A price isn't good just because the customer accepts it. What matters is that the company can deliver—with quality, on time, and with adequate coverage.
If the price is set based solely on the competitor, one's own costs become invisible.
If the price is set based solely on intuition, the risk is not factored into the price.
That is why we need a pricing framework.
Target margin. Minimum margin. Lower limit. Approval rule.
1. First, calculate the total cost
Direct labor hours alone do not represent the total cost.
The pricing basis may include:
- direct wages and payroll taxes;
- subcontractor fee;
- project license and third-party services;
- travel and logistics;
- project management;
- sales and bidding period;
- administration;
- management control;
- contingency reserve;
- funding period;
- the proportionate share of general operating expenses.
The goal is not a perfect cost model. The goal is a consistent cost base.
2. Separate the price and the margin
Revenue is not profit.
Basic formula:
margin = net price − variable and direct costs of production.
Coverage ratio:
margin ratio = margin / net price.
Example:
- net price: 1,000,000 Ft;
- direct performance cost: 650,000 Ft;
- collateral: 350,000 Ft;
- Coverage ratio: 35%.
If the price falls by 10%, the margin does not necessarily decrease by 10%.
New price: 900,000 Ft. Cost: 650,000 Ft. Down payment: 250,000 Ft.
The price fell by 10%. The margin is nearly 29%.
3. Set three levels
Each service or offer type should have three financial limits.
- Target coverage: the level of funding at which the transaction adequately supports operations and development.
- Minimum margin: the minimum acceptable level, which can be accepted only under justified conditions.
- Lower limit: During this time, the offer cannot be approved.
The lower limit is not a starting point for negotiations. It is a red line.
Don't let the fact that the client is big, well-known, pushy, or „promises a lot of work down the road” change your approach.
4. The scope of responsibilities should be measurable
Pricing is often not flawed because the fee is low. It is flawed because the scope of work is open-ended.
The proposal must specify:
- a specific commitment;
- quantity limit;
- deadline;
- responsibility for data transfer;
- number of modification cycles;
- framework for communication;
- Pricing for additional tasks;
- assumed client cooperation;
- disqualifications.
If the scope of responsibilities is not defined, the coverage is not defined either.
5. Use a quotation form
Every major bid should be accompanied by a one-page decision sheet.
Required fields:
- customer and service;
- bid price;
- estimated total cost;
- target value coverage;
- current collateral;
- payment terms;
- capacity requirement;
- major risk;
- discount;
- value of the discount;
- approver;
- validity period.
The purpose of the bid data sheet is not for administrative purposes. It is to make the decision-making logic transparent.
6. Discounts are available only in exchange for payment
Don't just offer a discount.
Replace with:
- advance payment;
- faster payment;
- a longer-term commitment;
- larger volume;
- standardized data transfer;
- a more limited scope of responsibilities;
- fewer rounds of revisions;
- more flexible delivery times;
- reference usage, if properly authorized;
- a process that can be automated.
Please specify the conditions for the discount in the offer.
There is no verbal exchange.
7. Approval Procedure
The salesperson should not be solely responsible for the decision regarding full coverage.
Logic example:
- Target value above the coverage threshold: standard approval;
- Between the target value and the minimum: management justification;
- below the minimum: financial review and management decision;
- below the lower limit: automatic rejection;
- special payment terms: separate monitoring of cash flows;
- Open call for proposals: No proposals may be submitted.
Set the specific percentages based on your own cost structure.
8. Price the payment term
The same price does not have the same value for payment terms of 8 days and 90 days.
A longer financing period has the following effects:
- cash flow;
- the loan application;
- credit risk;
- operational flexibility;
- the actual transaction value.
The payment terms are included in the price.
If the client requests a longer deadline, there should be a trade-off. A higher price. An advance payment. Partial invoicing. Milestone-based payment.
9. Implement change management
Do not treat any additional tasks that arise during the project as an automatic service.
Minimum requirements for the amendment request:
- new requirement;
- impact on the scope of duties;
- impact on the deadline;
- impact on costs;
- new price;
- approval.
No approval. No additional work.
This protects the customer as well. And the business, too.
10. Compare the planned and actual coverage
The bid margin is only an estimate.
Compare by project or time period:
- scheduled working hours and actual working hours;
- planned external costs and actual external costs;
- planned change and actual change;
- scheduled payment date and actual receipt date;
- Planned coverage and actual coverage.
Update the pricing model based on the discrepancy.
If the same service consistently underperforms, it's not the customer who's the exception. The pricing model is flawed.
11. Quarterly Price Review
Don't review the price list just because of inflation.
Check it out:
- change in costs;
- capacity load;
- coverage per service;
- customer profitability;
- proportion of overtime work;
- payment period;
- quality and risk exposure;
- market position.
The outcome of the price review may be:
- price increase;
- narrowing of the scope of duties;
- reorganizing the package;
- minimum fee;
- separate additional fees;
- Termination of service.
12. Minimum Operating Rule
A bid may be submitted only if:
- the scope of responsibilities is defined;
- the cost basis is documented;
- the margin has been calculated;
- the payment terms are known;
- capacity is available;
- the value of the discount is fixed;
- The approval threshold has been met.
There is no price without a documented cost basis. There is no discount without compensation. There is no transaction below the minimum threshold.
The pricing system does not hinder sales. It prevents unprofitable growth.
This article presents a general business framework. Specific pricing, cost models, and contractual terms require a case-by-case analysis.