By Victor Antonio, BSEE, MBA
Let’s say that you’re the new software manufacturer on the block who sells a software package to the high tech industry. You’ve been asked by a potential client to submit a bid, an RFP (Request for Proposal) for your product. You see this as a great opportunity to win your first big client.
But you have a dilemma. How should you submit your bid? Should you offer one consolidated price or should you offer partition pricing where you break down the pricing item-by-item?
Consolidated Pricing:
Software: $199.00
License Fee: $ 0
Upgrade Fee: $ 0
Tech. Support: $ 0
Total $199.00
Partitioned Pricing:
Software: $145.00
License Fee: $ 5.00
Upgrade Fee: $ 10.00
Tech. Support: $ 36.00
Total $199.00
Omar Cheema, an assistant professor of marketing at the Olin Business School, wanted to know the answer to this question. He also wanted to know how reputation (i.e., established credibility) would affect how a bidder would respond to these two types of pricing.
In one study, participants read the background on two fictitious cell phone companies. One was reported to have a ‘low reputation’ while the other was reported to have a ‘high reputation’. After a 30 day successful trial of the cell phones, the participants were asked to sign a contract to continue the service or not. The final price for the cell phones by both companies were the same, with the exception of how the price was presented to the buyer; consolidated versus partitioned.
The results were interesting. For the company with a low reputation, participants who saw the consolidated pricing were more likely to sign up than were those who saw the partitioned pricing. In other words, the cell phone company’s low reputation caused buyers to be a little more suspicious and they paid greater attention to pricing. The majority signed up if the prices were consolidated.
On the other hand, it’s no surprise that the company with a high reputation didn’t have a problem getting participants to sign-up with either consolidated or partitioned pricing. But it is worth adding that the consolidated pricing got a higher close rate than partitioned pricing.
How can this help you to sell more?
Go back to the original question regarding which way a software company should submit a bid, consolidated or partitioned. If a software company is ‘new’ to the industry (i.e., has a low reputation), then their best bet, based on Cheema’s study, would be to go with consolidated pricing.
If you’re in a business space where you’re the new kid on the block or the unknown entity, the best thing to do is to propose one bottom-line price. You’re the low reputation company that no one has ever heard of and this could be a problem when bidding on a deal. Consolidate all your features, add-ons, support and so on under one price to avoid triggering any suspicion or hesitation on the part of buyer.
I hope you will use this tactic next time you're submitting a bid. Take care!
Victor Antonio, Sales Influence
