Information Technologies Industry – the Case of a Financial Institution’s Back-End Management System

Our client’s proposal to a prospecting customer was compared to one from an eastern competitor, which was apparently satisfying the same need at a lower price. Through econometric calculation our client was able to explain its value and avoid discounting.
Client's problem Price-pressure from Eastern provider in RfQ setting
H&P solution Finding the financial value of implicit risks for the target customer
Impact on client’s business Deal won without price-cuts; new value-based pricing methods adopted for price-setting
Client's problem
A large IT solution provider received an RfP from a large financial institution, asking a back-end system to manage thousands of financial transactions a day. After submitting their proposal, they were challenged from their prospecting customer with an alternative quote received from an Asian competitor at a significantly lower price. Our client considered lowering the price substantially and was wondering if the new price would have even been profitable.
Hinterhuber & Partners Solution
Aggressive competitors undercut other companies all the time, and lowering price may often seem the obvious choice. The fear of losing revenue is usually the only reason behind this rationale and a lower price is the easiest thing to do, but the reality is more complex than this: opportunity cost, margin, asymmetric information, etc., are all things to be considered. Hinterhuber & Partners decided to approach the issue differently, through value quantification, and discussed internally with engineers, product-specialists and marketing managers about the importance of given features embedded in the product and ancillary benefits that it could provide, such as superior support, or financial solidity. If one is able to study itself against the competition, many insights come out: one may have unique selling propositions that are valued by the customer and surpass any price difference. This is exactly what happened: our client was able to identify and calculate with us the value of features that affect the most a business relying on 24/7 transactions, such as a 1% higher up-time than competitors, or a faster response time in case of problems, or using only servers located in the EU. A Financial Institution missing just a few transactions, or not being able to solve a technical problem quickly, might lose tens of thousands of euros in refunds, employees time on top of the risk of losing brand equity, in a matter of hours. These advantages, translated into lower costs, lower risks, and higher performance, proved that the price premium with respect to the Asian competitor, was nothing more than a small investment that would pay for itself. Our client used the H&P proprietary Value Quantification Tool® to undertake the calculation as shown below:
Impact on client’s business
The client recognized that the service level it was providing was indeed worth the extra investment it proposed and decided to explain it to the customer, which in turn was transparent and recognized it fully. The transaction took 2 months less than expected (about a third of the total average time for the industry) to be completed as the final customer felt confident it was taking the right decision. H&P’s client mastered Value-based Pricing and new prices are set based on the value delivered to their customers and not anymore on internal costs. Proving that the superior value offered is more important than an up-front lower price is an essential skill in all.