Using Intelligence to Set the Price-to-Win50Competitive Intelligence

From Networking Event to Action - 8 Lessonsfrom AppliedWINInLOSSAnalysisFindingthe Needlethe HaystackUsing Intelligence to SetFROMthe Price-to-WinTOEVENTby Michael C. O’Guin“Pricing is the moment of truth – all marketing comes intofocus in the pricing decision.”– Raymond Corey, Harvard Business School 1962Not long ago, as a construction companyexecutive was pulling into the CaliforniaDepartment of Transportation (Caltrans)parking lot, he received a cell phonecall from the company president. Theexecutive was in that parking lot todeliver their 650M proposal fora highway renovation project. Thepresident had been fretting over theirbid for weeks and had finally concludedit was too high. The president instructedthe executive to take out his pen andlower their bid by 30M. Weeks later,the president was thrilled to learn thatthey had won the contract, but stunnedto find that their bid was the lowest bid,by over 60M. The company presidenthad literally written off over 30M in thecompany parking lot just moments beforethat contract would be picked up. Hemade that decision with virtually no facts,only intuition. There must be a betterway to determine pricing. There is, andit is called Price-to-Win and competitiveintelligence is key.Volume 20 Number 1 Spring 2017Conducting a Price-to-WinPrice-to-Win (PTW) is a market basedanalysis of an opportunity to identifythe highest price a company can bidand still win. This formal process usestwo sets of information – customer andcompetitor intelligence. Using customerintelligence, the PTW analyst deducesthe customer’s true buying behavior –when and under what circumstances is thecustomer willing to pay a price premium.Parallel with that, the analyst assessesthe competitor(s) to understand whattheir most likely bid offering will be. Theanalyst then costs out the competitor’ssolution. In addition, the analyst assesseswhat investment the competitor is willingto make and how aggressively they willbid. Then the analyst puts themselves inthe customer’s position and determineswhere their company needs to put theirprice relative to the competition, basedon how attractive the customer findstheir offering vis-a-vis the competitor.By understanding what the competitorwill bid and how the customer is likelyto make their source selection, the PTWwww.scip.org51

Using Intelligence to Set the Price-to-Winanalyst identifies the highest possible winning bid price Customer Analysiswith the right balance of capability.Customers have consistent buying behaviors andunderstanding these behaviors is of critical importance.Some managers are under the mistaken impression Their buying patterns help one identify the customer’sthat a PTW is merely a justification for slashing profit true values in the source selection decision – if, how muchmargins, but it is not. PTW is a process for managing and under what circumstances they are willing to pay acosts while maximizing win probability. Establishing price premium. It is crucial to identify which situation youan early market based price and subtracting out the are in, to best configure your offering and avoid leavingdesired profit margin, allows management to set and “money on the table.” From historical analysis, you candeploy cost targets for the offering. Likewise, while project with a surprising degree of accuracy how theassessing what’s important and what the competitor is customer will evaluate the offerings.offering, the customer provides the PTW analyst withthe opportunity to find ways of adjusting their offering The first step to successfully predict the customer’s futureto make it more attractive to the customer, or influence purchasing behavior, is to analyze the customer’s pastthe customer to weigh their discriminators more heavily purchasing history to identify buying patterns. You porein the selection decision. This can allow their company to over past competition Request for Proposals, debriefings,bid a higher price and still win.lessons learned documents, and winner’s press releasesto identify and understand past purchases by theWithout Price-to-Win, many companies allow costs, customer. Once this preliminary information is collected,irrespective of competitive forces, to dictate pricing. Then you should find and interview participants in thosesuddenly as the proposal submittal nears, management competitions. From this study, you look to determine:decides their price is too high, a price which may not bebased on substantive facts. To reach management’s price, How did the evaluation process work (who did what,the capture team suddenly finds themselves desperatelywhen?)scrambling to reduce costs. The team frequently jettisonsfeatures and discriminators out of their proposal which Who were the key players in the customer organizathey spent weeks and months selling to the customer.tion and how much relative influence did each have?Likewise, management is forced to make painful decisions.To meet the desired price, executives are forced to slash What was the customer’s stated evaluation criteria?profit margins, commit millions in investment, and take onsignificant risk jeopardizing their business case. What appeared to be the real customer’s evaluation criteria? What did the competitors’ do that had the mostimpact on the eventual outcome? How important was price in selecting the winner? What type of negotiations were conducted andwere there more than one round?You need to understand the context of each of these pastprocurements – how important was this competition to theorganization’s mission, what were the funding constraintsand other environmental pressures on the organizationwhen this procurement was made. Customers emphasizeprice differently when their budget coffers are flushversus facing a severe cash shortfall. Likewise, customersare much more willing to pay a premium for a higher52Competitive Intelligence

Using Intelligence to Set the Price-to-Winperforming solution which addresses a significant missionshortfall than improve a support service.From the customer analysis you determine where yourprice should be relative to the competition, as shownin Figure #1 for two different customers. For example,if your customer is CalTrans and they have a statuterequiring them to select the lowest priced and technicallyacceptable bidder, then the winning price can be just onedollar less than the competitor’s bid price. Unfortunately,no one is good enough to predict the competitor’s bidwithin one dollar, so you should recommend a numberlower than the expected competitor’s bid by an amountinversely proportional to your confidence in estimatingthe competitor’s bid. The more confidence that you havein your accuracy, the closer their PTW will be to thecompetitor’s bid; the less confidence you have the moremargin you need to bid lower than the competitor’sprice. However, NASA often awards to the higher pricedbid. When selling to NASA, the winning price dependson how well your offering scores are on the proposalevaluation, relative to the competitors. The higher thescore over the competition, the greater price premiumyou can sustain. Conversely, if the competition’s scoreis higher, you must be much lower in price. Differentcustomers have different buying behaviors and thesebehaviors determine where you should target your pricerelative to the competition.Competitor AnalysisDeveloping the PTW requires a thorough understandingof the competitor’s approach. To win, one must devisea solution which differentiates themselves from thecompetition on those attributes most important to thecustomer. It is impossible to develop such a strategywithout understanding the strengths and weaknessesof the competition’s offering. Therefore, the analystconducts a rigorous competitive analysis parallel withthe customer analysis.First, you assess each competitor’s past bidding behavior.What win strategy does the competitor typically employ,technical features, low price, minimal risk, outstandingcustomer service? You use this information to help focusyour analysis on how the competition is likely to behave– where and how are they likely to innovate? Youidentify when they’ve bid aggressively and when not.Don’t merely use history as a predictor of the future.Look for patterns and discontinuities to understand thecompetitor’s underlying behavior. For example, onecompetitor has just lost three bids in a row. The PTWanalyst knew that the competitor was going to wakeup and bid differently. Therefore, as the PTW analystassessed the competitor they realized the competitor’sexisting business base was so precarious that unless theywon the next bid they were going to have to close a largefacility. This led the analyst to predict the competitorFigure 1Volume 20 Number 1 Spring 2017www.scip.org53

Using Intelligence to Set the Price-to-Winwould break with their past bidding behavior and bid division was in a production lull and desperately neededsignificantly lower to ensure a win.the work. Unfortunately, these machined parts requiredrelatively low skills and the sister division was not costThe next step in the PTW process is to understand the competitive. The PTW analyst then estimated the costcompany’s current cost baseline. Your own company’s difference of using a cheaper machined part supplierstaff has likely spent hundreds of hours engineering and and removed this cost from the current cost baseline toestimating your solution for an upcoming bid. They have create the should-cost.analyzed the market needs, environmental conditions,and customer requirements and then conducted dozens The next step in a competitive analysis is to deduceof trade studies to formulate a solution and cost it. You do the competitor’s likely solution architecture. Differentnot want to waste this information. In fact, it is illogical to architectures usually drive the major cost differences inbelieve one or two PTW analysts could replicate those bids, not variations in labor and overhead rates betweenhundreds of hours for the You deduce each competitor’s technicalapproach while adhering to strict ethical and legalYou build a cost model going down to the lowest level standards. All companies broadcast their intentions to thefeasibly possible. You then conduct a detailed analysis marketplace by the signals they emit. They communicateof the economy and efficiency of your own proposed their actions by whom they team with, who they hire, whattechnical approach, program structure, and estimating components they buy, what messages they send, so onmethodologies to identify a should-cost. When this and so forth. By systematically seeking out these signalsprocess is done effectively, it uncovers cost-saving and piecing data together a snapshot of their offeringideas from across the capture team and company. You will emerge. A vast array of diverse sources need toevaluate all of these factors against the customer’s be combed for important information, including pastrequirements to eliminate over-scoping, redundancies, bids, technical papers, marketing literature, financialunnecessary features, and poor bidding practices. By statements, and press releases, while interviewingassessing the solution’s costs versus the customer’s likely suppliers, financial analysts, test lab personnel and tradeevaluation scoring, you identify costly technical features officials. The should-cost analysis directs the competitivewhich create minimal evaluation credit. For example, in analysis by identifying the key cost drivers, so the PTWone bid the company was sourcing all of their machined analyst can focus on those technical differences that’llparts to a sister division in need of work. This sister likely have the biggest effect on cost.Figure 254Competitive Intelligence

Using Intelligence to Set the Price-to-WinOnce you deduce the competitor’s technical approach,you replicate the should-cost model of your solution andbegin making adjustments based on differences withthe competitor. You use the should-cost as a baseline forcreating the competitor’s cost buildup since it reflects theprogram’s requirements and should be free of all costefficiencies. From the technical architecture, you are ableto create a bill of material for all of the significant costitems. From the company’s procurement personnel andopen source literature, you can identify component costsfor the bill of material items. For software, installation,and other labor tasks, an analyst works with engineeringto estimate the man-months required for their solutionand applies appropriate labor rates and burdens.The analyst takes all the materials, subcontractors,and burdened labor and applies estimates of thecompetitor’s G&A and profit. You adjust this data forbusiness considerations and bid aggressiveness as youtry to “get inside the head” of the competitor’s keydecision-makers and anticipate their bidding approachand strategies.While most customers provide the offerors with theevaluation criteria, unfortunately, you usually should beconducting their analysis well before the customer haspublished it or even designed it. In those cases, you muststudy the customer’s past source selections and projecthow the customer is liable to evaluate this one. You willattempt to replicate the customer’s likely evaluationcriteria and weightings. You then try to objectively assesseach competitor’s offering against the evaluation criteriaand forecast their evaluation score. From this analysis,you are able to project which competitor is likely toreceive the higher score and what is the magnitude ofthe advantage.Integrating this information with the competitors’ likelybid prices and analysis of customer’s buying habits, youidentify the highest price a team can bid and still win. Ifyour solution is likely to receive a higher score than thecompetition (and the customer’s buying behavior showsthey are willing to pay a price premium) then the pricemay be set higher than the competitor’s bid price. Ifyour score is equal or less than the competitor then yourteam should set a PTW target below the competitor. Thisnumber is the “Price-to-Win” target.However, the Price-to-Win process should not end withjust providing a target, it should produce actionablerecommendations for improving one’s competitiveposition. A PTW is a comprehensive analysis whichsurfaces all of the critical competitive issues. It canprovide executives with an unparalleled independentassessment of the capture team’s win and pricingstrategy. For example, during the course of ourcompetitive analysis, while working on an InformationTechnology implementation bid, we discovered thedisplays that the competitor and our team were biddingon, were the same display, but the customer was havingfield problems with them and had to pay a companyto remove and replace those faulty displays. Feedingthis information back to the capture team allowed ourteam to change display suppliers and provide a moreattractive bid.You should work with business management/finance toallocate the PTW target into cost targets for the designersand functional department heads. The targets are set tomeet the overall PTW target while supporting the winstrategy. Optimally, the PTW should be derived earlyenough to allow it to drive the solution architecture. Theresulting cost targets should become design parameters.Cost targets must be deployed to a sufficiently detailedlevel for meaningful design-to-cost (DTC) targets. Thecost targets must be defined at a functional level whereaccountability for their achievement can be assigned andtracked. Only by having the market-derived PTW driveproduct development can profit margins be maintainedwhile creating a winning approach.Volume 20 Number 1 Spring 2017www.scip.org55

Using Intelligence to Set the Price-to-WinPTW Case StudyWe conducted a PTW analysis for a vessel trackingsystem bid to be installed at a large commercial port.A vessel tracking system consists of a control stationconnected to a series of radars to locate, identify, andtrack all ships in a port to avoid collisions.First, we analyzed the customer. We reviewed pressreleases and articles about the port authority to identifysignificant purchases they had made over the last fiveyears. Those articles gave us some clues on why somesuppliers were picked. Then, we found a couple of localpublic officials to interview who were knowledgeableabout the port authority and they were able to provideinsight on their procurements. We found that despite theport authority’s claims that they buy the best value, theyhad consistently chosen the lowest priced bidder, as longas the supplier passed the technical evaluation, whichwas usually pretty easy. In this case, our competitor wasvery technically competent and we were sure that theywould be able to be compliant. Therefore, we concludedthat we had to beat them on price to win.and communications interconnection design, and radarattachment. Each tower had to have a foundation sunkand a tower erected, but even with a heavier radar, thecompetitor’s per tower erection cost would be the sameas ours. We knew their tower design and erection costswould be the same per tower, because the waterfrontconstruction community in this port was small and bothteams were working with the same suppliers.We compared the features in the competitor’s marketingmaterial to the customer requirements, we were ableto identify what software functionality the competitorlacked. We worked with our engineering staff toestimate the competitor’s cost of developing this newfunctionality. Likewise, the competitor used a differentand more expensive approach to communicating withthe towers. We worked with our communications supplierto estimate the recurring communications cost of thecompetitor’s system for their 20 site installation.When we analyzed the Competitor A’s bidding history,we found a very consistent behavior – they rarely divedon pricing, did not amortize development costs and keptNext, we analyzed our team’s current cost baseline which their margins relatively stable. Therefore, we concludedpriced up the sum of all of their functional cost estimates. that the competitor would neither bid excessive marginsNext the PTW analyst adjusted this baseline to eliminate or bid more aggressively than normal, with their typicalexpensive and unnecessary software development and margin. Since the cost of the “Tower Hardware,” “Towerhardware which could be proposed as future upgrades. Location and Design,” and “Tower Erection” was directlyIn addition, the analyst added in missing bill of material proportional to the number radar towers, Competitoritems and revised some of the overhead factors to A with fewer towers, having an over 3.2 million priceadvantage, the company’s current approach was goingdevelop the should-cost (see Figure #3).to fail (see Figure # 3).To develop the Competitor A’s bottom up cost, theanalyst studied system’s cost drivers. One of the most When the PTW analyst presented this information, thesignificant costs of a vessel tracking system is the team brainstormed on how to get their costs down todesign and installation of the radar towers. From the meet the competitor. One engineer came up with the ideacompetitor’s marketing literature, the analyst found a of using existing towers or buildings instead of erectingpicture of their radar, while a press release announced new towers. The team went to work and discovered thattheir radar supplier. Knowing the supplier and matching with their smaller radar they could install their radarsthe picture to one on their web site allowed the PTW on ten existing structures. This approach eliminated theteam to determine which radar the competitor would tower erection costs for ten towers. In addition, the towerpropose and its specifications. The competitor’s radar location and design costs was significantly less expensivewas larger, more expensive and more capable than for an existing structure than a new site. This allowed theour team’s. When the team’s engineers overlaid the company to slash its estimate and increase its profit whilecompetitor’s radar’s capabilities on the port’s geography staying well below the competitor’s expected price, asthey calculated that the competition would only need 20 shown in “New Approach” and win.radar towers to our 27. Tower hardware consisted ofa radar, communication link up and wiring. Each tower It is important to note that this is a simple representationrequired a geographic survey, foundation design, power of a PTW analysis. There is more analysis used to cross56Competitive Intelligence

Using Intelligence to Set the Price-to-Wincheck the results, and the cost analysis goes down to avery detailed level. These methods lead to accuracy inthe analysis, giving executives confidence, so they canbid to win.PTW is not simply about driving down price, it is aboutidentifying all of the levers in the competition, to developa strategy to maximize return while still winning. In theabove case, the PTW analyst was able to identify theircost problem with sufficient time to develop an innovativesolution. In another case, a company improved itsoffering by adding features which lead to an improvedevaluation score and subsequent price premium. Inanother, the PTW/competitive analysis uncovered asignificant discriminator of the competition. In that case,the company copied it and neutralized the competitor’sadvantage. In still another case, the PTW quantified acost discriminator of the client which allowed them to bida higher margin and win. With PTWs, companies areable to leverage competitive intelligence to innovate,bid higher, and win more.Developing a Price-to-Win is one of the most actionableand beneficial uses of competitive intelligence. My firmrecently completed a study of 40 major bid losses andfound the leading cause afflicting 65% of proposals wasthe company targeted the wrong bid price. In half ofthese cases, the bidders did not understand the customer,Tower HardwareTower Location and DesignTower ErectionControl Station Equipment& InstallationCommunicationsSystem DevelopmentSystem Integration & TestPort Specific SoftwareDevelopmentOther (PM, G&A, etc.)ProfitTotalNumber of SitesNumber of New Towersand in all the cases the bidder underestimated thecompetition. Bidders need more effective intelligence,not just on the competition, but on the customer as well.More effective intelligence directly effects a company’swin rate and therefore its growth and profitability. ABOUT THE AUTHOR:Michael O’Guin has assisted clients inwinning over contracts worth over 367Billion. Since forming his company,Knowledge Link, in 1993 he has workedon a hundred capture efforts, performingPTWs, training capture teams and guided their winstrategy development. He and his partner Kim Kellyconducted the PTWs for the two largest awards inhistory – Lockheed Martin’s Joint Strike Fighter pursuitand Northrop Grumman’s KC-135 Tanker ReplacementProgram. When he was with Price Waterhouse, he led atwo-year strategic benchmarking study of 24 aerospace &defense companies to identify best industry practices. Heauthored the books – Winning the Big Ones: How TeamsCapture Large Contracts and The Complete Guide toActivity-Based Costing.Our CurrentCost Baseline 945 5,535Our ShouldCost 945 5,535CompetitorA 952 4,100Our NewApproach 945 3,835 12,150 12,150 9,000 7,650 210 120 165 120 130 4,800 2,099 130 3,900 1762 240 5,100 2,404 130 3,900 1,176 2,698 2,590 2,184 2,590 9,803 6,139 44,510 9,364 5,110 41,606 8,913 5,289 38,347 7,149 7,020 35,1022727272720202717Figure 3Volume 20 Number 1 Spring 2017www.scip.org57

it is called Price-to-Win and competitive intelligence is key. Conducting a Price-to-Win Price-to-Win (PTW) is a market based analysis of an opportunity to identify the highest price a company can bid and still win. This formal process uses two sets of informati