Pricing Guide

Summary

In short, while it is up to individual procurement departments to set their own prices, we recommend they set the price to be the square root of the order size.

For example, if an RPF was send out for a $1,000,000 order, we recommend the price for the 10min video call to be $1,000.

 

 

 

Motivation & Analysis

How should procurement officers on the VPM price their time? Of course, pricing is fundamentally subject to the balance between supply and demand; however, somewhere between 0.1 to 10 permille (1 in 10000 to 1 in 100) of the average contract value might be a good place to start. For simplicity’s sake, let us call this “fee rate.” There are a few important considerations that affect the fee rate and let us briefly examine them below.

  1. Business development and sales efforts always consume significant resources, so not all sizes of spending are economical for suppliers to personally engage with. For example, mature offerings such as basic SaaS products like Google Workplace or Microsoft 365 are usually self-service only, unless the buyer is looking for very elaborate customizations that warrant dedicated success personnel.
  2. Since commercial contracts can differ dramatically by value, it would be fair to claim that the respective sales correspondences incur varying levels of time and resource commitments. In general, the larger the contract, the more complicated the sales process. For the procurement officer, this means spending more time preparing for sales engagements and evaluating different proposals. Therefore, the fee rate should always be positive, and the engagement fee should always increase with the mean contract value.
  3. With that said, given internal procedures and general logistical overhead, even a small contract worth around $10,000 would incur no more than a few hours of a procurement officer’s time. The marginal cost of time decreases with contract value and additional time spent, so the fee rate itself should be monotonically decreasing.
  4. These two conditions allow for a wide range of functional relationships between the fee rate (or fee) and the mean contract value, but the simple of which is the square-function y=√x , or put in exponential notation, y=1/2(x)

 

 

 

 

The Square Root Rule

So how does this square root rule behave in practice? Look at the graphs below.

 

A. Meeting price vs. Order valise for different ranges

Figure A depicts the relationship between the meeting fee and the potential contract value. Sub-figure on the left caps the order value between $0 and $20,000. Sub-figure on the right depicts how the curve grows all the way up to a contract value of ten million ($10,000,000).

B. Price rate chart

Figure B depicts the relationship between the fee rate and the potential contract value. We assume that digital incentives are often a percentage of the sales proceeds, so without loss of generality, we assume that the rate is 1%. As the contract value increases, the fee rate converges to 0.

For a one million-dollar ($1,000,000) contract, the fee rate will be 0.1%, or one permille, or $1,000.

 

 

Summary

The family of functions that take the form of y=xp , where y stands for the engagement fee, x stands for the contract value, and p, strictly ranging between 0 to 1, stands for the parameter controllable by a slide, affords enterprise decision makers granular and effective control over the balance between access and cost-savings for their procurement functions. If they prefer to make their RFP/RFI more accessible to prospective suppliers, they can set p to be smaller than 0.5, while if they prefer to keep it close, then they can slide it in the opposite direction. We consider p=0.5 as the neutral position (shaded in blue), a position that has motivated our pricing strategy.

CONTRACT VALUE $10,000 $50,000 $100,000 $500,000 $1,000,000 $5,000,000 $10,000,000 $50,000,000 $100,000,000
0.4 3.981‰ 1.516‰ 1.000‰ 0.381‰ 0.251‰ 0.096‰ 0.063‰ 0.024‰ 0.016‰
0.41 4.365‰ 1.689‰ 1.122‰ 0.434‰ 0.288‰ 0.112‰ 0.074‰ 0.029‰ 0.019‰
0.42 4.786‰ 1.882‰ 1.259‰ 0.495‰ 0.331‰ 0.130‰ 0.087‰ 0.034‰ 0.023‰
0.43 5.248‰ 2.097‰ 1.413‰ 0.564‰ 0.380‰ 0.152‰ 0.102‰ 0.041‰ 0.028‰
0.44 5.754‰ 2.337‰ 1.585‰ 0.644‰ 0.437‰ 0.177‰ 0.120‰ 0.049‰ 0.033‰
0.45 6.310‰ 2.604‰ 1.778‰ 0.734‰ 0.501‰ 0.207‰ 0.141‰ 0.058‰ 0.040‰
0.46 6.918‰ 2.901‰ 1.995‰ 0.837‰ 0.575‰ 0.241‰ 0.166‰ 0.070‰ 0.048‰
0.47 7.586‰ 3.233‰ 2.239‰ 0.954‰ 0.661‰ 0.282‰ 0.195‰ 0.083‰ 0.058‰
0.48 8.318‰ 3.602‰ 2.512‰ 1.088‰ 0.759‰ 0.329‰ 0.229‰ 0.099‰ 0.069‰
0.49 9.120‰ 4.014‰ 2.818‰ 1.240‰ 0.871‰ 0.383‰ 0.269‰ 0.118‰ 0.083‰
0.5 10.000‰ 4.472‰ 3.162‰ 1.414‰ 1.000‰ 0.447‰ 0.316‰ 0.141‰ 0.100‰
0.51 10.965‰ 4.983‰ 3.548‰ 1.613‰ 1.148‰ 0.522‰ 0.372‰ 0.169‰ 0.120‰
0.52 12.023‰ 5.553‰ 3.981‰ 1.839‰ 1.318‰ 0.609‰ 0.437‰ 0.202‰ 0.145‰
0.53 13.183‰ 6.187‰ 4.467‰ 2.096‰ 1.514‰ 0.710‰ 0.513‰ 0.241‰ 0.174‰
0.54 14.454‰ 6.894‰ 5.012‰ 2.390‰ 1.738‰ 0.829‰ 0.603‰ 0.287‰ 0.209‰
0.55 15.849‰ 7.682‰ 5.623‰ 2.726‰ 1.995‰ 0.967‰ 0.708‰ 0.343‰ 0.251‰
0.56 17.378‰ 8.560‰ 6.310‰ 3.108‰ 2.291‰ 1.128‰ 0.832‰ 0.410‰ 0.302‰
0.57 19.055‰ 9.538‰ 7.079‰ 3.544‰ 2.630‰ 1.317‰ 0.977‰ 0.489‰ 0.363‰
0.58 20.893‰ 10.628‰ 7.943‰ 4.040‰ 3.020‰ 1.536‰ 1.148‰ 0.584‰ 0.437‰
0.59 22.909‰ 11.842‰ 8.913‰ 4.607‰ 3.467‰ 1.792‰ 1.349‰ 0.697‰ 0.525‰
0.6 25.119‰ 13.195‰ 10.000‰ 5.253‰ 3.981‰ 2.091‰ 1.585‰ 0.833‰ 0.631‰
CONTRACT VALUE $10,000 $50,000 $100,000 $500,000 $1,000,000 $5,000,000 $10,000,000 $50,000,000 $100,000,000
0.4 $40 $76 $100 $190 $251 $478 $631 $1,201 $1,585
0.41 $44 $84 $112 $217 $288 $558 $741 $1,434 $1,905
0.42 $48 $94 $126 $247 $331 $651 $871 $1,712 $2,291
0.43 $52 $105 $141 $282 $380 $760 $1,023 $2,044 $2,754
0.44 $58 $117 $158 $322 $437 $886 $1,202 $2,441 $3,311
0.45 $63 $130 $178 $367 $501 $1,034 $1,413 $2,914 $3,981
0.46 $69 $145 $200 $418 $575 $1,206 $1,660 $3,480 $4,786
0.47 $76 $162 $224 $477 $661 $1,408 $1,950 $4,154 $5,754
0.48 $83 $180 $251 $544 $759 $1,643 $2,291 $4,960 $6,918
0.49 $91 $201 $282 $620 $871 $1,916 $2,692 $5,922 $8,318
0.5 $100 $224 $316 $707 $1,000 $2,236 $3,162 $7,071 $10,000
0.51 $110 $249 $355 $806 $1,148 $2,609 $3,715 $8,443 $12,023
0.52 $120 $278 $398 $919 $1,318 $3,044 $4,365 $10,080 $14,454
0.53 $132 $309 $447 $1,048 $1,514 $3,552 $5,129 $12,035 $17,378
0.54 $145 $345 $501 $1,195 $1,738 $4,144 $6,026 $14,370 $20,893
0.55 $158 $384 $562 $1,363 $1,995 $4,835 $7,079 $17,157 $25,119
0.56 $174 $428 $631 $1,554 $2,291 $5,642 $8,318 $20,484 $30,200
0.57 $191 $477 $708 $1,772 $2,630 $6,583 $9,772 $24,458 $36,308
0.58 $209 $531 $794 $2,020 $3,020 $7,681 $11,482 $29,201 $43,652
0.59 $229 $592 $891 $2,304 $3,467 $8,962 $13,490 $34,865 $52,481
0.6 $251 $660 $1,000 $2,627 $3,981 $10,456 $15,849 $41,628 $63,096

 

Accounting and Capital Markets Impact:

The new revenue generated from this model will virtually all drop to the corporate bottom line for procurement teams.

The current costs of running procurement departments are already being born by the current business models, so there is no additional overhead needed to earn this additional revenue stream.

In addition, as this new revenue stream, paid for by a multitude of potential suppliers, drops down to the bottom line, it can have a material impact on corporate share prices based on related PE ratios.

At the current PE ratios of the S&P 500, at nearly 29x, $10 M in added revenue to the bottom line is worth $290M in additional market cap, and $50 M in added revenue to the bottom line is worth $1.45B in additional market cap, and $100M in added revenue added to the bottom line is worth $2.9 B in additional market cap.

Shareholders will welcome this use of existing corporate resources for further economic rewards and additional corporate value.