Saturday, August 30, 2014

How to Price - When Somebody puts a gun to your head?

The single most important decision in evaluating a business is pricing power. If you have got business in which pricing can be raised without losing business to competitor, you've got a very good business. And if you have to have a praying session, before price hike even by 10%, then  you have got a terrible business. Customer's are smart and appreciate value selling however, often pricing is usually an orphan child in the entire sales cycle and become extra critical in the last stages of sales cycle. 

How many times we come across this argument that " Drop 10% of current pricing and win this business or competitor pricing is too low to bid for this project. What usually missed or ignored in such situations is that little effort is made to explore different options: 

What are your choices when someone puts a gun to your head?

Usual Answer:-  What are you talking about? You do what they say or they shoot

Answer to think or atleast try to explore

You take the gun, or you pull out a bigger one, Or you call their bluff or you do any one of a hundred and forty six other things.

So this question is always on mind- How to distance yourself away from pricing?

This article is an attempt  to explore different ways or best practices for pricing especially when only approach you think is lower down your pricing. 

1. Reduction in Costs:- Since Profit is simply a linear function of Selling Price and Cost Price, one can definitely look into reducing the cost of Project especially in IT Projects. Some of examples are:-

1. Reducing Man Hours by 15 minutes per day for a 200 day job, can have a sizable impact in the Profits. This can be achieved by sharing resources in the project or using offshore- onshore combination. So, to sum up, planning of costs is very important and leaving anything to guess work may pinch you at final stages.

(:) My experience- If you are really convinced in the long-term profitability of project to you and your company-  You have to push people out of their comfort zone to make them really look into costs, already laid down processes and conclude with necessary approvals

2. Sharing- Unused resources ( Internal and External):-  A typical IT company has more than one projects going in parallel, optimization of skills and multitasking is key to BID aggressively for long term contracts. Furthermore, it's often an efficient use of company's resources to use in house personnel, when you can hire the work out.

(:) My experience- This is seen as a good opportunity even at resource level to work on multiple, diverse projects.

3.  Outsourcing and Managing Vendors:-  Outsource  non-core activities of the project to those vendors for which that set of non-core activities is core, this only help in both dimensions- cost effectiveness and efficiency. Make sure that you are getting the best value and that vendor is not passing along the costs of last-minute necessities to you.

(:) My experience- Make your vendors as partner, make the bid as their own bid and remain as transparent as possible, in terms of costs & scope of work

If above mentioned things are not working for firm, consider negotiating the scope of project- Can we implement the work in phases- Usually approach is to do set of activities, which can be managed without any hassle, this would give you time to go back to draftboard and make plans to tackle complex scenarios effectively.

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