RIP to RFPs: Why You Should Stop Chasing Bids for Business
Re
quests For Proposals (RFPs) are the business owner's enemy.
I think they commoditize a category down to the point where the only way to win a contract is to be the lowest cost provider. As a result, the companies who use RFPs to pick vendors get what they deserve: crappy, cheap work.
If you want your business to be profitable and enjoy fat margins, you need to stop responding to RFPs and start carving out your own one-of-a-kind product or service.
I used to own a market research business, and one of the services we provided was focus groups. You know the drill -- the clients are sipping beer on one side of the one-way mirror while eight hapless "respondents" on the other provide their feedback on whatever the client wants to peddle.
Focus groups used to be a great business. It costs about $2,500 per group to get the respondents in the room, pay them and pay for the facility. We would charge $6,000 for each group and clear a tidy $3,500, or roughly 58% gross margin.
I say "used to be a great business" because as more companies caught on to the profitability of focus groups, the competition increased, driving down prices. Worse, clients started to issue RFPs for their focus groups.
The first time I saw an RFP, I was excited. The client was a big phone company, and it had asked our little company for a proposal to conduct six focus groups. A $36,000 potential order was a big deal for us, so I painstakingly responded to all of the RFP's questions.
I sent off the RFP and waited. Eventually I got a call from the phone company saying it had chosen another bidder. I couldn't believe it. I thought our response was perfect. I followed up with the buyer and, after several failed attempts, finally reached him and demanded an explanation.
He told me the winning bid was $3,500 per group. I would have had to drop my gross margin to $1,000 per group, or 16%! I would have had only 16 measly points to pay for all of my operating expenses like payroll, rent, etc.
I decided to develop an alternative to focus groups that I could control the pricing for. We called them "customer advisory boards." A company who wanted consistent and candid feedback from its customers could hire us to set up and run an annual advisory board on its behalf. Since customer advisory boards were unique in the market, we were able to set the price at a point where the gross margin returned to our historical averages.
If you want to get off the RFP hamster wheel, here's a four-step plan:
Step 1: Name it
The very fact that we called our service "customer advisory boards" -- instead of a commoditized service like "focus groups" or a generic service like "qualitative market research" -- set us apart and told the customer we were offering something unique.
Step 2: Document it
We developed a unique approach for building and managing our customer advisory boards, which we documented. Each step in our approach showed that we had a consistent way of doing things that set us apart from a generic "vendor."
Step 3: Package it
Once we had a name and the steps, we created a PDF deck for our salespeople to use to pitch our customer advisory boards. We made the deck uneditable to ensure consistency, further legitimizing the uniqueness of our offering.
Step 4: Price it
We priced our service in the literature we used to describe it. This preempted customers' asking for a proposal and seeking competitive bids. We took ownership of the pricing discussion upfront.
The net result was we no longer got frustrated with the hurry-up-and-wait of replying to secretive RFP processes that ended, more often than not, in frustration. We opted off the hamster wheel, took control of our destiny with a unique offering and built a business with hearty profit margins to boot.
RFPs, RIP.
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