Sam owns a software design company. Sam is looking for new contracts and finds a request for proposal posted on the internet. Sam has no idea who his competition will be, how many other proposals the client will receive, or what the contents of the other proposals will be. The only thing Sam knows for sure is that there will be one proposal that will win the contract, and every other proposal will fail. This is a classic example of second place being nothing more than the first loser. Only by winning will Sam be able to recoup the costs of writing the proposal.

Sam pulls out his calculator and figures out how much this proposal is going to cost him to generate. His team will spend approximately 90 man hours to complete the proposal. He bases this off of his experience generating proposals similar to it. Sam pays his staff of all sub-contractors $150.00 per hour. Sam will spend about $13,500.00 to generate this proposal. Sam calculates the estimated profit, if he gets the deal, to be between $325,000.00 and $340,000.00. In the past, Sam has closed the deal 1 in 5 times in similar situations. This is because he is in a specific niche market and his team is well known in that market. Sam then calculates the estimated profit (at the low end) of $325,000.00 against the theoretical cost of needing to write 4 more proposals like this ($54,000.00) before he will land a contract. The numbers tell him that if he plays and stays in this game, he will make about $271,000.00 - This is where most business people stop and put the calculator away.

Sam isn’t done with his calculator yet. Sam understands the economics of the Nth step and wants to figure out what it would cost him to do something that he is sure his competitors will not have the resources to do. Sam has already figured out that a proposal will cost him $13,500 to generate. Sam has also just figured out that it would only cost him 10% more to deliver a software demo CD-ROM with his proposal that would serve as a proof-of-concept. Because Sam has written software like what’s requested in this proposal before, he has already written 70% of the code needed for this project. For an additional $1,500.00 he can pay his staff to organize the already written code into a demo CD-ROM that will literally "show" his client what they can expect. The $1,500.00 represents the cost of the Nth step and he would be a fool to not invest it. Sam adds in the additional 10% to his proposal costs that his competitor’s proposals will not include.

Sam won the contract. Sam played smart and played to win.

In the example above, the losers would have been better off to have only invested 15% into their proposal as they would have still lost, but they would have only lost 15% rather than the 90% they did lose. Realize however that even at a 15% loss, after 7 proposals, they will burn through 105% of their budget and they would do this for nothing as they are guaranteed to lose all seven proposals with an investment of only 15%.

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