Government Business
Government Market Segments
By Richard White
May 19, 2005, 11:22

In doing business with government -- whether it is federal, state or local -- the rules of the game depend largely on the market segment in which you're selling. In this discussion, we're speaking of market segments divided by purchasing threshold amounts rather than by industry. The purpose of this installment is to give you a broad overview of these market segments.

Market segments vary from jurisdiction to jurisdiction, but they can be roughly divided into three types: micro, small and large. The following summarizes these three segments:

Micro Purchase
Threshold: Under $2,500
Purchasing procedure: Sole source using a government credit card
Sales cycle: Same day

Small Purchase
Threshold: $2,500-$25,000
Purchasing procedure: Three informal quotes by phone, fax, email or regular mail
Sales cycle: Same day to several days

Large Purchase
Threshold: Over $25,000
Purchasing procedure: Public advertising and formal documentation of procurement
Sales cycle: Several weeks to a year or more

Micro Purchase

Government micro purchases can be made without competition. In practice, program personnel (end users) and official buyers are encouraged to make sure that prices are reasonable and purchases are distributed fairly among vendors. End users with a government credit card make most micro-purchases, although purchase orders are sometimes used if an official buyer makes the purchase.

The micro-purchase market segment was created to make life easier for end users managing and operating government programs or field offices. A manager of a government field office can buy office equipment and supplies under $2,500 by merely calling a local vendor, giving the vendor his/her credit card number, and requesting same day delivery.

Government credit cards (formally called purchase cards) are widely used and account for around 50% of all government buys. Credit cards are increasingly being used to make higher dollar buys.

If you want to compete in this commercial-like market segment, set up a merchant account (if you don't already have one) and sell to the government installations in your local area just like you would a commercial customer.

Small Purchase

Over the past five years, governments generally have loosened their procedures for making small purchases. They can now be made with three informal quotes obtained by telephone, fax, email or regular mail. Payment is made with a credit card or purchase order. The quotes themselves make up the purchase documentation so a buyer can act quickly and efficiently.

Official buyers make small purchases for end users. As we discussed in the prior installment, end users may or may not provide buyers with preferred suppliers. They might for, say, a scientific instrument but not for something like office supplies.

Buyers find suppliers using manual or electronic bidders lists (maintained by individual purchasing offices), centralized electronic vendor directories (both on and off the Internet), or other vendor sources like Thomas Register and the local yellow pages.

Small business preference procedures vary considerably, but as a general rule most small purchases are set aside for small and small disadvantaged businesses unless this type of company cannot be found to satisfy the requirement.

A small purchase can be done in a day, but several days or a week or more would be more typical.

Buyers typically rotate companies they contact for a quote, often the last supplier plus two new sources. As I tried to emphasize in the last installment, your company will not be contacted if they don't know you exist. Get out there and sell! If you have a technical or complex product or service, sell the end user. If you're successful, the end user will let the buyer know that your company is a preferred source for the required product or service. If you sell common commodities, focus on the buyer.

Large Purchase

Large purchase procedures vary widely among government jurisdictions. The dollar threshold used to define a large purchase can be as low as $10,000 for smaller cities and counties and as high as $100,000 for the federal government. (The federal government requires formal advertising for most purchases exceeding $25,000, but all purchases up to $100,000 are defined as small and are set aside for small businesses.)

In most state and local jurisdictions, the dollar threshold defining a large purchase and the threshold for formal advertising are the same.

Large purchases require formal advertising and more stringent and formal purchase documentation. The required method for public advertisement of a large purchase is specified in a jurisdiction's procurement regulations. Possible methods include city newspapers, periodicals published by agencies, Internet sites, or some combination of these.

More and more jurisdictions are using the Internet as their primary medium for publishing large procurements. The Federal government has recently designated the Internet site FedBizOpps, http://www.fedbizopps.gov, as its official publishing medium for all procurements exceeding $25,000. The Commerce Business Daily paper publication and Internet site are being eliminated effective January 1, 2002.

Large purchases require strict, formal documentation concerning how and why the successful vendor was selected. The contacting mechanism is usually an Invitation for Bid (IFB) for a sealed, fixed-price buy or formal Request for Quote (RFQ) for a non-sealed fixed-price buy. (Sealed bids require a formal, public opening and a subsequent formal public posting of all bids.)

A Request for Proposal (RFP) is used for negotiated procurements. Negotiated procurements are used for complex procurements where many factors besides price enter into the buy. The contract does not necessarily go to the vendor with the lowest bid, although price is usually a major factor in making the selection. This method is used when the government is seeking a solution to a problem, buying a complex product or contracting for a complex service.

Fixed-priced procurements can take 30 to 90 days to complete and negotiated procurements can take from three months to a year, and, in some cases, even longer.

Future installments in this series will be devoted to selling in each of these three market segments.

© 2005 by FedMarket.com