This could be quite interesting indeed to find answer to pricing your product or service. I struggled to find the exact answer to this on many occasions may be due to number of reasons. Apart from very old 3C’s pricing methods, the time has come to move to something more radical while answering above question. Let’s talk about this in later blog.
Albeit constraints, we often fail to recognise various aspects of pricing your product & services while bidding or evening selling in B2B or B2C deals. One such aspect is budget of buyer.
But then question comes, how do we know the budget of customer? It’s hard to find exact answer to the question but we can have quality guess, if we do some research about the customer or about the RFP they released.
Certainly, RFPs are highly competitive landscape when it comes to pricing and buyers rarely quote or mention their budgets. Of course, one way is to ask buyer directly but often such approach alienates buyer from answering next set of our queries, especially when buyer has no such price point defined yet. It’s my observation that despite having rough figures in mind, these days buyers rarely disclose the price point at the start of discussion and it takes multiple level efforts to reach to the conclusive point while deciding on pricing.
Most of times, pricing a service or product is iterative process where we start setting the price either based on 3C’s or based on our assumptions. But later on working out bidding couple of RFPs or even taking the services/product to market, we realize the false assumptions we made, leading to wrong pricing often. Often such assumptions are uncovered during various negotiations with prospective buyer and with couple of iteration, we reach to a price point, where we are convinced that buyer will buy our value added service or product at negotiated or set price point.
Let’s work out real world example, which I found quite interesting to quote here with details. Please note that all assumptions & methods are based on my own logic & there could be better way to do this. Suggestions are always welcome.
RFP Problem Statement: End to End IBS-DAS Turnkey Contract of a Neutral Host Player with following major SoW items:
- Supply of Material required during projects with long warranty of ‘x’ years.
- Services like Survey of Sites and I&C of material.
- Maintenance of installed sites & faults rectification.
Although it’s still not clear how many IBS Sites will be allocated during a FY, neither we are aware of how many bidders will be in fray for total business pie. At such point, we need to assume things where the risk starts to play down your motivation to be part of the uncertain business prospect.
There’re three different weighted criteria of evaluation to this RFP which we will be assuming explicitly:
- 30{af589cdba9d77786c8c861317dbad60bba1e2ebbf56e2ffab874a1b59fde9ce3} Technical Capability.
- 50{af589cdba9d77786c8c861317dbad60bba1e2ebbf56e2ffab874a1b59fde9ce3} Commercials/Pricing.
- 20{af589cdba9d77786c8c861317dbad60bba1e2ebbf56e2ffab874a1b59fde9ce3} Project Delivery Capability.
Although buyer hasn’t specified such criteria, we assumed it for sake of our understanding on how our proposal is likely to be evaluated.
Let’s make some general assumptions here:
- Entire project size won’t be bigger than 20{af589cdba9d77786c8c861317dbad60bba1e2ebbf56e2ffab874a1b59fde9ce3} of last year’s FY revenue of the bidder on actual. So if your top line was Rs 20 Cr in FY 12-13, the project which you are planning to bid won’t be bigger than Rs 4 Cr tentatively.
- With Rs 4 Cr as target, how much money will you be allocating to supplies, services & maintenance per part which we need to solve now!
- We would be bidding for 36 sites End to End project during present FY 13-14 with each site having <=5,00,000 sq feet area avg for passive infra installations only. Can we do 36 sites in Rs 4 Cr budget? Let’s find it out, if not.
- Moreover setting budget doesn’t end our job. How do you know the profitability of the endeavor? We don’t know at this stage, but assuming the time value of money, we certainly want to generate Rs 40 lakh (net 10{af589cdba9d77786c8c861317dbad60bba1e2ebbf56e2ffab874a1b59fde9ce3} of Revenue) for stakeholders; otherwise the project will be termed as loss making.
Now let’s start working on solution.
At first, we need to meet the technical criteria of the project. Although we can demonstrate the credentials from past projects or customer feedbacks from similar deliveries in past, couple of clients demand separate technical evaluation these days. We can call it as Pilot at our own cost or Proof of Concept.
Please note that, you need to include the cost of PoC at later stage while bidding for project in services item.
Technical evaluation in current RFP would be to carry out Survey & iBwave Design of IBS Site. Based on survey & design submitted, the buyer will evaluate our technical capability.
Once done, we have satisfied the 30{af589cdba9d77786c8c861317dbad60bba1e2ebbf56e2ffab874a1b59fde9ce3} of evaluation criteria. Although at what rating still not clear, assuming every other bidder is equally competitive, we are allocated 90/100 points.
Now moving to next big part is pricing, which carries 50{af589cdba9d77786c8c861317dbad60bba1e2ebbf56e2ffab874a1b59fde9ce3} of weightage for evaluation of bid purpose & forms crux of bid. Please note that, when buyer specifies such evaluation criteria, we need to understand that ‘Price’ will dominate the discussion, despite value offerings in technical or ‘Solutioning discussion’. So better bring ‘Price’ as value to buyer rather than marketing feature or capability (which will be evaluated separately).
A) Let’s start working on supplies pricing:
1. The first step will be to go through RFP document shared by customer at least 5 times, so that you get complete overview of entire requirement & don’t miss any point or hidden items.
2. Next step would be to get the pricing of BoQ items which are required in supplies. It will take another one week’s time (min) to gather quotes from quality suppliers for competitive analysis. Make sure you are clear of specifications & supplier quality before you zero on pricing.
Once you receive the bids from supplies, job will be easier.
3. Now as you have demonstrated your technical ability by submitting Survey & Design of IBS Site, we need to understand how much does this site going to cost us in terms of
1. Survey
2. Design
3. Supplies
4. Logistics
5. I&C
6. Maintenance.
Assuming you have carried out technical solution design of site area 3,00,000 sq feet and has certain BoM of Antenna, Cables, Splitters etc material.
Now for said IBS Site, how much does that site going to cost you, if you buy from supplier having highest price & lowest price. It will give you fair idea of supplies budget for single IBS Site.
Based on supplier pricing, the said 4.0 Lakh sq feet site going to cost you for Rs 7.5 Lakh on high side & Rs 2.0 lakh on lower side. This much variation could be acceptable. Please note that, the above supplies is only for IBS Material & doesn’t include Electrical & Hardware supplies cost.
4. Get the quotation for Electrical & Hardware material and tentatively assume that they going to cost you 15{af589cdba9d77786c8c861317dbad60bba1e2ebbf56e2ffab874a1b59fde9ce3} of your IBS Supplies cost. Please note that this assumption is based on pricing only, as you are no-way going to find exact cost going into electrical & hardware BoQ unless you install those items with tentative BoQ.
5. Find the total cost of supplies including IBS, Electrical & Hardware with misc items for trial site having area of 3.0 lakh sq feet. This will give you fair idea on how many sites you would be in position to carry out in said budget of Rs 4 Cr, which you set aside for the project.
Assuming, the site will cost you Rs 8.5 on high side & Rs 2.1 lakh on lower side in total.
6. Next come warranty factor. This is important to understand. As buyer has specified the exact duration of ‘x’ years on all material procured, we need either:
A. Get back to back warranty confirmation from suppliers for ‘x’ years.
B. If not, then get the product life cycle of each product of each supplies and understand that how many replacements we might needs to be done in ‘x’ years of warranty period. In most of the case, if supplier is reputed manufacturer, you won’t find it difficult to get fair understanding of this or talk to your supplier on warranty part, before you jump to conclusion.
Fortunately in our case, the supplier on high side has agreed to give us ‘x’ years of warranty. But the supplier on lowest price side hasn’t. So based on data sheets shared by supplier, we assumed that during ‘x’ years of warranty to buyer, we might need to replace the products at least 2.5 times free of cost. So can we build the cost of replacement into existing prices of supplies?
There’s way out. Assuming 30{af589cdba9d77786c8c861317dbad60bba1e2ebbf56e2ffab874a1b59fde9ce3} of supplies will need replacement of 2 times during warranty period of ‘x’ years, we need to include the pricing of replacement into existing cost as Total Supplies Cost = Supplies Cost + Material Replacement Cost.
This 30{af589cdba9d77786c8c861317dbad60bba1e2ebbf56e2ffab874a1b59fde9ce3} could be any of the items which we aren’t sure of at this stage. So assuming the site which costs you Rs 2.1 lakh (lower price supply giving year of warranty) would cost you another Rs 1.25 lakh of burden, which you need to include in the supplies cost equally by raising prices by 60{af589cdba9d77786c8c861317dbad60bba1e2ebbf56e2ffab874a1b59fde9ce3} of each component.
These warranty cost calculations points to one another important factor. Buyer is looking for solutions providers who are having strong commitment & resources to be in business for at least ‘x’ years & the project is strategically important to their as well as from bidder’s future business growth.
Next steps of pricing calculations will be about Services pricing which we will discuss in next article.
