Latest / What is Business Development? / Episode 86: BD-BOK...Chapter 13 How to Price to Win

Transcript

Episode 86: BD-BOK...Chapter 13 How to Price to Win · What is Business Development?

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  Speaker 1: Welcome back to the deep dive. Today, we are stepping
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  Speaker 1: directly into the cockpit of corporate strategy, specifically for you,
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  Speaker 1: the business developers out there navigating these enormous, high stakes
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  Speaker 1: enterprise deals. The margins are just so thin, the competition
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  Speaker 1: is fierce, and the difference between winning a profitable deal
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  Speaker 1: and winning a contract that will actively cost you money,
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  Speaker 1: it's just razor sharp.
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  Speaker 2: It's the moment of truth for the entire organization, isn't it.
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  Speaker 2: Because if your price is too high, all that time,
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  Speaker 2: all that energy, I mean, the resource investment in the pitch,
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  Speaker 2: it just evaporates instantly. But if your price is too low,
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  Speaker 2: you essentially trade future profitability for a moment of celebratory victory.
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  Speaker 2: It's an incredibly difficult line to walk.
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  Speaker 1: And what makes this whole dilemma just unavoidable is the
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  Speaker 1: sheer dominance of price. Let's start with a foundational data
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  Speaker 1: point here. The twenty twenty one Demand Gen report confirmed
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  Speaker 1: and it is a definitive that when decision makers are
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  Speaker 1: signing a contract, price is the single top consideration.
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  Speaker 2: Yeah, isn't even close.
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  Speaker 1: Not at all. It didn't just edge out factors like
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  Speaker 1: features or quality. It exceeded all other factors combined by
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  Speaker 1: more than twenty percent.
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  Speaker 2: That statistic as a mandate. Really, it tells you that
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  Speaker 2: every business development professional has to approach pricing not as
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  Speaker 2: some kind of art, but as a rigorous science for
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  Speaker 2: these big contracts, just you know, relying on historical costs
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  Speaker 2: or simple cost plus models that just guarantees you're going
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  Speaker 2: to get a suboptimal result.
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  Speaker 1: Absolutely, And that is exactly why we're diving deep into
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  Speaker 1: the methodology built specifically to solve this problem. It's called
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  Speaker 1: price to win or PTW.
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  Speaker 2: Mmm. You might also hear it called strategic pricing or
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  Speaker 2: price optimization, same idea.
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  Speaker 1: Our mission today is to analyze exactly how PTW works,
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  Speaker 1: and more importantly, to identify the critical you know, the
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  Speaker 1: non obvious steps where you, the business developer, provide the
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  Speaker 1: essential intelligence that makes that winning price even possible.
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  Speaker 2: We need to understand the framework, the math, and the
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  Speaker 2: intelligence engine you need to find that intersection point that
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  Speaker 2: optimal price that maximizes profit for your company while at
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  Speaker 2: the same time maximizing the perceived value for the customer,
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  Speaker 2: all against the backdrop of your toughest competitor.
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  Speaker 1: Okay, so let's unpack that core framework. We talk a
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  Speaker 1: lot about profit maximization, but the real insight behind PTW
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  Speaker 1: is that we have to look outward first, right Exactly.
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  Speaker 2: It forces us to acknowledge that in a competitive market,
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  Speaker 2: value isn't just subjective. I mean, as doctor Thomas Nagel,
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  Speaker 2: who was a real pioneer in this field, put it,
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  Speaker 2: competitive advantage is the only sustainable source of profitability. Your
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  Speaker 2: prospects perception of what a reasonable price is depends entirely
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  Speaker 2: on what your competition is offering and what they're charging.
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  Speaker 1: So we're intentionally pricing based on competitor value, not just
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  Speaker 1: our own internal profitability goal. Yeah but wait a minute.
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  Speaker 1: If we use the competitor's price as the foundation, aren't
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  Speaker 1: we just guaranteeing a race to the bottom. Where's the
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  Speaker 1: strategic room to move?
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  Speaker 2: Ah, that's the brilliance of the framework. We only use
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  Speaker 2: the competitor's price is a reference point. The PTW method
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  Speaker 2: then builds up what's called the total economic value or
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  Speaker 2: TeV based on three fundamental components. Ok these three components
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  Speaker 2: they define the core PTW formula.
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  Speaker 1: Okay, so lay the formula out for us.
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  Speaker 2: Clearly, the core formula is this PTW equals reference value
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  Speaker 2: plus positive differentiation value minus negative differentiation value.
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  Speaker 1: All right, let's nail down those definitions, starting at that
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  Speaker 1: foundation reference value.
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  Speaker 2: Okay. So reference value or RV, that's your starting point.
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  Speaker 2: It's the price charged by your top competitor for their
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  Speaker 2: closest comparable product. It sets the market reality.
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  Speaker 1: Okay.
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  Speaker 2: Then positive differentiation value or PDV is the dollar value
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  Speaker 2: a prospect places on your unique value proposition, what you
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  Speaker 2: offer that the competitor doesn't that actually benefits the customer.
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  Speaker 1: And the last one the negative value right.
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  Speaker 2: Negative differentiation value or NDV. That's the penalty. It's the
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  Speaker 2: dollar value assigned to any perceived deficiency or a feature
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  Speaker 2: gap your product has compared to whatever the competitor is offering.
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  Speaker 1: So we start with the competitors price, add the extra
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  Speaker 1: value we bring, and then subtract the penalties for our shortcomings.
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  Speaker 1: It sounds simple in concept, but making those three values
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  Speaker 1: concrete and financially measurable that's the real challenge it is,
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  Speaker 1: and that's where the business developer shifts from say a
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  Speaker 1: relationship manager to more of a strategic intelligence officer.
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  Speaker 2: Precisely, the BD team is the absolute lynchpin. Here. You
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  Speaker 2: are the intelligence engine that feeds this machine, especially when
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  Speaker 2: it comes to those highly qualitative inputs of PDV, RV
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  Speaker 2: and NDV.
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  Speaker 1: Okay, let's focus on that BD role. We know the
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  Speaker 1: sales team is the one to crystallize the value in
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  Speaker 1: the final proposal, but the BD team has already done
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  Speaker 1: the heavy lifting, especially with PDV way earlier in the
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  Speaker 1: activation phase.
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  Speaker 2: That's so important. If the business developer hasn't successfully activated
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  Speaker 2: the prospects positive perception of your unique value proposition, I mean,
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  Speaker 2: if they haven't framed why your goalplayer solution is worth more,
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  Speaker 2: then it doesn't matter how perfectly you calculate the price.
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  Speaker 2: The customer just won't buy the value prop. BD has
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  Speaker 2: to set that narrative early.
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  Speaker 1: And where BD really drives the numbers for PTW is
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  Speaker 1: in calculating those competitive inputs are V and NDV. This
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  Speaker 1: this requires serious competitive analysis. So what are the practical
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  Speaker 1: steps BD has to take to get this intelligence.
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  Speaker 2: It starts with defining the battlefield. Step one is identifying
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  Speaker 2: the incumbent. You have to know who currently has the
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  Speaker 2: contract or who the top competitor is in your customer's mind. Sure,
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  Speaker 2: research public comments and social media, but the most effective strategy,
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  Speaker 2: just talk to the customer.
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  Speaker 1: But how do you talk to the customer to get
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  Speaker 1: that kind of intelligence without giving away your own strategy?
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  Speaker 2: You focus on their pains and gains. With the incumbent.
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  Speaker 2: You don't ask, so what's their price? You ask if
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  Speaker 2: you could change three things about your current.
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  Speaker 1: Solution, what would they be oh interesting?
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  Speaker 2: Or what was the biggest unexpected cost you had last
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  Speaker 2: year because of a limitation in your current system. This
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  Speaker 2: starts to reveal their subjective view of MDV and it
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  Speaker 2: helps you frame your own PDV.
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  Speaker 1: That immediately gets as closer to quantifying that negative differentiation value. Okay,
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  Speaker 1: what's step two?
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  Speaker 2: Identifying the competitive field? You have to know who else
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  Speaker 2: is bidding. You monitor events like industry days or what
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  Speaker 2: they call advance planning Briefings to industry APBIS. The prospect
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  Speaker 2: hosts these to go over requirements. The attendee list often
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  Speaker 2: tells you exactly who your major contenders are.
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  Speaker 1: Now, Step three is the hardest part, determining that reference
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  Speaker 1: value price. I mean, competitors are masters at keeping their
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  Speaker 1: price a secret, especially for these big tailored deals. How
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  Speaker 1: do we estimate our V if they won't publish it?
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  Speaker 2: You have to get forensic reviewing publicly disclosed transactions is helpful,
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  Speaker 2: but for deals with government entities, BD needs to know
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  Speaker 2: how to use a really powerful strategic tool, the Freedom
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  Speaker 2: of Information Act or FOIA.
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  Speaker 1: The Freedom of Information Acts. That sounds like a legal weapon,
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  Speaker 1: not a sales tool. How do our listeners actually use
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  Speaker 1: that in a normal BD cycle without tipping off the competition?
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  Speaker 2: Well, it is a strategic tool, especially in government contracting.
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  Speaker 2: It allows your BD team to request previous RFPs and
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  Speaker 2: detailed contract award data directly from government customers. That request
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  Speaker 2: can reveal the incumbents prior pricing specific contract line items,
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  Speaker 2: maybe even their proposed labor rates from past successful bids.
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  Speaker 2: It gives you hard, actionable data points for the RV.
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  Speaker 1: That is massive leverage. Okay, but what if that price
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  Speaker 1: data still isn't publicly available.
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  Speaker 2: Then you turn to cost benchmarking data. We aren't talking
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  Speaker 2: about stealing proprietary blueprints here. We're talking about finding out
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  Speaker 2: the industry average costs for common components. For example, what's
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  Speaker 2: the average fully burdened hourly rate for a Tier three
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  Speaker 2: developer in say Dallas, right?
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  Speaker 1: Or as standard material costs exactly?
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  Speaker 2: You use this benchmark data to build a highly educated
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  Speaker 2: estimate of the competitor's total product costs, and it gives
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  Speaker 2: you a solid, defensible estimate for the reference value, so bd.
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  Speaker 1: Dry the qualitative inputs for PDV, and the hard competitive
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  Speaker 1: numbers for RV and NDV. Now we get to the
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  Speaker 1: final step quantifying that differentiation using our own internal cost structures.
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  Speaker 1: This is where the math really starts to work for us.
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  Speaker 2: So we use two critical internal estimates. First is the
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  Speaker 2: basis of estimate or BOE. Think of the BOE as
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  Speaker 2: your internal cost to produce the minimum viable product to
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  Speaker 2: check the box solution that just meets the prospects stated requirements.
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  Speaker 2: It's your cost floor.
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  Speaker 1: And the second is the top level estimate, the TL,
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  Speaker 1: which you called the gold plated estimate.
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  Speaker 2: Correct. The TL is the total cost required to exceed
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  Speaker 2: the requirements and fully deliver on your unique value proposition. Yeah,
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  Speaker 2: the aspirational version. The difference between those two estimates instantly
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  Speaker 2: gives us the dollar value of our positive differentiation, our PDV.
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  Speaker 1: So the PDV calculation is simply the top level estimate
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  Speaker 1: minus the basis of estimate. That's the premium measured in
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  Speaker 1: our own cost investment that we are bringing to the
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  Speaker 1: table exactly.
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  Speaker 2: But then we have to quantify the penalty ENDV, and
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  Speaker 2: since this is based on perceived efficiencies, it can be
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  Speaker 2: really subjective to bring some financial rigor to it. We
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  Speaker 2: use a scoring methodology.
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  Speaker 1: Walk us through that NDV scoring process step by step.
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  Speaker 1: Because this feels like where a lot of companies could
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  Speaker 1: lose control.
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  Speaker 2: Of the calculation, you have to be mercilessly honest. You
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  Speaker 2: list every single requirement the prospect cares about, features, benefits, performance, everything.
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  Speaker 2: Then for each one, you score your product's ability to
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  Speaker 2: meet it, three for high ability, two for medium, and
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  Speaker 2: one for low.
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  Speaker 1: So you're basically grading yourself against a perfect score.
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  Speaker 2: Yes, you sum up your total score achieved. Then you
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  Speaker 2: calculate the total perfect score, which is just the number
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  Speaker 2: of requirements multiplied by three. The difference shows you the gap.
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  Speaker 2: The NDV percentage is calculated by taking one minus the
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  Speaker 2: ratio of your total score divided by the total perfect score. Okay,
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  Speaker 2: You then apply that resulting NDV percentage against your total
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  Speaker 2: offering cost the top level estimate to get the final
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  Speaker 2: NDV dollar value.
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  Speaker 1: That makes the penalty totally quantifiable. Let's immediately apply this
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  Speaker 1: to this specific numbers from our sources to make this
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  Speaker 1: really tangible for everyone listening. Imagine we're beating on a
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  Speaker 1: new logistics system.
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  Speaker 2: Okay, let's use our source numbers. Your corporation determines that
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  Speaker 2: your basis of estimate, your BOE. The minimum cost just
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  Speaker 2: to meet the requirements is seven million dollars.
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  Speaker 1: Our cost floor is seven million.
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  Speaker 2: Got it? Your aspirational top level estimate. The TL the
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  Speaker 2: gold plated solution is fifteen million dollars.
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  Speaker 1: Okay, Calculation one is done right there. Fifteen million minus
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  Speaker 1: seven million equals a PDV of eight million dollars. That's
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  Speaker 1: the dollar value of our positive differentiation. Now for the
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  Speaker 1: competitive intel, your.
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  Speaker 2: BD team used FOIA in competitive analysis and determined that
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  Speaker 2: the incumbent, our top competitor charges ten million dollars for
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  Speaker 2: their comparable solution. That's our reference value our RV.
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  Speaker 1: So we have RV at ten million and PDV at
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  Speaker 1: eight million. Now for that final NDV penalty.
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  Speaker 2: Calculation, so assume the prospect had thirty two critical logistics requirements.
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  Speaker 2: The total perfect score ninety six. That's three times thirty two. However,
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  Speaker 2: our product has a known deficiency in one specific tracking module,
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  Speaker 2: so our total score is only eighty three.
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  Speaker 1: So we plug that right into the NDV percentage come exactly.
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  Speaker 2: The NDYV percentage is one minus eighty three divided by
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  Speaker 2: ninety six. That ratio is about point eighty seven. So
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  Speaker 2: our an NDV percentage is thirteen percent point one to three.
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  Speaker 2: We then apply that deficiency penalty against our top level
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  Speaker 2: estimate of fifteen million.
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  Speaker 1: Thirteen percent of fifteen million is just under two million.
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  Speaker 1: Let's call it a two million dollar endb That two
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  Speaker 1: million is the dollar penalty the customer thinks we deserve
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  Speaker 1: because we're missing that one feature precisely.
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  Speaker 2: And now we calculate the final optimized price RB ten
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  Speaker 2: million plus PDV eight million minus NDV two.
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  Speaker 1: Million, which results in the winning price or PTW of
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  Speaker 1: sixteen million dollars. Sixteen million is the highest price we
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  Speaker 1: can charge while ensuring we beat the competitor's perceived value
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  Speaker 1: and maximize our profit.
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  Speaker 2: That is the power of turning competitive intelligence and internal
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  Speaker 2: costs into a mathematically optimized bid. But we have to
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  Speaker 2: reiterate that warning from the comparative analysis. Never bid below
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  Speaker 2: your basis of estimate that was seven million in this example.
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  Speaker 2: Bidding below that floor even if you win guarantees, quality
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  Speaker 2: issues damages your brand and destroys profitability. PTW gives you
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  Speaker 2: the ceiling. The BOE provides the floor.
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  Speaker 1: This has been a really practical look at how the
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  Speaker 1: BD function transforms strategic pricing from a guessing game into
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  Speaker 1: a repeatable, profitable process. Let's quickly summarize the top three
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  Speaker 1: actionable takeaways for our listeners.
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  Speaker 2: Number one the price mandate. You just can't ignore that
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  Speaker 2: twenty twenty one demand gen report. Price is the dominant factor.
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  Speaker 2: PTW is the rigorous methodology that ensures your bid is
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  Speaker 2: optimally priced for both max margin and max chance of victory.
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  Speaker 1: Two. BD is the intelligence hub. Your function is solely
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  Speaker 1: responsible for generating those essential defensible inputs, especially the reference
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  Speaker 1: value AREV and the negative differentiation value NDV. That means
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  Speaker 1: proactive competitive intelligence, knowing how to use tools like FOIA
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  Speaker 1: and using cost benchmarking.
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  Speaker 2: And finally, number three value is calculated. Your positive differentiation
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  Speaker 2: value PDV is not subjective wishful thinking. It is mathematically
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  Speaker 2: defined as the difference between your internal cost to deliver
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  Speaker 2: your gold plated solution your TL, and the cost to
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  Speaker 2: just meet the minimum requirements your BOE.
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  Speaker 1: If you fail to do this strategic pricing process, you
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  Speaker 1: are guaranteed to either leave significant money on the table
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  Speaker 1: by underbidding, or you're going to waste vast resources by
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  Speaker 1: submitting a price that has zero chance of winning. This
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  Speaker 1: deep dive helps mitigate that high stakes risk.
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  Speaker 2: Which brings us to a final provocative thought for you
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  Speaker 2: to consider. The last step in PTW requires you to
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  Speaker 2: constantly evaluate if your gold plated needs to be reduced
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  Speaker 2: if the competitor's totally economic value is lower than your
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  Speaker 2: calculated PTW. This raises a crucial question for every BD
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  Speaker 2: professional out there. How often are you selling value that
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  Speaker 2: eight million dollar PDV in our example that the market
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  Speaker 2: or the prospects simply isn't willing to pay for And
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  Speaker 2: what are you prepared to cut from that gold plated
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  Speaker 2: estimate to ensure the bid stays winnable without sacrificing the
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  Speaker 2: core of what you do.
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  Speaker 1: It's that constant reevaluation of worth versus cost, and it
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  Speaker 1: really defines strategic profitability. Thank you for joining us for
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  Speaker 1: this deep dive into price to Win. We hope this
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  Speaker 1: analysis helps you identify and nail that optimum price every
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  Speaker 1: single time until the next deep dive