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Strategy for Choosing a Profitable Supplier of Translation Services

John Nash, a Noble prize winner of 1994, demonstrated in his both works (1950 and 1953), that suppliers, competing for the same product, can try to cooperate and set a higher price. At that he noticed an important moment: for an independent participant a possibility to offer a lower price in the very last moment seems to be more attractive than missing a contract. The other independent competitor is in the similar situation. The following reasoning is noteworthy:

Reasonably assuming that all the participants of bidding offer the customer the most optimum price from their point of view and estimate their potential correctly (offering the lowest economically sound price), we see that the winner usually receives a contract at the price which is lower than the economically sound one.

In other words, estimation of conditional chance in this mathematical model definitely shows that usually the winner is the supplier, who has overestimated his potential and offered a price which is not economically sound. This amazing mathematical effect is called «winner’s curse».

Mathematical effects of the game theory prove that «winner’s curse» is the essential part of any open markets and auctions. Moreover, it concerns any auction type: the offtake and the offer of services.

«Winner’s curse» exists irrespective of whether the market participants realize it or not. It is an inevitable corollary of conditions of a problem, not the mistakes in participants’ reasoning or tactics.

How to avoid the «winner’s curse»? What strategy should follow the service supplier on the one hand and the customer on the other in order to choose the supplier properly, efficiently and economically sound, because subsequently the winner must not blame himself for offering a very low price and operating at a loss?

The answer on this question is very important for all the service suppliers, because nobody is interested in the market price which is not economically sound. Suppliers, who work under the level of profitability, spend their money without opportunity to invest in business development, technology improvement, increasing capacity for work and the other things. Customers are not interested in cooperation with the supplier who inadequately estimated his potential, because it significantly increases economic risks during project implementation and affects the quality of the translation services.

Customers, who have a problem with choosing the supplier, are recommended to do the following:

1. The most attractive price is not the lowest. Underestimated price often means that the supplier overestimated his potential, operates at a loss and at the limit of cost-effectiveness and consequently does not have the «reliability reserve». The result is that the work is done with lower quality than has been expected and longer than it has been  planned. There is still a risk that the project will not be finished at all.

2. The price of the offer must not be the only criterion for choosing a supplier. You should remember that the types and quality of services are different among different suppliers. It means that choosing a supplier who has more experience in the definite type of service at respectively high rates, is very often more economically sound. With reference to translation market it means that, e.g. choosing a supplier who has great experience in the required sphere, is more reasonable than choosing suppliers who work at lower rates but do not have the necessary experience. In the last case there is a necessity in the regular monitoring, further alterations and risk of failure to meet the delivery date which can lead to extra costs and, as a result, to a much higher project cost.

Service suppliers should remember the following simple rules:

1. Try to avoid a fully price auction (the auction in which only the price offer matters) with a great number of participants as hard as you can. A company with a reasonable price policy has a very small chance to win at such auction.

2. It is very important to estimate the cost of your services properly. Never perform a contract which does not pay its way, because: a) there is no guarantee that the customer will continue cooperation, so the effort to buy «relations» with the customer through offering the economically unjustified price is a very risky investment; b) it will be hard to return the price on the appropriate level. Even if your customer stays with you, he will cooperate at the certainly unprofitable rates.

3. The experienced supplier avoids the «winner’s curse» (mistakes of receiving an unprofitable contract), keeping an eye of the price of the contract which must be always higher than the minimum price. This approach decreases the probability of receiving a contract a little bit, but secures from loss of unprofitable price instead. Such supplier realizes that he does not want to receive the contract, if it means operating at a loss. Winning the contract on the basis of the price only is a bad practice both for the seller and for the buyer.

4. Real stable relations between a customer and a service supplier, as well as stable balanced market are based on the unique features which make the market participants different. The variety of the offered services helps to maintain the balance which is profitable both for the customers and suppliers. It is essential to set oneself up at the market, clearly showing both the customers and the competitors your unique qualities, which provides your success under conditions of the intense competition.

Of course, it is impossible to consider peculiarities of different situations in details in such a short article. We cannot go through simulation versions of these models and analyze numerous consequences and results. We tried to state the main principles, which can be applied to the sphere of professional services. In the further articles we will definitely analyze some specific situations.

Translated from article written by Sergei Gladkov

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