Whether you are a market leader or a challenger in a competition for a “franchise” program, pre-emptive pricing strategies are likely to be a factor. It can be an offensive play for the challenger—or a defensive play for an incumbent on a program being upgraded or replaced. Reflecting on TMI’s 600 engagements over the past 30 years, this article—the first in a monthly series of Winning Insights—presents insights gained from classic competitive situations where pre-emptive price was a primary Source Selection determinant.
What Is a Pre-emptive Price? Given an acceptable technical offer, it is the “Godfather” offer price—the offer the customer cannot refuse. It cannot be denied, in spite of cost realism and risk based adjustments for Most Probable Cost (MPC), best value trade-off analysis in assessing Total Evaluated Price (TEP), or Value Adjusted Total Evaluated Price (VATEP).
Competitive Situations with Pre-Emptive Prices. The generalized competitive situations discussed below were selected from dozens of TMI engagements where a pre-emptive price was a primary Source Selection determinant. Among the many examples include—
* Market leader (also incumbent for an airborne BMC2 program) faces the threat of later technology and greater mission capability in a competitor offer.
* Challenger beats the axiomatic winner and/or current incumbent on a competitive major upgrade by offering a credibly rationalized pre-emptive price.
* Market leader protects long-term legacy, dominant market position in an open competition for mission recapitalization where the competitor offers a product with greater mission capability.
* First-to-market “strategic win” of a later generation technology product against a competitor (who earlier pioneered the first generation development).
* Competitor beats the customer’s defacto preferred contractor in a single-up to one contractor in a competition between two companies producing the exact same weapon.
* Challenger beats the multi-decade incumbent in a competition for the next generation space system for a critical mission.
* Incumbent, threatened by strong competitor in OSD initiated competition, defends its position and beats the competitor who offers what could have been a pre-emptive price.
Relevant Experience. In TMI’s 30 years and 600 consulting engagements, we have contributed to both winning with a pre-emptive price and defending against pre-emptive pricing by competitors.
* Winning. TMI helps clients build their business case to justify the pricing risk needed to win “franchise making” opportunities. Further, we help develop and pre-sell the technical and programmatic evidence to convince the acquisition customer that the integrated product offering (technical, schedule, and price) is executable.
* Defending Against. Pre-emptive pricing is likely in cases where the assessment of “What Winning Means for the Competitor” is huge and/or where winning is the competitor’s entry path into a strategic market. In the pre-RFP phase, we help develop and pre-sell the offer to counter the competitor’s likely combination of technical capability and price (low or pre-emptively low).
Winning insights are presented below for three of the competitive situations described earlier.
Market Leader Threatened in Competition Where the Competitor Offers Newer Technology With Greater Mission Capability. To preclude entry of a competitor into the market they dominated, the leader actively shaped the acquisition early on by—
* Defining, through mission analysis, threshold capability required.
* Deriving and pre-selling the acquisition customer an affordable unit cost goal, based on actuals and company investments in continuous cost reduction. And thus, informing the customer on needed contractor funding.
* Offering a robust lifecycle technology insertion program.
* Monetizing the risks the leader has already mitigated. Thus, “ghosting” the competitor’s higher risk
* And, finally bidding a unit price at least 10% less than the affordability goal.
Meanwhile, the competitor attempted to rationalize a best-value offer based on greater than threshold capability. The competitor’s price—with company investment—was within the available budgeted funds. The Source Selection cost evaluation “risked up” the competitor’s Total Evaluated Price (TEP) to a value exceeding the budget. The market leader’s TEP was 20% less than that of the competitor.
Beating the Axiomatic Winner With a Rationalized Pre-Emptive Price. In a competition to develop a new capability upgrade for a surface-launched interceptor missile, the axiomatic winner (incumbent) submitted a “business as usual” credible proposal that received a higher technical evaluation rating. Meanwhile, the challenger, being in the interceptor missile business for a different U.S. military customer, had a strategic objective of breaking into the incumbent’s market. The EMD consisted of developing and integrating the seeker upgrade and building several hundred LRIP units for testing and live test firing evaluation. The development involved technical advances in response to a dynamic definition of the threat. Additionally, LRIP was the major share of evaluated EMD cost. Because funds were limited, the challenger bet it would not be productizing and producing the technical baseline exactly as proposed. Further, it would not likely have to deliver the number of LRIP units per the planned annual buys in the RFP. Therefore, the strategy to win a new customer—was a pre-emptive price. Also, the challenger reasoned that, in reality, the contract had “get well” potential, which reduced the pricing risk. Thus, the challenger priced the CPIF NRE tasks aggressively, supported with a solid cost credibility and completeness story. The challenger also used a “gamey” progress learning curve to lower the average unit price of the LRIP units. This pricing strategy resulted in a significantly overall lower price. The customer’s MPC adjustments could not offset the winner’s pre-emptive price without prompting a solid basis for a sustainable protest.
First to Market Win to Develop a Next Generation Weapon. The winner knew going in that the competitor to beat had helped shape the requirements and the acquisition plan. And, this competitor was likely to be evaluated as having best technical offer. Thus, the winner worked to have a technically acceptable proposal with a credible cost. Moreover, a comprehensive risk mitigation plan supported their claim of an executable program. Further, the winner’s leadership saw winning as the strategic first entry into a much bigger and broader market (additional customers), making the win a “franchise maker.” The pre-emptive price was rationalized as a warranted (by CLIN) company investment of 40% of the total bid price for the EMD (NRE and LRIP). The Source Selection Authority (PEO for several similar program), concerned about available funds for existing EMD efforts in his program area, asked the evaluation team leader how the competitors ranked. When told the rankings, he asked if they were all technically acceptable. He got a “yes, however…” response. He then asked the PCO and the legal counsel if the warranted investment terms were legal and enforceable. With their “yes” answer, he had an offer he could not refuse.
Our Winning Insights series will continue with next month’s article: Preemptive Pricing Part 2 – Insights from Additional Competitive Situations.