The ongoing discussion of Game Theory based on the book Co-opetition
Eight Hidden Costs of Bidding for New Business
1. There are better uses of your time. Making a bid takes a lot more time and effort than simply reading a number off a price sheet. That time and effort often takes priority over serving your current customers. Keeping your current customers happy is smarter than chasing after other people’s customers.
2. When you win the business, you lose money. If you win the business, you should be a little suspicious. Do you really want to win a customer just because you are the low price? A customer you win on price alone is telling you he has no loyalty. Thus you’d better make sure that you could make money at the price you offer to attract the customer.
• Ask yourself – why is the current provider letting the customer go?
• Perhaps the customer doesn’t pay his bills or has a poor payor mix.
• Perhaps he is particularly demanding.
3. The former provider can retaliate. Don’t think that winning this customer is going to be the end of the game. If this is a good customer, then your win is someone else’s loss. The former provider can go after your customers. He may not be successful, but he may force you to lower your price. If he succeeds in getting one of your customers, then you and your rival may have turned two profitable accounts into two less profitable accounts. And you have traded accounts with a relationship, for accounts in which a relationship needs to be established.
4. Your existing customers will want a better deal. The price you offered to get the new account is unlikely to stay a secret. If your current customers find out how low you are willing to go to get a new account, they will likely demand them at least as good a price.
5. New customers will use the low price as a benchmark. The bad precedent goes beyond givebacks to existing accounts. Think ahead to the next time a new account opens up. The low price you offered this time becomes the benchmark in bidding for the new customer.
6. Competitors will also use the low price as a benchmark. Even if you were willing to risk charging a higher price again in the future, your rivals might expect you to come in with a low price, and these expectations become a self-fulfilling prophesy.
7. It doesn’t help to give your customers’ competitors a better cost position. Your future and that of your current customers are naturally linked. You help your competitors customer by bidding and thereby hurt your own customer.
8. Don’t destroy your competitors’ glass houses. Lowering your competitor’s profits isn’t necessarily smart. The view that you win if your competitors lose is simplistic and potentially dangerous. If you lower your rival’s profits, he then has less to lose and every reason to become more aggressive. In contrast, the more money your rival is making, the more he has to lose from getting into a price war.
Next – Game Theory Part IV