Under Bidding a Bridge to Nowhere

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Bridge between North Korea and Dandong, China in disrepair following the Korean war. [Source: Huseyin’s flickr photostream, used under a creative commons license.]

If a customer isn’t 100% certain about the value of a product, then they’ll want to minimize their committed costs.  From an ROI standpoint, their R (the return) is uncertain and has risk.  To maximize their ROI, they will want to reduce their I (the investment) as much as possible.  This is a reasonable way to approach risk.

whole-product-planning-crossing-the-chasm

Each step in product development reduces customer adoption risk and increases the speed and ease of customer adoption.

When customers are behaving in such a way, and when competitors are able to enter the market at slight discounts to current pricing, then there is a gap between the value customers get from a product or process and what they need. The vendor is leaving risk for the customer to deal with, rather than fixing the product.  Rather than buying a fully formed project, they are having to buy a product that is not fully developed.  Using Crossing the Chasm terms, the ‘Whole Product’ is not yet fully developed.


Underbid: (in an auction or when seeking a contract) make a lower bid than (someone).

Bridge to nowhere: a bridge where one or both ends are broken or incomplete and does not lead anywhere.

Under-bridge: A lower bid made deliberately knowing that the resulting effort will be a bridge to nowhere.

The term is similar to:

Race to the bottom: Originally coined by US Supreme Court Justice Louis Brandeis, and defined more recently by  “The “race to the bottom” implies that the states compete with each other as each tries to underbid the others in lowering taxes, spending, regulation…so as to make itself more attractive to outside financial interests or unattractive to unwanted outsiders.”

Winner’s curse: The winner will tend to overpay.  Here in our example, the winner is the low bidder, who has mispriced their bid to the low side.  As opposed to a winner’s curse with an over-confident bidder and the sale going to the high bidder, here we have a sale that goes to the low bidder.  The low bidder will tend to have bad information about the true costs of the activity, similar to a high bidder having insufficient information about the value of the asset they are buying.


A losing scenario

These terms come together to compound customer and competitor behavior in new markets with high startup costs, high uncertainty and high risk.  The results are even more harmful in scenarios where the outcomes are binary – a project is either successful or a failure, with no gradient in between.

A knowledgeable vendor (“KV”) bids the work out at USD 100.  A new competitor can go in and state to a prospect, “this is much too high.  We can do this work for $50, and further, it will do much more than what KV says.  The KV technology does not work as well as ours.”

This creates a dilemma at the prospect.  They may have worked with KV and understand the capabilities and realities of the technology.  KV may have an order of magnitude more experience than their new competitor.  But how as a vendor can you be certain?  The cost to evaluate is high.  This diligence cost required of the prospect to know is very high.  KV must not only be able to demonstrate that what they do works, but also be able to show why the new competitor’s concept won’t work.

This trap is tough for the customer to avoid.  They don’t want to share with KV the value they see in the new technology.  They don’t want to tip their hat to the market.  They want to pursue their effort in secrecy to create a sustainable barrier to new competition and reap the rewards of their investment in this space.

Consequences & Innovation Death Spiral

The customer goes with the new vendor, thinking they will not only save $50, but also get access to a bigger market.  Two years later they find that they’ve spent $50 and have nothing to show.

How does that organization respond?

What do they do next?

Do they admit they were wrong and go back to KV?  Do they declare that, “we’ve spent 1/2 our budget, thank goodness we didn’t spend all of it!”  Given the binary nature of the project, they didn’t really learn anything.  There is no benefit of going to KV with the work as it stands, as there is nothing to build from.

What happens then is an innovation death spiral.  KV is the right answer, but with a slew of competitors constantly under-bidding them, and doing so on projects with a ‘bridge to nowhere’ there is no ability for the prospect to learn and move ahead.

The onus here lies mostly on KV.  KV must have a better answer for why they should be the vendor of choice.  The arguments must be so compelling that no competitor can enter the market behind them.  While the losses and pain may accrue at the prospect and the societal level, the source of the pain is with KV.

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