Are ‘alternative’ tender bids worth your time and energy? Frequently, no. Here’s why, and what you can do instead to make your bid more competitive.
You may have noticed that some Request for Tender documents offer the option of submitting a compliant and an ‘alternative’ bid. Often, the alternative bid will only be assessed if a compliant bid is submitted as well.
Should you go to the effort of developing an alternative bid, on top of your compliant bid?
And if not, what other options do you have instead?
The psychology of complex decisions
First, let’s look how people make complex decisions, particularly where there is risk involved. Buyers who are evaluating competitive tenders are in exactly this situation.
Prospect Theory, developed by Daniel Kahneman and Amos Tversky, explains how people choose between different options (‘prospects’), and how we estimate the perceived likelihood of each of these options. In 2002, Kahneman won the Nobel Prize in economics for this work.
Prospect Theory suggests that in making choices, we are influenced by several factors, including our level of certainty in the outcome, a preference for avoiding loss, and what they call the ‘isolation effect’:
Certainty - we would rather accept a small but certain reward over a chance at a larger gain;
Loss aversion – we tend to focus on minimising losses, even where the probability of those losses is small; and
The isolation effect – we tend to disregard any elements that are common to more than one option, in an effort to simplify, and focus on what is different.
Live experiments using Prospect Theory have shown that when choosing among several alternatives, people will tend to avoid losses, and optimise for certain gains. This is particularly true in high-stakes and complex decisions, where the pain of potential loss has more effect than any potential satisfaction that may come from an equivalent level of gain.
The value of alternatives
So how can you help your customer to make a good choice – in your favour – and one that makes them feel that they are avoiding losses, while achieving a definite level of gain?
One way is to offer alternatives and options within your own offer, rather than just being one of many companies competing for their business.
To avoid overburdening the customer, you might offer a choice among three options, in ascending level of cost and value. This approach has a proven track record in consumer markets, and is also known as the ‘good, better, best’ pricing strategy.
Offering three options has the advantage of giving the customer a ‘choice of yeses’, rather than the more binary ‘yes/no’ of a single option.
Pricing consultant Rafi Mohammed, writing in Harvard Business Review, says:
“...when faced with multiple options, customers tend to decide more quickly whether they are going to buy something, using their remaining time to focus on what. Having made that mental shift, they typically treat the Good version as a sunk cost, which makes them more amenable to upgrading. Salespeople exploit this tendency all the time: For example, instead of detailing all the features of a $1,200 appliance, they emphasize that “for only $200 more” than the entry-level $1,000 unit, a buyer gets lots of extra bells and whistles. Rental car companies highlight the full-size sedan you could be driving for $12 a day more than the price of a subcompact car.”
Prospect Theory and alternatives in the context of competitive bids and tenders
When a buyer puts a Request for Tender out to market, they have (usually) gone to some lengths to decide on what they’re going to buy.
As you may have discovered, it’s hard to completely change their minds at this late stage of their buying journey.
There are just too many hurdles they would need to jump to entertain a solution that is radically different from the one they are expecting.
In this situation, Prospect Theory indicates that we should optimise our offer to avoid losses and deliver certain gains to the customer. More than one option could be part of this offer.
However, adopting three options - a ‘good, better, best’ strategy - is not necessarily the answer in competitive tenders, particularly if your ‘best’ offer will require a lot of work on your part to submit an alternative bid.
Let’s think of your compliant proposal as your ‘Good’ (or entry level) offer. Your Good tender bid should give the customer everything they’ve asked for, at your sharpest possible price. From a psychological perspective, this is the buyer’s sunk cost – the thing they’ve already ‘bought’ by writing a tender specification. A Good bid means you’re in with a chance, but this field will be very competitive.
Because you’re the expert in what you do, you might want to do things differently to what the customer has asked for, in order to deliver what you consider the ‘Best’ (or premium) result.
There’s a risk in this though, as it will most likely involve deviating from the scope or specifications to make an alternative proposal. In a competitive tender, you’ll need to decide whether this is really worth your time.
Is it worth developing a completely separate tender bid for a customer who hasn’t asked for it, is already fairly fixed in what they want to buy, and is formally evaluating multiple other offers, as well as yours.
Enter the Upgraded Compliant tender bid
Competitive tenders usually involve a high-value, complex purchase for the buyer, and a lot more work for you as the seller.
Rather than simply submitting a Compliant (‘Good’) tender bid, you may be able to pull ahead of the competition with an Upgraded Compliant bid that offers something tempting – and better – than they are expecting, but that doesn’t ask them to change their specifications in any meaningful way.
This is a ‘Better’ tender bid for you, and them, because it doesn’t stretch their decision-making faculties past the point of comfort.
In developing your Upgraded Compliant tender bid:
Don’t forget that the customer’s primary need is to avoid losses. Avoid trade-offs against the scope of work, unless you can prove these are minor and won’t affect the outcome or the cost.
Identify three certain gains that you can deliver, preferably gains that competitors can’t offer (or won’t have thought of) and that don’t cost you, or the customer, extra. No one likes to pay more, but everyone loves an upgrade.
Gains should be proportionate to the size of the opportunity – higher in perceived value for more lucrative contracts - while also minimising the effort on the customer’s part to realise them.
A word of warning, though; this is all about the decision-making behind your bid strategy, not the mechanics.
Every tender request has different requirements, so make sure to check yours carefully to make sure that your Upgraded Compliant bid will still comply, and won’t be thrown out for being non-conforming.