The answer is a simple mathematical equation: Bids x Cost < Profit x Wins
Is the number of bids times the average cost of bidding greater or less than the average profit times the number of wins? In other words, you don’t want the cost of bidding to exceed any profit you might make.
The key variables are:
- What is the cost of bidding?
- What is your probability of winning?
- Will it be profitable if you win?
Small projects or slim profit margins decrease what you can afford to spend to pursue an opportunity. If you cannot afford to prepare a customized proposal and are planning to send the customer a “quick” proposal, then you are really trying to get away with sending them a brochure and a quote. You are basically trying to win by being the lowest cost.
Small projects or slim profit margins are not the kind of opportunities where you should casually follow a low cost bid strategy. Big projects or nice profit margins are worth investing in winning, so your win strategy should not be to minimize the proposal effort.
The real conflict is that to win, you want to invest in the pursuit, both before the RFP is released and in preparing the proposal after the RFP is released. If you are not consciously investing in the win then you are just fishing and hoping to get lucky. Unfortunately if you invest in the pursuit of a low probability opportunity you can easily spend more on the pursuit then it is ultimately worth. This is why some people don’t like to respond to RFPs. The problem is that they haven’t found a sweet spot where the profit from the wins covers the cost of bidding. This is usually because they bid on the wrong RFPs.
This brings us to the probability of winning. The problem is you can’t predict it. Over time, you can track various factors and see how they correlate with your win rate. Because the same factors can have a greater or lesser impact from one company to the next (even one business line to the next), this is the only way to predict them reliably. The CapturePlanning.com MustWin Process is designed to provide the foundation for identifying these factors and tracking the metrics data needed so that you know what things correlate with a positive win rate at your company and how strongly.
Short of collecting metrics over a period of a year or two, all you can do is identify “indicators” based on best practices and assume they correlate to a positive win rate. These “indicators” can include positive things like:
- You had an existing, positive relationship with the customer before the RFP was released
- You understand the customer’s needs and preferences
- You understand the customer’s procurement, evaluation, and selection methods
- The customer is willing to talk to you when you need clarification
- You have detailed knowledge of the competitive environment
- The potential for additional/follow-on work with the customer is high
They can also include negative indicators like:
- You had no relationship with the customer before the RFP was released
- The customer doesn’t want to talk to you or help you understand their needs and preferences
- You did not help the customer develop the RFP
- You do not know who your competitors might be
- This project is likely the only work you will do for the company
The dozens of pre-RFP readiness factors identified in the CapturePlanning.com MustWin Process can be used to create a list of bid/no-bid design criteria. These criteria can form the basis of a point-scoring system. In a point scoring system you add points for positive indicators and subtract points for negative indicators. The final score can be used to substantiate a bid/no-bid decision.
Finally, the potential profit must be taken into consideration. However, you probably won’t know how much profit is in it until you prepare the bid (or more realistically start the project). Most companies either use an estimate such as their average profit rate or just use the potential revenue as a guide. If you can’t even estimate the potential revenue, there might be other factors that can be used to estimate the project’s size. What you use depends on the nature of your business. For example, a staffing company might use the number of staff, hours, or person-months. Other types of companies might use the number of units, deliverables, users, servers, square footage, etc.
While a large project is always attractive at first, consider that the investment to respond to the RFP is much higher, but the win probability could be much lower. You might only have to win one to be very happy, but you could go broke losing bid after bid waiting for the win. Meanwhile smaller projects produce less profit to cover the cost of responding to the RFP. Ultimately, what has the biggest impact on the equation ends up being your win probability. To bid on RFPs successfully, you need to win enough of them (in dollars and in units) to cover the cost of responding to them.
So the answer to whether they are worth bidding usually is driven by your probability of winning. If you go with your gut, you’re probably wasting your time. If you prepare a list of positive indicators and negative indicators and then assess each opportunity against that list, you’ll do much better. If you start bidding and find that it has potential, even if it is a rocky road, you can improve over time if you collect metrics regarding which indicators correlate with your win rate so that you can continuously improve your list (including how much weight to give each item) over time. Ultimately you win more and achieve the best profit not by responding to the most RFPs, but by having the best bid/no-bid indicators so that you only respond to the RFPs where you have decent odds of winning.