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It is a prevalent practice followed across all industries wherein bidders lower the pricing for work contracts by compromising on their profit margins. It is indeed done to ensure they can earn the Goodwill from the customers. The customers are also inclined to go with existing vendors (bidders), as they are aware of bidders' ethics and practices. It mutually benefits both parties involved in a transaction. The reason being, the vendors find it easier to trust an existing bidder as they have worked before for the company and understand what is expected from the bidder to deliver the work. The second reason being, over a while, the company knows that the bidder is qualified enough to provide the work on time. Thirdly, there exists a relationship between the vendor and the bidder, which helps to close the deal early.
There is no denying the fact that Goodwill for a business is an intangible asset, and it helps in winning future contracts (Douglas, 2012). There are times when companies prefer and intend to go with newer bidder; this happens when the company was unhappy with the services rendered by the previous bidder. In business, it's all about grabbing the opportunities available and then ensures the work is completed on time under the allocated budget to become successful.
I believe that compromising on profits is helpful as it helps to get continuous work without spending much on marketing and convincing newer clients. The cost and the time saved can be used to find new customers and increase the top line for a business. A lower bid helps to build a good rapport with the customers and leads to more revenue channels in the future. It is a common practice to offer lower bids when the bidder is new and is introducing a new service or a product to achieve greater penetration into new markets (Douglas, 2012).
Douglas, E. (2012). Managerial Economics (1st ed.) [Electronic version]. Retrieved from https://content.ashford.edu/ (Links to an external site.)
Working in the homeowners insurance and being an insurance adjuster, I deal with bids and contractors pretty much on a daily basis. I think that competitive pricing is extremely important in both the company's interest and the customers. For example, as an adjuster, I remember the individual contractors who are hard to deal with, extremely overprice their bid, etc. (even though I am over 12 different states). I also remember, and am willing to work more with the contractors who are willing to work back with me, whether that means coming to a compromised amount, easy to get a hold of, and friendly.
Now, coming from a customers point of view, I think that price is very important. I know that I personally look at price as the first thing when I am comparing bids. Someone who is going to offer a great price is who I am going to recommend to other customers. Perfect example, my husband and I are about to get a fence built and we were just going to build it ourselves. However, a friend told us of a company who will do a great job, at a low price. we are now going to give them our business, solely because of the goodwill and the price. if the price was too high, we would have just built it ourselves (and they would have lost our business and maybe others).
As Douglas (2012) states the higher the bid the lower their success probability will be, which is if the buyer will choose them or not. You can expect as a contractor that the buyer will get a few different quotes to find the best price. While lowering your bid may cost you money up front, I think it is the best move to make to obtain and promote your company so that it will generate revenue in the long run. The bet advertisement out there is word of mouth. Price and effectiveness, in my opinion are the two things that the buyer is going to look for. When people tell their friends, "you should use company xyz for your fencing!" the two things that individual is going to ask was, "How much did they cost? Did it turn out nice?" If they hear a large number, they wont even give the contractor the time for a quote. This is ideal in a contractor's world. Price is king! WIthout a competitive price, you have no business which means no goodwill. To me, goodwill holds a great deal of value when it comes to lowering the price. Goodwill allows you to receive excess growth and revenue that would not have been there otherwise (Beers. 2019)
Beers, B. (2019, March 31). How Does Goodwill Increase a Company's Value? Retrieved from https://www.investopedia.com/ask/answers/010815/how-does-goodwill-increase-companys-value.asp (Links to an external site.).
Douglas, E. (2012). Managerial Economics (1st ed.) [Electronic version]. Retrieved from https://content.ashford.edu/
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