Target Costing Strategy: How Pricing to Win (PTW) Intelligence Drives Technical Design
- Jordan Clayton
- May 21
- 5 min read
A defense technology firm executes a technically flawless capture campaign. The engineering is robust, the team is elite, and the solution objectively outperforms the incumbent’s legacy architecture. The price is built using standard commercial logic: labor costs, overhead, materials, plus a "fair" 15% profit margin. The final bid is $1.3 Million.
Six months later, the contract is awarded to a competitor who bid $980,000 with a technically inferior solution.
This scenario is the most common and painful failure mode for new entrants in the defense market. Firms often operate under the delusion that a "fair price" is a "winnable price." In the federal acquisition ecosystem, these are unrelated concepts. The winner did not price based on their balance sheet; they priced based on the market's reality.
To win, a firm must abandon the "Cost-Plus" mindset and master the discipline of Pricing to Win (PTW).
PTW is not an accounting function; it is an intelligence discipline. It is the process of determining the exact price point that maximizes the Probability of Win (Pwin), and then reverse-engineering a solution to fit that constraint. It transforms pricing from a financial output into a strategic input.
The Structural Flaw: Bottom-Up vs. Top-Down
Most founders price their government proposals the same way they price commercial SaaS: Bottom-Up.
The Formula: (Direct Costs + Indirect Rates + Desired Margin) = Price.
The Flaw: This approach is introspective. It ignores the external realities of the customer’s budget ceiling and the competitor’s aggression. It assumes the customer cares about your margin. They do not.
The winning strategist prices Top-Down.
The Formula: (Customer Budget - Competitor Aggression) = Winning Price Target.
The Execution: Once the Winning Price Target is identified (e.g., $980k), it becomes a hard design constraint. The question shifts from "What does our solution cost?" to "How do we engineer a compliant solution that costs $980k?"
The Three-Pillar Analysis: Finding the Number
Finding the winning price requires a rigorous intelligence effort. You cannot guess. You must triangulate the target using three specific vectors.
1. The Customer's Price-to-Pay (The Budget Ceiling) The published ceiling in an RFP is rarely the real budget. It is the maximum authority, not the "pain point." Firms must determine exactly how much funding is actually programmed for the effort.
The Intel: This requires forensic analysis of the Department of Defense (DoD) budget. You must locate the specific Program Element (PE) codes in the "R-Docs" (Research, Development, Test & Evaluation budget forms) or "P-Docs" (Procurement budget forms). These public documents reveal what the Program Office told Congress they would spend.
The Analysis: If the R-Doc shows $5M programmed for FY25, and you know there are three contractors supporting the program, the "Price-to-Pay" per contractor is likely capped at $1.5M minus government withholdings. Any bid over that amount is technically acceptable but fiscally impossible.
2. The Competitor's Price-to-Win (The Market Floor) Bidding is not done in a vacuum. You are bidding against ghosts. To defeat them, you must build a "Ghost Proposal" for every major competitor.
The Profiling: You must analyze the business model of your adversaries.
The Incumbent: They have zero capture costs and a fully staffed team. Their risk is low, but their rates are likely bloated by legacy overhead.
The "Body Shop": Is there a low-cost staff augmentation firm bidding? They will bid razor-thin margins (2-3%) just to buy the revenue.
The Strategic Prime: Is a major defense prime (Lockheed, Northrop) bidding? They may be willing to bid at a loss ("buying in") to secure a strategic foothold in a new technology area.
The Calculation: By estimating their "wraps" (Fringe, Overhead, G&A) and predicting their strategic aggression, you can calculate the price floor. If the "Body Shop" can do it for $950k, your $1.3M bid is dead on arrival.
3. The Value Delta (The Justifiable Premium) A firm can bid higher than competitors, but only if they can prove the Total Ownership Cost is lower. This is the "Best Value" trade-off.
The Scenario: An RFP for base security. The incumbent bids $1M for 50 guards. You bid $1.2M for an AI-enabled sensor system that requires only 10 guards.
The Win: You are $200k more expensive on the contract line item, but your solution saves the government millions in long-term logistics, housing, and healthcare costs associated with 40 fewer personnel.
The Execution: A robust PTW analysis quantifies this "Value Delta." You do not just say "we are efficient"; you provide a Life Cycle Cost Estimate (LCCE) proving that your $1.2M price tag saves the government $5M over five years. This gives the Source Selection Authority (SSA) the ammunition to justify paying a premium.
The Reverse-Engineering Imperative: Design-to-Cost
Once the PTW analysis triangulates a target price of $980k, the nature of the capture effort changes. The target price is no longer a financial suggestion; it is a Key Performance Parameter (KPP), as rigid as "battery life" or "radar range."
The strategy shifts from "Pricing" to "Engineering." The capture manager must take the $980k target to the technical team and ask: "How do we deliver a compliant solution for this number?"
This forces operational innovation and ruthless prioritization:
Labor Mix: Can we replace a Senior Engineer (Level 4) with a Mid-Level Engineer (Level 2) overseen by a Senior Architect for 10% of the time?
Automation: Can we automate the reporting function to reduce labor hours by 20%?
COTS Utilization: Can we use a commercial SaaS module to satisfy a requirement instead of building custom code?
Scope Scrub: Are we "gold plating" the solution? If the RFP asks for a sedan, and we are bidding a Ferrari, we will lose. We must bid the sedan that meets every "shall" statement, not the Ferrari that bankrupts the customer.
This process—Design-to-Cost—is painful. It creates friction between engineering (who wants to build the best) and business development (who wants to win). But it is necessary. A perfect technical solution that costs 20% more than the winner is not a solution; it is a case study in failure.
The "Green Team" Review
In a mature capture process, the PTW number is validated during a "Green Team" or "Black Hat" review. This is a wargame where your internal team role-plays the competitors. They look at the solicitation, look at your likely price, and aggressively try to beat it.
If the Black Hat team, playing the role of a hungry competitor, can consistently build a compliant bid for $950k, and your bottom-up price is $1.1M, you have a "Gap to Close." You must either find efficiencies to drop your price or increase your technical score (the Value Delta) to justify the premium. If you cannot do either, the rational strategic decision is "No Bid."
From Cost-Plus to Market-Minus
Pricing to Win is the discipline of accepting market reality. It rejects the entitlement that comes with "fair pricing" and embraces the brutality of competitive bidding.
It requires a fundamental shift in corporate culture. It moves the organization from a passive "cost-plus" mentality to an aggressive "market-minus" posture. It ensures that when you submit a proposal, you are not crossing your fingers and hoping the government values your genius; you are submitting a mathematically optimized instrument designed to win.
Stop bidding "cost plus a fair margin." That is a passive strategy that lets the market happen to you. A winning firm takes control, using PTW intelligence to reverse-engineer a solution that is both winnable and profitable. At DualSight, we provide the Strategic Advisory to calculate the winning price and the Capture Strategy to engineer your solution to hit it. We turn pricing from an accounting exercise into a competitive weapon.
