MaRS Library Revenue models: Request for proposal (RFP) and competitive bidding
Companies that sell big-ticket items or services often rely on competitive bidding to secure sales, frequently through a request for proposal (RFP) process.
Applicable businesses/products for the RFP process
Many industries make sales using the process of competitive bidding and RFP; these sectors include information and communication technologies (ICT), cleantech, medical devices, and other regulated health care markets supported by economic health models.
It is extremely difficult for startups to enter markets where RFPs are common practice. This happens because buyers generally only invite known suppliers to bid on products.
Innovative new startups are rarely able to compete with established providers of traditional products and services since they offer a new and less-proven approach. Therefore, startups need to influence buyers indirectly through the media, trade shows and other means.
Many startups in life sciences employ a“Trojan horse” strategy in order to reach their target customers. By partnering with major distributors who have strong channel relationships with hospitals and clinics, lesser-known companies can leverage existing sales networks and procurement relationships.
Marketing issues related to the RFP process and competitive bidding
The criteria laid out in the RFP determine the focus of marketing in this type of revenue model. In practice, this means that the company must educate potential buyers about new technologies and new approaches to the problem that is the subject of the RFP.
RFPs will commonly ask for many elements that are beyond the start-up’s ability to provide. When this happens, it is an operational necessity to create and manage complementary partnerships. Additionally, as a start-up in a market where RFPs are common, it is important to develop a world-class RFP response team.
Financial and strategic implications
The binary win/lose nature of RFPs makes them high-risk undertakings for start-ups. Investors must be willing to support the start-up through the completion of a number of RFP bids before the company begins generating revenues.
In a competitive bidding and RFP-dominated market, potential customers may be hesitant to work with earlier-stage companies because they are inherently less stable and because the technology that underlies their product offering may not be sufficiently proven.
To demonstrate stability and staying-power and also to make clear the viability of a new product, it may be necessary to conduct pilot projects. Often public funding is available for this type of project; the Innovation Demonstration Fund is one example.
Key metrics for RFP market
A startup in an RFP market should monitor the following key metric: the number of RFPs available in a given time period. You need to understand the number of RFP opportunities available, as well as the likelihood and frequency of winning bids, in order to plan operations and forecast revenues.
Costs and benefits of the RFP model
RFPs are normally issued for large contracts. In this case, a single win can be significant for a startup. However, buyers often prefer to deal only with“vendors-of-record,” which effectively excludes new bidders from the opportunity. The risks involved in the bidding process as well as the execution of high-value contracts can put severe, and possibly terminal, stresses on a startup company.