Original Post Date: Friday, August 1, 2008

Whether you are pricing a competitive bid, or you are trying to get a new product to market, estimating accuracy will determine your success or failure.  When pricing a competitive bid, you first want to “ghost the competition” to determine a price-to-win.  Parametric estimating models allow you to quickly estimate the cost of recently priced items from your competition to determine their bidding margins and target a likely price-to-win for a new competition.  I recently worked with one of our clients who has an extensive database of competitive bids from which he can determine a price-to-win for a new bid in less than one hour.  The rich set of industry benchmarks we supply with our TruePlanning models streamlines the task.

Once you have a price-to-win, you need to estimate your business's cost, schedule, and of risk of meeting the requirements.  Comparing the most-likely cost estimate and potential cost of risks to the price-to-win, helps management decide their bidding strategy, metered by the businesses risk tolerance. 

(Cost + (Risk Tolerance x Risks)) x Profit_Margin = Bid_Price ≤ Price-to-Win

Estimating accuracy is vital to winning the bid, and vital to delivering the expected margin after the bid is won.  You must win and you must realize your margins to achieve revenue growth.

All new products have a certain “window of opportunity” to capture market share and achieve revenue growth for a business.  Everyday I read stories of cancelled new product developments or new products failing in the marketplace because their window of opportunity has passed.  Most new products are good ideas and most product managers are skilled, but failure is the result of over-optimism.  The most common cause of new product failure is inaccurate estimates of the scope, cost, schedule and risks of bringing the product to market.  Inaccurate estimates result in bloated requirements, under-estimated schedules, and missed opportunities.  Successful new products bring just enough features (scope) to market on schedule to be first, capture initial market share and then grow with successive offerings – look at the iPhone story. Accurate estimates help you launch within the window of opportunity and achieve revenue growth.