What is Strategic Pricing?
Over the past decade or so, we’ve all been whacked by this beast of a trend called “Low Price Technically Acceptable” (LPTA) evaluation criterion. It’s where the government looks at one thing and one thing only. Namely, your price. The lowest price to be clear. As long as all of your other volumes meet the basic criteria to “pass” the gates, the evaluation comes down to who has the lowest price proposal. Yes, ladies and gentlemen, we are now talking about a government that has and is acquiring national security services/items by trying to shop at “Walmart” or “Amazon” (whichever is cheaper). Let that sit for a minute.
It is unlikely that this trend is going to change quickly, in fact, it will probably be around for a few more years. It’s smart to start bidding and optimizing your pricing strategy in a holistic way. The best approach isn’t to cut rates across the board), but also to understand what happens to your business and to the market when everyone finds themselves in the same boat.
Let’s dive in to the term “strategic”. This means you need to approach each and every bid, whether it’s an LPTA or a best value or other type of evaluation, with a healthy amount of preparation. You must review all of your contracts, your pipeline, your teammate rates, your teaming commitments, your HR policies, recruiting capabilities, and your mission and strategy in whole. Is going after low price contracts going to keep you in line with your corporate strategy? Are you going after these bids to increase revenue so that you have a great top line figure, and perhaps aim for an acquisition? Are you bidding for past performance? Depending on your intent to bid, you should shape your pricing approach accordingly.
Strategic pricing should be a very integrated and well thought out function of your organization that involves smart capture practices to smart financial planning. Your pricing team should be a part of your bid/no bid decision phase, and they should also be advisors to your financial and executive teams to submit smart, effective, and winning proposals.
Various approaches to lower your rates can include:
- The Easy One: lower all of your rates, across the board. If you’re the incumbent, don’t bid your existing employee rates. Why? Because your competitors aren’t going to do that, they’re going to bid at or below market rates.
- The Difficult One: lower your indirect rates. This is a hard one to do quickly. How do you lower an existing General and Administrative (G&A) rate? It’s a part of your business costs, you can’t suddenly drop your G&A. Or can you? Consider the impact of adding new revenue to your existing contracts, project out new budgets and forecasts and update your bid G&A rate. Remember, this is just to bid. First you bid, then you win. Is your corporate G&A overloaded? Are there functions in your company, such as Accounting/HR/Recruiting that you can outsource and make your backbone leaner?
- The Good One: Overhead rates. For every new contract, create a new contract overhead rate. Try to bid as many costs direct. Keep the overhead rate to 4-6% of the total contract revenue.
- Escalation rates: research various sources, such as GSA rates, government data as Bureau of Labor Statistics. Don’t just bid your existing policy rates, or incumbent contract raises. That might not be a competitive approach anymore.
These are some quick and dirty ways to start sharpening your pencils for the next few bids. As you build your strategic pricing capabilities for the long term, keep simple strategies in mind, but also know that it takes a while to actually become a smart bidder. It’s not just about the mechanics of preparing a cost volume, but a multitude of factors. Your pipeline strategy, new cost centers, perhaps new divisions, new targets for M&A activity, new bids that might diversify your portfolio, all of these impact the growth of your business. If you bid with the right intent, your strategy should follow as such.
If you’re questioning your current strategic pricing strategies, connect with those in the know. BOOST LLC has experts to assist you in managing this part of your proposal routine. Connect today at [email protected]