These days everybody is an “entrepreneur” which is usually code for “I don’t know how to run a business.” For over 20 years I owned a small business and experienced all its different phases from the start-up process to the exit sale, and everything in between (and I do mean everything).
In this series I will share some of my insights so that if you are currently running a small business or thinking about starting one, you can benefit from my experiences and hopefully avoid my mistakes (and there were a lot of them). And remember, every small businessman is an entrepreneur, but not every entrepreneur is a small businessman.
As a small business owner, one of the things I hated most was having to bid on a job in a competitive environment. There are just too many unknowns.
You know what your costs are, but how much margin can you add to the job and still make sure you’ll get it? What about your client? Are they looking for the ultimate bottom barrel price, or is there some other intangible they’re willing to accept in order to award you the job?
What about your competitors? Is one of your competitors willing to make a rock bottom, money-losing bid in order to get a foot-in-the-door and establish a relationship with one of your long-term customers?
Small business owners don’t like uncertainty and that is exactly what the bidding process involves.
It wasn’t until I had lunch with a family friend who had run a successful construction company for over 50 years that I began to understand how you could get around this process and win on almost every bid.
He introduced me to the “baker’s dozen” concept of bidding. A baker’s dozen is when you order twelve items, say donuts, and get the thirteenth one free. The concept, applied to bidding, is to overbid with services or product instead of underbidding with price.
For example, say you’re a manufacturing company, and you manufacture widgets that cost 30 cents apiece to make. On a bid for 20,000 widgets, you believe that you can sell them to your client for a dollar each and still get the bid, but you’re not 100% sure. What do you?
You offer your client a 10% overrun on the widgets, in essence, giving them 22,000 widgets at the cost of 20,000 widgets. You’re basically leveraging the margin built into your product in order to make sure you get this bid.
From your standpoint, the extra 2000 widgets only cost $600, and divided by the 20,000 in the order, comes out to a meager 3 cents per item, a very minor reduction in margin. But from your client’s standpoint, they receive $2000 more in product, at no extra cost. Invariably, they’re going to resell those widgets to their customers at higher price points. That exponentially adds to the benefit they get from the overrun you’re offering them.
But how does this work for a service company?
Let’s take another example. You own a local carpet cleaning company and you’re asked to bid on a 30-room hotel. You submit the bid for the cleaning and offer to give one free “touch up” per room in the following 12 months, based “upon scheduling availability”. In essence, what you’re doing is saying, “We will clean these 30 rooms and if at any time in the next 12 months they need to be touched up again, we’ll do it at no cost, once per room.”
This is a tremendous value and benefit to your customer. They know that if something happens to one of the rooms after six months, they can have you come out and clean it at no extra cost.
However, you know that the likelihood that any of those rooms will need to be touched up in the next 12 months is very low. And even if there are, it should only be a small percentage of the rooms. Because you have inserted the clause, “upon scheduling availability,” if rooms do need to be touched up in the next 12 months, you can schedule those touch ups to coincide to times when your crews are already in the area on other jobs, thus reducing your actual costs tremendously.
Obviously, you will always have some clients whose bottom line will be the almighty dollar. Nothing you can promise them will sway them from getting the lowest price possible. In those cases, you’ll have to sharpen your pencil, get out your slide rule, and figure out what the best price you can give them is.
You may have to accept the fact that the price you need to give in order to secure the bid may not be profitable for you and thus you will have to decide if you should “pass” on the bid. But for the vast majority of your customers, by giving them an added benefit, whether economically, or just in peace of mind, you’re almost always guaranteed to come out as the winning bidder.
Brilliant stuff like this rains down like..well, rain, on my stream during the week. If you want to get wet, follow me on Twitter and StockTwits. You can also pick up my book Trading - The Best of the Best: Top Trading Tips For Our Times by clicking here.