RFP and ends with you offering a discount in order to keep the business you already have. If you play along with this poker game, the procurement professional gains credibility and power in the firm. When that happens, poker playing will become a routine procurement activity.
But what can you do? Can you really decline to participate in the RFP process? These situations are more difficult to "no bid," but there may be alternatives.
The first thing to realize is that it's probably a bluff. The trick in responding is to understand as best as you can what the company's true preferences are. This lets you avoid wasting your resources on an exercise that benefits you not at all. Even if you decide to respond, knowing what the company really values allows you to avoid or minimize the damage of the inevitable price war.
Let's look at the alternatives. If you bid a lower price and win the business, your real customer learns that you have been charging them "unfair" high prices all along. If you bid and another competitor offers a lower price, the customer will often switch the business even if the other vendor is of lower value or quality. That's because the buyer now has ammunition to change suppliers. The sad reality is often you can't win whatever you do.
The best response might just be to not bid at all. Instead, go to both procurement and your end customer and tell them two things: First, you'd be more than happy to lower the price, but you need to identify which features or services you need to take away in order to do that. Second, you would love to work with them closely to lower their total costs, but it will take discussions with engineering and production to understand how to do that. Rather than undermining your position, you're actually strengthening it. You are sending a signal that you are a concerned partner who wants to help them improve their business. At the same time, you've actually undermined the power of the buyer, too.
The bottom line: A knee-jerk reaction to respond to all RFPs is, at least in some cases, a waste of time. Your bid people usually know. Next time, just don't respond. Ask your salespeople to identify the RFPs coming out of loyal customers and assemble a program of asking a series of questions to better qualify their needs.
Put together a program that continually focuses on how you can improve your value and customer service for loyal customers. That way, you might not have to deal with an RFP in the first place. In either case, you’ll be freeing up resources that can be better used servicing good customers, or else doing a better job responding to the RFPs that may pay off in profitable new business.
Editor's Note: To determine whether or not your own organization has pricing under control, take a few moments to complete this quiz (www.holdenadvisors.com/quiz/quiz.html).
Dr. Reed K. Holden is founder of Holden Advisors (www.holdenadvisors.com), a consulting and training firm. He is also an adjunct associate professor at Columbia University and the co-author of Pricing with Confidence: 10 Ways to Stop Leaving Money on the Table. He can be reached at: rholden@holdenadvisors.com.
Sales & Marketing Management Magazine
This article is brought to you by Sales & Marketing Management, the leading authority for executives in the sales and marketing field.
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