The business services industry consists of companies offering B2B services including IT&C, marketing and advertising, consulting, HR, security, outsourcing, management and more. According to GlobalEdge, the industry is highly fragmented. Primary demand drivers include new business arrangements, increased disposable income and higher involvement of corporate business. Profitability drivers are represented by the ability to grow the business, effective marketing and an appropriate mix of services.
With this in mind, how close is your company to driving business leads and new contracts? We are discussing today the topic of guesstimation, estimation and quotation.
According to Oxford Dictionary, “a guesstimation is an estimation based on a combination of calculations and guesswork”. In the business world, guesstimation is a quantitative approximation, not backed by any previous data. In dynamic environments such as web development or marketing, the scope is a moving target, therefore guesstimating the scope implies flexibility.
How Guesstimation Works
Guesstimates are distributed as probabilities. This means a project can cost less than the initially agreed amount, but it means it can also cost more. In web development projects, there is an average lower bound (limit) of – 25% and an upper bound of +75%. If we guesstimate a project to cost USD 1,000,000, in reality its final price varies between USD 750,000 and USD 1,750,000.
Guesstimates reflect input quality. To successfully drop the guesstimation bounds (upper and lower), the scope should be as clear as possible. A deep understanding of requirements, design and resources is required.
Experience influences the accuracy of the guesstimation. The more experience, the better. Same goes for the team doing the work: they give better guesstimates than project bystanders.
Guesstimations are never final and should always be updated in time. This means final costs may vary, and clients need to be informed prior to the actual contract. In time, guesstimations require updates due to increase of costs.
Guesstimation works better for smaller things and for work done in the present. Smaller projects imply smaller costs. Work done in the present implies a deeper understanding of the current situation and helps break tasks into smaller elements, which are ultimately easier to guesstimate.
The more guesstimates, the merrier. Keep in mind though that a guesstimate costs money and resources.
Estimation is a quantitative approximation backed by previously observed data, while still recognizing that some facts remain unknown. In the business world, an estimate is an educated guess that provides approximation of the true outcome. Is it considered to be the least accurate type of financial modelling.
How Estimation Works
There are two ways estimation can be approached when planning a business offer. The first approach uses top-down estimation, where the client has a budget in their mind and asks for a breakdown of services. This approach consists of five major steps:
- Direct costs. These include direct labor work costs (i.e. expansion of the team, external hires), materials, resources, tools and technologies involved in the process, commute costs.
- Indirect costs. These include additional equipment costs, office space costs and any administrative costs that can appear along the way.
- Clarifications. An estimation of direct and indirect costs is not enough to deliver a final quote. Seeking clarifications from the client can help save future costs for both parties. For e.g., tight deadlines can imply higher costs.
- Brief agreement. In some cases, the client may have already made up his mind about the budget for his project. Both parties must agree and understand that even a final estimation is still but an approximation of the real outcome.
- Custom estimates. The more custom the request/project, the higher the cost estimates. The only way to handle custom estimates that fit the client’s budget is to cut resources and find a middle win-win way. You can always suggest a standard services package for clients who cannot afford larger budgets.
The bottom-up estimate approach is similar to the previous one. However the client does not have a budget set. In this case, whenever presenting the price estimation, a detailed breakdown of all costs for every service is required. Actions that can help justify the price estimates:
- Differentiate between hourly rate estimates and fixed package estimates. In some cases, an hourly rate estimate might do more justice than a fixed rate estimate. In the end, it’s all about the breakdown though.
- Less is more. Simplify the estimates if they seem too bulky or discouraging for potential clients.
- Professional design. Finally, work on the design of your estimates. Any visually appealing offer has a higher chance of actually getting accepted.
Quotation is a formal contract in response to a request for quotation, submitted by suppliers of goods and services.
How Quotation Works
Quotation addresses services required by the buyer at specific prices, under specific conditions. Simply put, it is the price charged by a service provider for a particular task or set of tasks. This means, the client gets not just an estimate or guesstimate, but the real cost approximation of the actual outcome.
Quotation works in two ways:
- The buyer sends a request for quotation, referred to as RFQ, a document submitted to one or several suppliers, implying a quote for a given product or service. This approach is systemized and works well with defined and quantified items.
- The buyer sends a request for proposals, referred to as RFP. This type of document is used when the buyer’s requirements are complex, and the items are not properly defined and quantified.
Quotations are more restrictive than guesstimations and estimations altogether, since both parties sign a contract and commit to one another. This is a great approach to use if the requirements are clear in terms of time, efforts, technologies etc., your costs are highly stable and there is a certainty that the final product will not be more complicated than expected.
A written quotation can often include the overall price, contract period, payment terms, business contact details and breakdown of components included in the price quote.
– Guesstimates are not backed by data and rely mostly on probability than the actual outcome. Guesstimates work better in the case of smaller less demanding projects. They do not represent the final price;
– Estimates are closer to the real outcome, but there are things to keep in mind before calculating overall costs. While it is not fully dependent on the client’s budget, there is a certain limitation in terms of finances from the client’s side;
– Quotations work best if you have a clear breakdown of the costs and resources. Clients can send RFQs and RFPs, and once you agree to a price quote, it is final.
Which one works better for your business model? Share your story.