Financial Benefits of Accurately Priced Proposals
As a sales manager, you spend a great deal of time analyzing the deals suspected to close in the next few months. You’re looking at the sales pipeline, and oftentimes there is one proposal in particular that’s near close and seems to promise a healthy margin — but this is only at first glance. Upon further examination, you’ve seen this exact type of project be delivered before, and it always costs more than what the proposal is estimating. A few questions and concerns come to mind:
- Is the salesperson unaware that past similar projects have been much more expensive?
- Do they have access, and have they analyzed, the past project data?
- Are they being optimistic?
- Are they fudging the numbers to ensure the deal is closed?
- Is there something about the scope or timeline of this project that would warrant the lower price?
You’re not sure what the case is exactly, and you can’t tell from the information that’s available. The only option is to reach out to the salesperson directly to get to the bottom of if and why the project is being inappropriately priced. Hopefully it’s not too late.
This late intervention can be avoided by involving the delivery team while the project is being scoped. This proactive collaboration is an important part of making sure projects can be delivered on budget. However, it can be hard to find the bandwidth to dedicate billable resources to pre-sales activities. The lack of collaboration — and most commonly, time — during pre-sales can lead to inaccurately priced projects. If projects routinely fail to bring in a profit, the business risks eventually not being viable. Alternatively, if projects are routinely overpriced, the business will be vulnerable to competition from others who can provide the same value for less.
Getting the pricing right at the proposal stage may not usually be seen as a step towards customer satisfaction, but in fact it is a basis for being able to deliver great value at a good price in a predictable and confident way. Getting the pricing right feeds into more accurate forecasts, fewer surprises, and helps to build a strong and sustainable business.
What Causes Incorrect Pricing?
A range of challenges can result in proposal pricing being off the mark: from not being able to access accurate data about similar proposals from the past, scope creep in the project after it’s sold which changes the cost, or underestimating the amount of work it will take to deliver what was promised.
If the work estimate is wrong, the slack may get picked up for a time by the team. Many highly motivated service professionals have chosen the career they are in because they want to engage in meaningful work and getting great feedback at the end of each project is all important. Some businesses routinely put people in the position of having to work many hours of unpaid overtime just to do the work that was committed.
A survey Kantata conducted found a fifth of services professionals said their managers routinely low-ball work estimates. That allows them to offer a competitive price for the project — but if it also means asking dedicated employees to work 14 hours to achieve what someone said would take them 8, it is not sustainable. Over the long term, people will start to burn out or leave. The same survey showed more than a third of US-based professionals say they feel burnt out by their workload.
Bringing pricing under control involves looking at the bigger picture and designing a process that will improve accuracy over time.
Here are Some Key Challenges for Pricing Proposals Correctly
1. Pricing is too ad hoc
In some businesses, each project is priced individually. There isn’t a consistent pricing process, involving the application of baseline proposal templates. This may be because detailed data about what similar projects cost in the past is unreliable or out of date. Perhaps the sales team do refer back to similar projects to guide pricing, but because they don’t know how much these projects actually cost to deliver, they risk repeating the same errors.
2. Factors affecting project cost are not controlled
A project might look on paper as if it will bring in a lot of revenue, but then the costs spiral above the estimate. This can happen if, for example, the start date is moved at short notice. This may mean that the right resources are booked and have to be replaced with expensive contractors at short notice. There could be other issues such as revenue leakage. In businesses which don’t manage these costs, the estimation process becomes next to impossible.
3. Instead of being discounted, projects are routinely underpriced
Sometimes businesses decide to sell proposals at low or even no profit because it helps them win an important new client, support a new product, or build references in a new market. However, there is a difference between discounting and incorrect pricing. Without measuring the average discount rate, it will be impossible to see the effects of that. If the project is underpriced, this feeds into the lack of predictability and consistency going forward.
4. The actual financials of each project are not compared to the baseline
Looking at each project’s actuals against the proposal is an important way of evaluating the estimates. In companies which don’t do this, it is hard to build a consistent and confident pricing process. The templates which are used and relied on won’t be adjusted to take account of the factors which have affected similar projects.
Suggested Solutions
1. Create a unified view of proposals and pricing
Having a connected view of the proposals that are out for consideration is the first step towards building a more accurate process. If the customer relationship management solution is linked to sales through a PSA, it becomes possible for the pre-sales or bid team to draw out the data on what proposals in the past ended up looking like in reality. Having that view of both what was sold and what was delivered is key.
2. Be aware of the factors affecting the real world project
A good solution with a proposal modeller gives the business the potential to model and undertake multiple proposals with varying drivers. That view of margin, revenue, cost, and the ability to see the effects of different models on the end result is a basis for ensuring that the proposal is carried through to the finish. It is also important to capture how many hours of work it actually took to deliver the project — if people are routinely taking much longer than planned, it is important to know this in order to improve pricing accuracy.
3. Resource early in the cycle
In a services business, the major source of cost is often expert time. It is not an easy matter to put together the right time with the appropriate mix of skills and experience for each project. As soon as the proposal begins to look likely, the resourcing team should be aware of it and before the contract is signed they should be soft-booking resources against it.
4. Constantly review the cost of delivering projects
In order to make sure that project templates are as accurate as possible, every project should be measured against the proposal. What was the margin it achieved? How did that look compared to baseline? How can this process be made more accurate over time? Even if the project makes more money than expected, it is important to know that. Understanding the actuals may put the business in a stronger position to offer competitive, discounted rates.
Final Thoughts
Collaboration between sales or pre-sales, and the rest of the organization is the basis for creating an accurate pricing strategy. Purpose-built technology is crucial to enabling this cooperation and sharing of data. But technology alone can’t achieve this —developing the right process is important to realizing that potential.
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