Global Pricing Strategies

Specific pricing strategies must be developed for each individual situation. Frequently, however, one of two situations prevails when one is pursuing project acquisitions competitively. First, the new business opportunity may be a one-of-a-kind program with little or no follow-on potential, a situation classified as type I acquisition. Second, the new business opportunity may be an entry point to a larger follow-on or repeat business, or may represent a planned penetration into a new market. This acquisition is classified as type II.

Clearly, in each case, we have specific but different business objectives. The objective for type I acquisition is to win the program and execute it profitably and satisfactorily according to contractual agreements. The type II objective is often to win the program and perform well, thereby gaining a foothold in a new market segment or a new customer community in place of making a profit. Accordingly, each acquisition type has its own, unique pricing strategy, as summarized in Table 141.

Comparing the two pricing strategies for the two global situations (as shown in Table 14-1) reveals a great deal of similarity for the first five points. The fundamental difference is that for a profitable new business acquisition the bid price is determined according to actual cost, whereas in a "must-win" situation the price is determined by the market forces. It should be emphasized that one of the most crucial inputs in the pricing decision is the cost estimate of the proposed baseline. The design of this baseline to the minimum requirements should be started early, in accordance with well-defined ground rules, cost models, and established cost targets. Too often the baseline design is performed in parallel with the proposal development. At the proposal stage it is too late to review and fine-tune the baseline for minimum cost. Also, such a late start does not allow much of an option for a final bid decision. Even if the price appears outside the competitive range, it makes little sense to terminate the proposal development. As all the resources have been sent anyway, one might just as well submit a bid in spite of the remote chance of winning.

Clearly, effective pricing begins a long time before proposal development. It starts with preliminary customer requirements, well-understood subtasks, and a top-down estimate with should-cost targets. This allows the functional organization to design a baseline to meet the customer requirements and cost targets, and gives management the time to review and redirect the design before the proposal is submitted. Furthermore, it gives management an early opportunity to assess the chances of winning during the acquisition cycle, at a point in time when additional resources can be allocated or the acquisition effort can be terminated before too many resources are committed to a hopeless effort.

The final pricing review session should be an integration and review of information already well known in its basic context. The process and management tools outlined here should help to provide the framework and discipline for deriving pricing decisions in an orderly and effective way.


Type I Acquisition:

One-of-a-Kind Program with Little or No Follow -On Business

1. Develop cost model and estimating guidelines; design proposed project/program baseline for minimum cost, to minimum customer requirements.

2. Estimate cost realistically for minimum requirements.

3. Scrub the baseline. Squeeze out unnecessary costs.

4. Determine realistic minimum cost. Obtain commitment from performing organizations.

5. Adjust cost estimate for risks.

6. Add desired margins. Determine the price.

7. Compare price to customer budget and competitive cost information.

8. Bid only if price is within competitive range.

Type II Acquisition: New Program with Potential for Large Follow -On Business or Representing a Desired Penetration into New Markets

1. Design proposed project/program baseline compliant with customer requirements, with innovative features but minimum risks.

2. Estimate cost realistically.

3. Scrub baseline. Squeeze out unnecessary costs.

4. Determine realistic minimum cost. Obtain commitment from performing organizations.

5. Determine "should-cost" including risk adjustments.

6. Compare your final cost estimate to customer budget and the "most likely" winning price.

7. Determine the gross profit margin necessary for your winning proposal. This margin could be negative!

8. Decide whether the gross margin is acceptable according to the must-win desire.

9. Depending on the strength of your desire to win, bid the "most likely" winning price or lower.

10. If the bid price is below cost, it is often necessary to provide a detailed explanation to the customer of where the additional funding is coming from. The source could be company profits or sharing of related activities. In any case, a clear resource picture should be given to the customer to ensure cost credibility.

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