Four Reasons Not to Base Your New Business Pursuits on Price
Updated: Nov 10, 2020
As we adjust to the new world, some pursuit teams have seen the potential value of offering prospects lower fees. This may seem like the best way to go since so many companies are wrestling with the financials of their businesses and many prefer to pay less for just about everything in this economic climate.
However, does it makes sense for you, as a competitor to win a project, to offer the lowest price compared to other RFP respondents? Especially if this hasn’t been your pursuit strategy up until now?
You might win the business, yes. But that could turn out to be a worse outcome for you than losing the opportunity.
Here are four compelling considerations that argue against this “lowest fee” approach.
Being a low-price competitor can severely damage your bottom line.
Once you win at the lowest price, where do you go from there?
You’ll bury the lede – your price will overshadow your other benefits.
If you’re successful, you’ll join a race to the bottom.
Let’s take a look at each.
Impact on your bottom line
Your organization may have been structured to provide exceptional service, innovative solutions, rapid response, and category leadership. It might be how you’ve built your business to date.
A change to a low-price strategy, while it might buy you a new project, will put tremendous strain on your operating model, as well as on your bottom line. You’re not structured to deliver the same caliber of solutions at lower margins.
We know a marketing communications firm not long ago that won so many new accounts using this approach that it went out of business. It had built its brand on the capability to deliver cutting edge solutions with top-notch talent, but management wanted rapid growth. So, they pursued new business with the intent of being the low-price option. They won most of those pursuits. A couple of years later, they had to close their doors. Turns out, there wasn’t enough income to generate the required profit and still deliver the level of service their new clients were promised.
Where do you go from here?
This is a painful truth that most organizations eventually learn. It’s hard to raise your prices for subsequent projects once a client views you as the low-priced option. And that’s even more true if you’ve been able to deliver superior processes and outcomes despite the low prices (and low margins). By trying to raise your fees for subsequent projects, or in a renewal negotiation of a contract, you’ve changed your positioning, and your competitive set. You might create resentment. You might reduce your trustworthiness. You’ve also trained your client to expect low prices. It will be the same for any referrals that may come your way from those clients.
Yes, you can begin the relationship by offering a “special, limited time promotional price.” Sometimes that can work if your client is completely on board, and already expects the next project to come at your regular, higher fee.
We prefer a different approach. If you feel you need to offer a lower price in order to get in the door, then associate that with a smaller project. In other words, reduce the scope of work to justify the lower fee.
Don’t bury the lede
Something interesting about players who compete in the low-price segment of the category. Some of your buyers will see that as the dominant benefit of working with you. (In the worst case, perhaps as the only benefit of working with you.) Even when you’re offering legitimately competitive services and results of higher-priced firms, you’ve pigeon-holed yourself into a very specific category. Your prospects won’t see – or acknowledge – the other benefits you offer. You’ve made those aspects of your business less prominent in exchange for the low-price positioning.
It’s hard to communicate and sustain the positioning of both a lower-cost provider and premium outcome provider. If you’ve been occupying the premium end of the spectrum, stay there.
Race to the bottom
Once a client is trained to buy on price, that client will continue to buy on price. If you’ve been successful in winning the business once, the next time the contract comes up for bid, or the next time a project from that client becomes available, you can expect they’ll look at price first.
Remember, there’s always another competitor who wants your piece of the business and will be willing to offer an even lower price. What do you do? Lower yours to meet or beat theirs? Well, there you go, forever lowering price and, in all likelihood, either lowering your margins or lowering your level of service. Chances are those low-price competitors are structured to make money at those fee levels. You’re not, unless you’re willing to make major changes to your business strategy.
Even during these challenging times, there are clear risks to taking on a low-price strategy in order to win new business. Consider them carefully.
- Bob Wiesner, Managing Partner, The Americas