Answering RFPs

Most customers are pretty smart. They have to be or they don’t get to stay customers for very long. They go out of business. Ever since the first business transaction occurred where a customer gave a vendor gold (or its fiat representative, money) and in return received something they either wanted or needed, customers have been asking the eternal question:

Did I get a good deal?

The answer is invariably, maybe.

If the customer received a product or service that met their expectations and fulfilled their needs, and parted with an amount of money that still enabled them to continue operations, then they are probably not unhappy. Notice I didn’t say happy. A customer will always find room in their heart to spend less money on something. If you gave a customer their desired product for free, they would probably wonder if they should have asked for you to throw in the installation of the product for free as well.

Here in lies the rub. How does a customer get a vendor to part with their highly desirable product or service for less money? Vendors want to raise their prices. Higher prices mean better margins, better profitability, higher stock prices and eventually a larger yacht for the CEO. Keeping the CEO happy seems to be the driving force behind most business decisions these days.

The answer as to how the various customer – vendor balances are achieved lies in the market’s dynamics. If there are many people chasing or wanting the good, and relatively few suppliers, then the balance swings in the vendors favor. A good example of this phenomenon can be seen in plethora of collector car auctions that are popping up on the various television channels.

These auctions are events where we can all vicariously watch a number of rather wealthy people throw incredible amounts of money at old cars. Why are they doing that? I don’t know. I only know that when I am watching them run the price of some vintage 1960’s AC Cobra up close to seven figures, I too want that car. I don’t want to drive that car. Who would risk an accident driving a car valued at a million dollars? I would like to have that car so I could sell it for a million dollars.

Perhaps the wealthy bidders on the televised auction have already obtained their larger yachts and need another type of good to serve as the latest trophy for their success.

The point here is that there seems to be more wealthy people throwing money at old cars than there are old cars for them to throw money at. Why is that? I think it is because they are not making any more old cars, only new ones, hence there is a limited supply of old cars. But here too the economic laws of supply and demand indicate that if there are more people that want a good than there are goods (old cars) available, the price of the good will go up. This is how you get million dollar AC Cobras.

On the other side of this spectrum is the situation where there is an industry dominated by a very few customers and relatively numerous vendors contending to be one of the chosen suppliers of a good or service to them. Examples of this market structure can be seen in the automobile manufacturing or communications provider markets. These are other examples of markets that are dominated by a few very large players with many vendors contending to be suppliers to them, but these are two that we should all be familiar with.

When these customers decide that they want to buy goods or services, they also hold an auction of sorts. They hold a silent auction, with one of the prime differences being it is not the buyer who bids the highest price that wins; it is the vendor that bids the lowest price that wins. This type of scenario is called a Request For Proposal (RFP), and the really fun part of this process is that again unlike the auto auction, no one gets to know how low the others involved in the process are bidding. It’s good to be the customer in an RFP process, just as the film director Mel Brooks once said “It’s good to be King” in his movie The History of the World.

Can you imagine how much more fun it would be if car manufacturers had to go through a process like this every time you wanted to buy a car? Think about what it would be like to have car manufacturers coming to you and disclosing to you the lowest price at which they would sell you a car, without knowing what the other manufacturers are bidding. We would all probably buy more cars just for the shear pageantry and enjoyment of the process.

A customer’s RFP process is designed to do one of two things: create a process that justifies the selection of the vendor, and product that they wanted in the first place, or to reduce the vendor decision process to the lowest common denominator – price, and then choose the cheapest provider.

The RFP process enables a customer to create a specification for the good or service that they wish to obtain, and have multiple vendors submit their lowest possible price for their good or service that meets the specification. A customer can favor one vendor over other vendors in this selection process by including terms or requirements in the RFP specification that may be more advantageous to one vendor’s capabilities, or conversely have requirements that are disadvantageous to the other vendors’ capabilities.

In either event, it is the responsibility of the sales team to have previously created the relationship with the customer that will enable this sort of influence of the buying process. If you are trying to answer an RFP that does not accentuate your company’s or products advantages, your sales team has not done their job. You can usually tell this is the case by how loudly the sales team is screaming for a lower price to be included in the RFP response. You are also probably answering an RFP that does accentuate your competitions capabilities, and their sales team has done their job.

On the other end of this RFP decision process, it may be possible that the customer has in fact created their own RFP with no input from any vendors. This is a rare occurrence. If this is the case you are now in the midst of what is known as a “Price War”. This is a situation where the vendor with the lowest cost basis, or the vendor willing to take the lowest profitability margin will win the opportunity to sell their good or service to the customer.

Unless you know that you are the lowest cost supplier of the desired good or service, this is also known as a waste of time. Trying to win a price war RFP process is not usually a profitable endeavor.

The only thing worse that some unprofitable business is a lot of unprofitable business. The idea of economy of scale does not hold when it comes to unprofitable business and large RFPs.

I believe that everybody in business at one time or another has responded to an RFP. Some of us have even won them and become the selected vendor. I think that most of the times that I have been successful have been because of the influencing work that was done prior to the RFP being issued. I also think that most of the time we have all been sorry for the RFP competitions that we have won purely on price.

This probably holds true for the customers as well. If they are not willing to enable the vendor to provide their incremental or differentiate value, but only their price, then they will probably not get any incremental value in return either.

I find it even more interesting that even after all of this customer – vendor type of interaction associated with the RFP and purchase process, all the hoops that customers will create and that the vendors must leap through, and all the price discounts that will be demanded, weaseled and cajoled, the buyer will almost always refer to the selected vendor as their “Partner’.

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