Tomicide Solutions, October 2016

The Art And Science Of Offering Options In IT Service Proposals

By Tom "Bald Dog" Varjan

Do you know which was the shortest war in history?

Well, it was the Anglo-Zanzibar war in 1896.

Believe it or not, it was over in only, depending on sources, between 38 and 45 minutes.

At that time, Zanzibar was a British colony, and the Brits were rather pissed off with Zanzibar's government.

So one day, the British Navy lined up five warships right in front of the royal palace and blasted it to little pieces.

In the meantime, Royal Marines got on shore and mounted a ground attack.

It took Zanzibar's leader, Sultan Khalid bin Barghash, about 45 minutes to realise that time was up for him and the Brits had come for his head, so he nonchalantly buggered off to the local German embassy, where the Brits couldn't reach him.

So, the key to success, and not only in the military, is to have an effective action plan and an overwhelming force to carry out that plan.

And this 45-minute "activity" is interesting because it usually takes less time to reject an IT proposal simply because it's written incorrectly. It ignores how humans make choices.

And the problem with many IT proposals is that they don't offer choices. They are "take it or leave it" type documents.

So, this month, we discuss the ins and outs of options in proposals.

Where It All Goes Wrong

In the IT world, it takes about 180 person hours to sweat out a proposal for a high-five or six-figure project and even more for more expensive ones. And by the time, sellers reach the last lap of the proposal development race, they are eager to finish and submit it as soon as possible.

But as we know, the devil is in the detail, and when a tiny detail is overlooked, the reward is yet another rejected proposal for an otherwise perfect solution.

One of these tiny details is offering buyers options to choose from. It's so simple. Or is it really?

There is a certain science to options.

But why would we offer options?

Well, options empower people and lack of options disempowers them.

Without options we feel we're not in control of what we spend our money on.

Many years ago, while growing up in communist Hungary, people could choose from just a very few makes and models of cars. There were the East German Trabant and Wartburg, the Soviet Zaporozhets and Lada and the Czechoslovak Skoda. Then later came the Romanian Dacia.

But Ladas and Dacias were mainly for the well-heeled communist party functionaries, not for ordinary mortals.

Since there were no dealerships, cars had to be pre-ordered from state-run agencies, and then, after full payment and the appropriate waiting period of 5-11 years, the proud owners could go and collect their new cars.

The cars differed really only in names, Maybe the only difference was that only Trabants had two-cylinder engines and Wartburgs had three (yes, you read it right).

So, it was pretty much of a take it or leave it market.

Just like with most IT proposals.

It's just amazing how much time and effort sellers are willing to invest in the creation of a document that will have a 50% rejection rate.

What makes the situation even worse is that many proposals are responses to RFPs, and the rejection rate is much higher in that deceptively convoluted arena.

Offering Options

Its definitely a big step up to offer options, but if we want to step up even higher, we have to look into the psychology of options: How many we offer and how we spread them out in terms of service levels and pricing.

There is some interesting research from Dr. Paul Rodway at the University of Chester in the UK whose research goes deep into the psychology of choices.

His article, Preferring the One in the Middle: Further Evidence for the Centre-stage Effect, co-written by Astrid Schepman and Jordana Lambert, was published in the July 20111 issue of Applied Cognitive Psychology, and goes into the details making choices.

The essence is that when people are offered two options, they choose the less expensive one, but when they're given three choices, they usually choose the middle offer

And this choice of three has already penetrated so many industries, but, in most cases, stayed out of the operation of IT service companies that offer high-ticket services.

The good news though is that more and more software companies do it, and hopefully with time, more and more IT consulting firms will do it too.

But why do most people choose the middle options?

It has something to do with our herd mentality. That is, we usually go where the crowd goes. If that specific option is good for the crowd, it's good for us too.

The Difference In Options

While when offering options in SaaS services, you have two main factors to control: Perceived value and price. When you offer IT consulting services, you have a third option: Scope.

The main difference is that SaaS services are ready-made off-the-shelf productised services, but consulting is a kind of service buyers and sellers perform together in close collaboration.

And this is why scope becomes an important factor.

Price

After the appropriate discussion with buyers, you price your services according to buyers' perceived value of those services.

Basically, you have to work backwards.

  1. You start with the annualised increase of something quantifiable of achieving certain goals. E.g. Let's go with an annual sales increase by 100,000 and growing by 5% per year. After five years, the expected improvement is $580,200. Add to this the qualitative improvements, like higher morale, higher reputation, etc. and we're at around $700,000.

  2. Next you can see what you can reasonably charge for this expected improvement. I say "expected" because there are no guarantees in this world besides death and taxes. As a taxpayer who used to be a gravedigger, I can attest to this statement. Let's say, your basic (lowest option) fee is $70,000.

  3. Next you can calculate how to deliver the required value within the required parameters under $70,000. How much under? As much as possible. If you value-price your services, your incentive is to deliver the required value using the least of your resources.

Perceived Value

Just as beauty is in the eye of the beholder, so is value.

If you sell bottled water, who values your water higher? Someone in a big city who wants to wash his hands or someone in the desert who is about to die of thirst?

That is, you price the buyer not the product.

And as a seller, it's up to you who you are willing to sell your water.

And what is the best way of establishing perceived value?

Well, by diagnosing a problem to be solved or an opportunity to be seized.

In one fell swoop, you both establish perceived value and your credibility.

Scope

The third factor is to define what gets done to deliver the promised value.

If the client's goal is to grow online sales to $1 million per year (which you cant guarantee), scope includes a fully search engine- and user experience optimised website, certain content pieces, and a marketing funnel with an email management system.

But fulfilling the scope doesnt automatically mean the instant achievement of a goal.

If you complete law school today (scope that you can control), it may take a few years to become a supreme court judge (goal that you can't fully control).

And Now You Price Your Options

And now comes a sensitive part of this options equation. Now you have to price your options, and that's not exactly easy. What makes it a bit complex is that it's more art than science. It's intuitive not formulaic.

Here we discuss some formulas as starting points, but then you still have a hell of a lot of figuring out to do.

Let's start with three core premises

  1. Value is subjective: It's only a buyer who can put value on a value-creating intervention. Once you know this value, you can decide whether or not to accept the gig and deliver that value.

  2. Cost and value are unrelated: Since value is perceived by the buyer and cost is incurred by the seller, the two are unrelated, and one is not the function of the other.

  3. Price and value are related: Since value is perceived by the buyer and price is paid by the buyer, the two are related, and one is the function of the other.

  4. Price and cost are related: Since price is what the seller receives for delivering a predefined value, the price has to include both the seller's costs (delivering the value and parts of other costs) and profits. So the two are related, and one is the function of the other.

Safe And Conservative Options

Options formulas: $1X, $1.5X, $1.75X

Use this option when you want to get the gig without fairly high certainty and don't want to leave too much money on the table.

Aggressive Options

Options formulas: $1X, $2.2X, $5X

This is a high risk and high reward option. You have a fair chance of losing the gig, but if you get it, you get kingly compensated.

Use it when you don't care about getting the gig.

But also consider that the less you care about getting the gig, the more attractive you become to high-end clients.

You're not the desperate vendor but the already fully-booked respected expert.

Regular And Premium Options

Here there are only two options

Options formulas: $1X, $1.05X

The significant value difference and the tiny price difference make up a great incentive for the premium option. It forces buyers to read and fully understand each option.

Use this approach when you just can't come up with a third option.

Presenting Your Options

We know from psychology that the pain of loss is more powerful than the pleasure of gain. This is human nature, and there is not a sausage we can do about it.

So, let's use this approach when presenting options.

But first let me give you an example from life.

When you board a plane, you board through the front door right behind the cockpit

So, you enter the plane with your coach ticket through the front door. By the time you enter, the first class passengers have already settled in their comfy seats. Then you walk through this section to your coach section where you know you will travel as tightly with other passengers like sardines in a can.

What airlines quietly communicate to you is something like...

"Look at these happy first class passengers and remember them as you're busy smelling your seatmate's breath, feet or armpit in the sardine can."

And airlines are not dumb. They know that, next time, many of these passengers buy first class tickets because they want to desperately avoid the nasty ordeal of the "sardine can".

Based on this logic, you present the highest option first and then start taking things away as you move towards lower options.

So, if you present a proposal for an intercontinental flight, you present the "Concorde" (interior) option first, the middle option second and the "Antonov AN-2" (AN-2 interior) option last.

So, as your buyer reads, she can see that with every option, something is taken away and this is why the price gets lower. Yes, you can travel on an AN-2 wherever you can travel on a Concorde, but there are some significant differences, like comfort, time, safety (the AN-2 wasn't designed for intercontinental flights). But if you plan to parachute over your destination, the AN-2 is better. I've got my fair share of parachute jumps from that baby, and I can report it's an excellent parachute plane.

And finally, as you submit your proposal with your options, you and the buyer agree how and when to follow up.

If you submit your proposal to real buyers, they won't try to hide from you. It's only self-important flunkies and procurement agents who do that. Real buyers are straight shooters and tell you what they think, including giving you a definite yes or no.

When you submit your proposal without options, you have a 50% chance to win. When you submit three options, your chance of losing goes down to 25%. I think this is a significant improvement and justifies the practice.

Try it and see how it works for you. You will be surprised.


Attribution: "This article was written by Tom "Bald Dog" Varjan who helps privately held information technology companies to develop high leverage client acquisition systems and business development teams in order to sell their products and services to premium clients at premium fees and prices. Visit Tom's website at http://www.varjan.com.