Sometimes, a bidder on a work contract may bid lower than what would maximize his/her profit from the contract and the reason for that is to create goodwill (to increase expected future business from the buyer). How would you value the goodwill that is obtained in this way?
Think about an example that pertains to you. If there is expected goodwill, would you be prepared to bid lower to get a contract?
It is true that earning a profit is an ultimate objective of any firm and all firms intend to maximize their profit. However, in some cases, a firm may charge less than that price, which maximizes profit. Similarly, a bidder may go into a contract at a bid that is lower than that bid, which maximizes his profit. It is a business strategy, which a bidder implements when the market is highly competitive, and services or products are similar, if not identical. When products or services are similar, a buyer does not discriminate between different producers or service providers. In such a situation, the emphasis goes back on price to attain a competitive edge (price leadership model). However, if the products are distinguishable and there is asymmetry of information, then bidders do not have to emphasize prices, necessarily, to earn a high profit for the longer period (Young, 2007).
Discounts or low bids have a particular objective, and one of the objectives is to develop goodwill. It increases the probability of more work/business from the buyer (loyalty). However, it is not guaranteed that this strategy would surely create goodwill between buyers and seller of the product or service provider.
This business/corporate phenomenon can be explained with the help of an example. For instance, a seller offers units of the good, say trousers, to a buyer at a rate lower than the market rate (quality of the product is as per standard defined by the buyer). This business tactic may create goodwill between buyer and seller, as the buyer knows that he/she is buying units of goods at a lower rate than the market. He/she may prefer to buy a unit of goods from the same seller in future; however, it would entirely depend upon the price seller would charge for units of good or service in the future (Trans World, 2017).
Goodwill facilitates firms or businesses to earn a considerable profit in both medium and long terms. In a competitive market, goodwill must be the strategy, as earning a sizable profit is quite difficult.
References
Trans World. (2017, October 23). Goodwill When Buying or Selling a Business. Retrieved from https://www.tworld.com/blog/goodwill-buying-selling-business/
Young, A. (2007). Profitable Marketing Communications: A Guide to Marketing Return on Investment. Kogan Page Publishers.
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