[SwellJoe]

You're reading way too much into one piece of advice. The whole "eating from the bottom" thing is a time honored tradition in the computer industry. IBM mainframes were eaten from the bottom by Digital systems, which were eaten from the bottom by Data General mini-computers, which were eaten from the bottom by PCs, which will be eaten from the bottom by mobile devices.

But, your problem is not a paradigm shift that alters the competitive landscape. Your problem is a competitor with unsustainable pricing. Don't play that game. It's foolish and you'll lose more customers than you win by playing it. You'll also dig yourself an early grave (figuratively, and possibly literally, if you take your business too seriously).

Ignore your foolish competitor. Build better products, charge the right price for them (you may still be too cheap), and keep working. The low-priced competitor will continue to lowball his bids, and will eventually get a reputation for under-serving and over-promising. In a year or two, you'll have a chance to re-bid the same customers you lose this year. And the customer won't be so interested in getting the product cheaply.

[josefresco]

OR, the smaller competitor will deliver a much smaller and simpler product for less money and build a solid reputation as a high value low cost provider who's not over pricing their software just because they're working for the "government" which is known to have deep pockets and understand little about what they're buying.

[SwellJoe]

"OR, the smaller competitor will deliver a much smaller and simpler product for less money and build a solid reputation as a high value low cost provider who's not over pricing their software"

That's only possible if there has been a paradigm shift that the original poster has not identified. He's stated a few times that his company is operating on thin margins. I'm gonna give him the benefit of the doubt and assume he's running an efficient shop.

I don't believe that leaves room for a "low cost" competitor at the bottom. And, unless it's a commodity, it wouldn't matter anyway. People who do these kinds of acquisitions make a check list...the product that checks off the most items on the list, and brings in a reasonable bid vs. all of the other bidders, gets the contract. It's not like consumer markets.

I still suspect the OP is charging too little, if his product is good, because being the low cost provider in just about any market is not a good place to be. Margins are thin, customer satisfaction is low (think eMachines and Packard Bell vs. Apple and ThinkPad) and you can't make enough to push forward on the projects that'll help you grow and provide better services.

[skmurphy]

I don't believe that leaves room for a "low cost" competitor at the bottom.

This is precisely the thinking that leads to getting disrupted by a different business model.

[SwellJoe]

"This is precisely the thinking that leads to getting disrupted by a different business model."

Please re-read my whole comment (and the one above it). I've explicitly discussed paradigm shifts that change the shape of the industry. A "different business model" is obviously one such type of shift. But given the description of the situation, I don't believe the OP is in such a moment in the history of his industry.

[skmurphy]

I did, it's just that I agree with josefresco's comment, or at least see that scenario as more likely. We have different interpretations of the same information. My other point is the firms that get disrupted always see the alternative as less attractive.

[SwellJoe]

If that's the case, we can't save his company. If he's being blindsided by a significantly different way of doing business, and one that undercuts his already razor thin margins by a large amount, then his company is already dead and just doesn't know it yet.

That could be the case, of course. So, you're right, we are just taking a different view of the provided data.

[theyoungceo]

Some clarification on what this product does... * It requires a physical component beyond desktop computers, one that requires ongoing support and maintenance and precision installation. This isn't like a sales order system or something like that, it might more be called a public works project. * It is a service-based ASP model * Bear in mind that the usual pricetag for organizations of medium to large size is $2M to $30M and we are doing these deals in the $100-200k range so we very much are operating on razor thin margins

[skmurphy]

So your smaller competitor is doing to you what you are doing to your more established competitors. Do you think your major competitors initially discounted your ability to prosper? Also from the perspective of your prospects, given that the next nearest major competitor is 20X your price there may not be enough of a difference between you and your lower priced competitor. Why not be just be 1/2 price of your nearest major competitor instead of 5%? Do you have to discount so strongly? Will you significantly enlarge the number of buyers with your price point or just shrink the total spend in the market? You may be being excluded from many more deals because your price is not credible (e.g. are you trying to sell a $10 car, people wonder what's missing or wrong with it).

[theyoungceo]

There are two types of government entities: let's call them "private" and "pseudo private"....then there is a third type that is very public, very well funded, and very demanding. The first two markets were grossly underserved because they couldn't dream of affording the product for the third. A few startups have sprung up in this area, and that's where we got our start. Only the two rolls royces have any substantial market share in the big public market, and we're going to be the first company of the little guys poised to make the jump into the big one. We're trying to figure out how we're going to multiply our price by 20x, and it is probably going to mean we fork the product development into two separate lines for the smaller ones and the bigger ones even though the cost structure is more or less the same. The big big guys have been enjoying OBSCENE margins (think 5000%) in the big market for a long time due to the barrier to entry of "establishment" there.