7 Tips For Evaluating Low Cost Pricing Offers – Too Good to be True?
When are low cost pricing offers, too good to be true?
Too Good to be True?
I wonder what the circumstances were that made someone use the old saying
“Too Good to Be True”
for the first time.
I grew up with it, I use it with my children and expect that they will do the same with their children. Google strangely enough could not answer my curiosity as to the origin of the saying, but was filled with searches expressing exactly the same sentiment. When you receive an offer that appears to be too good to be true, it normally is exactly just this – too good to be true.
Often times we fall into the trap where price becomes the overriding, convincing principle for making business decisions. There is another life-lesson around that says that cheaper is not always better. However when every dollar matters, it does create challenges in making the right decisions.
What do you do when a provider offers low cost pricing offers that are too good to be true?
Thus a price that is substantially lower than what you have been paying others? Not only is the offer substantially lower in price than any of the other potential providers but the promise is that the quality will be the same or better?
What to do when you are confronted with an offer that appears to be too good to be true?
#1. Evaluate the low cost pricing offer as an exercise in risk management:
It is prudent to fully understand the changes and risks around accepting an offer that is substantially lower than what the market generally offers. Therefore handling this as a detailed risk review is recommended; regard it as a change and thus review:
- what has changed or what has stayed the same;
- what new risks are introduced
- are any opportunities arising as a result of this.
A few simple questions such as the ones below, will be useful:
- What is included and what is excluded,
- How significant is the difference between this provider and what others offer in the market;
- What is the likelihood that this provider does not really understand what is required;
- Is it a change in methodology or process and if so, has it been proven to be successful;
- Has the vendor changed delivery or lead times;
- Are there any shortcuts in quality;
- What conditions are attached to the offer, either direct or indirectly affecting the offer;
- Which events will cause hardship for the provider and if so, what will the impact be?
It is not to say that one cannot accept a low cost price offer or not choose to accept a certain level of risk, but the decision needs to be made with eyes open. It is prudent to make sure that the appropriate controls are understood, managed and monitored.
#2. Be curious about low cost pricing offers
Ask why as many times as is needed to get the right answers. Do not stop at the first explanation but drill deeper.
It is important to understand what can cause hardship for yourself and the provider in this case.
Get to understand their business and decision-making processes as if it is your own.
Work out why and if they do deliver best value for money for your organisation. How do they demonstrate this for other customers?
#3. Do you own homework around low cost pricing offers
I have seen too many tenders where there was no follow up from references. Suggestion would be not only to call but also to go further and visit the references if possible. You will pick up a lot more in person than what you would do on the phone. It is easy to dodge the true issues on the phone.
In person you will pick up on the more subtle clues.
I also like to review instances where the provider is no longer providing goods or services to a customer. Understand what went wrong and what went well and understand how it will fit into your own organisation.
#4. Visit the low cost pricing offer provider
One can pick up many clues from the culture of an organisation when you visit their place of business. I like speaking to people in the kitchen and reception and like to watch interactions in general.
Get out on a site tour and see what their housekeeping standards are – do they take shortcuts? Housekeeping says a lot about the standards of a business.
It is easy to appear shiny and glossy in a PowerPoint presentation. But at site, you will see the provider in action and you will be able to draw your own conclusions.
#5. Make sure the scope is watertight
It is critical to make sure that the scope is clear on what is included and what is excluded. It is important to make sure that the provider understands the scope and what is required.
Can the supplier deal with circumstances where there may be hardship?
Too often with providers knowingly under-quote but then hammer down with variations and requests for price increases a few months into the contract.
Thus, how will you deal with variations, what will be accepted as a variation and what is the process for managing variations?
It is also important that the scope well understood within your own organisation. Your personnel need to understand the risks and what the controls are; appointing a dedicated contract manager to the provider is recommended.
With a clear scope, you will be able to make sure that the contract terms and conditions are right and that there are no grey areas.
#6. Ask for a performance guarantee
Performance guarantees cost money and generally require to be backed up with cash. Personally I am not a fan of requiring performance guarantees when an organisation is trying to build lasting win-win partnerships.
However, it will be a good method to determine what the cash flow and cash availability is for the provider. It is a good indicator of cash on hand in a business.
Once the provider has proven their worth, one can always release the performance guarantee.
#7. Be SMART and manage performance
SMART KPIs are useful as risk management control and a good way to manage low cost pricing offers.
It is important to set, measure and monitor KPIs on an ongoing basis.
Have regular performance review meetings at the provider’s business. PowerPoint can paint a story that you may need to hear but action speaks louder than words and when visiting a provider’s place of business, you will be able to determine how the provider’s business is going.
In my experience, when evaluating tenders or offers, it is best to keep price away from the evaluation until all of the qualitative evaluations are completed; only then look at price.
It stops prejudice based upon price.
Note: SMART refers to Specific, Measurable, Achievable, Realistic and Time specific
In the end, it is best not to burn bridges and have a plan B.
I have found in practice that it works well to have honest discussions with the incumbent providers, especially when confronted with low cost pricing offers from providers that are not the incumbents.
People understand the concept of business and needing to make money.
Conversations with integrity and respect will ensure that you do not burn bridges – often the incumbent is the one companies go back to and then have to pay so much more.
It is prudent to discuss plan B as part of the exit strategy with the current incumbent; this way you do not get burned twice.
If you understand the risk, you will manage the risk – this way too good to be true, can be really good and true!
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