Strategic Bid Pricing: Balancing Profit and Market Entry

According to A J Smith (1995) the bid team is faced with two crucial decisions: firstly whether or not to submit a competitive tender, and if so what the bid price should be. The price is the major aspect to determine the bidding successful or not. To win the bidding company management should set the bid price strategy with the consideration of the factors listed above. Bidding price strategy After the company decided to bid, he should estimate the project cost.

Although there are many factors that can decide the bid is successful or not, perhaps the bid price makes the largest single contribution.

The bid price is different from the project estimate cost. The bid price should include a margin of the optimum profit on estimated cost and direct and indirect overheads. If the price doesn't cover the net estimated cost, it will lead the bidder to incur losses. Making profit is the objective of the business not making losses. But sometimes the bidder can't get the job because the bid price with covering all costs and margin of profit is too high.

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Therefore the company management should not only transform the net project estimate to the bid price, the company also needs to have a suitable pricing policy and a bid price strategy with competitive power to determine the price for winning the bid.

Establish a pricing policy within the company is important to winning a bid. If a company decided to make a bid, the company won't only want to win the bid; the company also wants to make profit by winning the bid. Therefore a company establish a pricing policy to reflect what level of profitability that the company wants to achieve.

To establish a pricing policy, the company should consider which level the business is pitched at. The business always has the aim to achieve being the best value with the lowest price. Therefore the company can enlarge the market share while beating the competitors. To achieve the goal of being the best value with the lowest price, the company must minimise the cost and control and monitor the operation well. Then the bidder can represent his quality price to the client. As a part of the pricing policy, the company also need to establish the business objectives.

The bid price is based on the company's price policy and the bid price strategy. After establishing a price policy and the objectives of price policy, the company will translate them to bid price strategy. As Tweedley(1995)'s point, the company must set the bid price to take advantage of the company's strengths and unique selling proposition which are the factors that differ you bid from those of your competitors. Before the company decide bid price strategy, there are some things that the company must analyse. First the bidder must analyse his situation in the market.

The bidder should know who are the competitors and the situation of the competitors. For example, the bidder should know what strengths competitors have and the relationship between the competitors and the client. Secondly, the bidder must make a good relationship with client and know the client well. For example, the bidder should know why the client put the project in tendering and the client's budget and price expectations. The price is the most important aspect of the client to consider awarding the offer. Therefore the low-price method is the major strategy to win the bidding war currently.

As Fischbach (2003) stated, to provide a lower bid, a contractor can look at one of two things - labour or material. She means if providing a lower bid price, the bidder must minimise the overhead of the project. But reducing the cost is not enough; the bidder should bids at lower profitability strategy. This strategy will help the bidder get more chances to win the bid and enable bidder to increase the share of the market. Before the bidder builds the bid price strategy, he must analyse the client and competitor.

If the bidder found the client has ability and is preparing to pay high price, the bidder has a chance to build a maximising profit strategy. But before the bidder decides to build that strategy, he should also consider the situation of the competitor. If the competitor is weak or can't meet the client's requirement. The bidder can build a maximising profit strategy. And if the bidder has an innovation technology that the client needs and the competitors lack of that, the bidder can consider using maximising profit strategy.

Another condition is that the bidder can use maximising profit strategy is there is only one bidder is invited to the tendering. Maximising profit strategy means put the bid price high. The high price should cover the net estimate cost of the project, the direct cost of the some unsuccessful bids and reasonable high profit. But the high price must be realistic. If the price is too high for the client to accept or the client feels be forced to accept the high price, the bidder will be possible to fail to win the bid.

If the bidder wants to entry to the market quickly, the bidder should provide a low bid price to ensure he can win. But the bidder can gain more return because of winning a bid with low price. For example, there is a British company and the company wants to entry the market in China because the market in China is big and easy to gain chances to make profit. Therefore the British company builds a gaining "market entry strategy". The company bids a project in China with very low price and wins the bid. It is a very good beginning for the British company to entry China market.

And then the British company builds a good relationship with the client and collaborate on a serial projects with the client in China. Finally the British company entries the market in China and gain a lot of return. Although the bidder should put the bid price low to entry the new market, the low price must cover a minimum reasonable profit and the project cost. The bidder usually faces a dilemma that the bidder submits a high bid price that the bidder can make a profit, but he loses the job; or the bidder submits a low bid price and gets the job, but he loses the profit.

How to find a balance point between the price and the profit? The bidder should provide a perfect estimation of the project cost and overhead. The bidder should also analyse the market, the client, and competitor and himself and consider the factors that possibly influence the determination the bid price. The bidder needs to determine the price policy and business objectives and translate those to a right bid price strategy. Finally the bidder can set the bid price at the balance point between the price and the profit under the right bid price strategy.