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Winning in the Public Sector: Pricing Strategy

I was discussing pricing strategies with a client last week – Gregory Webb.  At times it felt like I was the student and he was the master.

He contrasted the pricing strategies that, in his experience, worked in the private versus public sector.  We ended up with a simple napkin diagram, set out below.

Pricing Changes in Procurement -  Public vs. Private

Put simply, in most private sector tender processes, the buyer expects to “walk the price down” through each stage of the procurement process.  It is routine for there to be at least two, and often three or four, rounds of price submission as each stage of downselection takes place.  The buyer will give feedback (often very detailed feedback!) after each stage, trying to obtain incremental improvements in both the price and technical fitness of each offer.

In this context, the optimal pricing strategy is to submit a broadly costed offer at the tender stage, and then progressively move the price down (considering both margin and technical changes to the solution) through the procurement.

Contrast this with public sector procurements, which are often conducted on a “lowest compliant offer” basis.  In these cases, there is no second round, no chance to amend the technical design, no substantive feedback.

The optimal pricing strategy here is obvious, isn’t it?  You just submit a compliant, very keenly priced, offer; knowing that in practice the customer will end up buying something different.  As far as the procurement process is concerned, the requirement is the requirement (even if both bidder and buyer know that it will change substantially in contract).  The price is the price (even if both bidder and buyer know that the out-turn will be higher, due to changes in the requirement).

In both cases, the pricing at BAFO will end up in more or less the same place, and in both cases the supplier will look for additional value and opportunities to charge for that value post contract.

However, there are some key lessons for both seller and buyer.

  • for sellers used to operating in the private sector, it can be a real shock to find themselves regularly losing on price in the first round.  They need to adjust their pricing strategy to recognise that, in most cases, the first round is the only round that counts.
  • for buyers, the important lesson is what happens post contract.  By having multiple rounds, a private sector buyer gains valuable insight about the relationship between requirements and price (e.g. what happens to the price if you change this service level).  This makes it much easier to manage changes to the original budget or cost envelope.