What you’ll learn to do: explain the use of competitive bidding for B2B pricing
Generally in business-to-consumer sales there is a standard price structure for all customers. That doesn’t necessarily mean that every customer will pay exactly the same price. The company may provide discounts—such as “loyalty” discounts, for instance—to a particular group of customers, but overall, the pricing is fairly uniform.
This is not at all the case in business-to-business marketing. In B2B marketing, most vendors will expect to give deep discounts to large customers who generate significant revenue. They also expect to tailor the solution to the customer to a much greater extent. This may include making adjustments to the levels of service, response time for issues, payment terms, and other aspects of the solution. The B2B marketing requires solutions that are more customized to the individual buyer, and the pricing is no exception.
The specific things you’ll learn in this section include:
- Describe the competitive bidding process
- Describe the role of pricing in the competitive bid
What is the Competitive Bidding Process?
When we discussed buyer behavior, we identified the stages that organizations go through to make a purchase decision. When it comes to pricing consideration, two of these stages are especially relevant: proposal solicitation and supplier selection.
You will remember that during the proposal solicitation stage of the process, qualified suppliers are invited to submit proposals. Those vendors will each craft a detailed proposal outlining what the provider can offer to address the buyer’s needs, along with product specifications, timing, and pricing. These proposals are submitted to the buying organization, which will review them during the supplier-selection stage of the process. During this stage the buyer completes a thorough review of the proposals submitted, scores the proposals, and often narrows down the list of vendors to the highest-scoring proposals. This short list is marked for “further negotiation,” which may include negotiating product quantity, specifications, pricing, timing, delivery, and other terms of sale. This process is called a competitive bid process.
A competitive bid is a procurement process in which bids from competing suppliers are solicited. The competitive bid process generally advertises the requirements and specifications of solutions and invites suppliers to provide a proposal about how they will meet the need and at what price. Together, the steps of requesting proposals from multiple vendors, evaluating the proposals by comparing them against one another, and negotiating the terms constitute a competitive bid process.
Let’s consider a very simple example of the differences between the competitive pricing for a B2C sale and a competitive bid in a B2B sale.
Imagine that you are traveling to Chicago and you want to find a low-cost hotel room. There are a number of Web sites that allow you to compare costs of different hotels. You are able to select the location and dates for your stay, compare information about the available hotels, and see the price for each option. This enables you, as a buyer, to select and reserve your room without ever having direct contact with the hotel.
If you are planning to hold a large conference at a hotel in Chicago, then the process if very different. The meeting planner will generally do some research to identify all of the hotels in the area that have facilities with sufficient capacity to accommodate the conference. Then the planner will issue a request for proposals (RFP) to all of the possible venues. The RFP will provide information to the hotel about the conference needs: number of expected attendees, meeting space required, hotel rooms required, and any special requirements (such as catering, etc.). Each of the hotels has the opportunity to craft and submit a proposal. The hotels have a good sense of what their competitors offer, so they will describe what is unique about their facilities and available services. They will also price their proposal according to how confident they are that their facilities and services can support the value. Unlike the consumer, the business will be offered a full, customized package with pricing that will include a hotel room rate for a defined block of rooms, a minimum dollar amount that must be spent on food and beverages, and pricing for other items. If the food-and-beverage expense is high, then the hotel might waive the cost of meeting-space rental. Once the business has reviewed the proposals, it might negotiate on any of these terms or ask to have some of the services that will incur a fee, such as Internet access, included in the package.
The competitive bid process creates an opportunity to tailor pricing for a specific customer’s needs, based on the value is provided relative to a specific set of competitors.
Price in the Competitive Bid
What role does the price play in the competitive bid process? The answer to this question can vary significantly, but in every case, the marketer has a specific goal: to minimize the role of price in the proposal. To understand what this means, let’s consider two different scenarios.
Scenario 1: The value proposition of all solutions is identical; there is absolutely no differentiation between the products, companies, or brands. In such a case, suppliers can only compete on price. Each proposal must slash prices to the lowest possible level in hopes of coming in below the other bids.
Scenario 2: Each solution is differentiated in every element of the marketing mix. Price is different for each solution and is based on the value provided by the product, the service and relationship commitments, the brand, and the expected customer experience.
Consider both scenarios. If you are hoping to set the highest possible price, which one would you prefer? Clearly, scenario 2 provides much greater flexibility in pricing, because the marketer can use price as one of several tools to differentiate the proposal and maximize the value, rather than having only the option to drop price.
There are two primary reasons why businesses don’t want to compete on price alone in a competitive bid situation.
- Price is not a sustainable competitive advantage. Competitors can copy price more easily than any other element of the marketing mix. When a strong competitor sees a weaker companies competing only on price, it can lower prices temporarily and drive others out of the market.
- Low prices can jeopardize a company’s ability to profitably deliver sustained value. When the price is very low, there’s a risk of cutting into profits or needing to reduce service in order to cut costs. Both create risk for the business over the long term.
The best approach to pricing in a competitive bid situation is to be disciplined about optimizing the full marketing mix. Practically, companies generally use one of two approaches to arrive at the package that provides the greatest value in a competitive bid situation. In situations where price is not the dominant decision factor, the marketer can craft a proposal that best addresses the customer’s business goals and needs. Then price can be set at an appropriate level to support the unique value offered in the proposal. In this case, price supports a differentiated proposal that provides unique value.
Sometimes price is unavoidably the dominant consideration. In fact, in some government bid processes, the buying organization is required to select the bid with the lowest total cost. In other situations, the company knows how competitors are pricing and has an indication of where it must price in order to be competitive. In this case the price becomes somewhat fixed, and the marketer must determine which proposal offers the highest possible value at that price. It requires discipline to be realistic about costs and trade-offs, else there is risk of underpricing. A disciplined approach enables the marketer to create a proposal that maximizes value, rather than ignoring the pricing realities and submitting an uncompetitive proposal.
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