What is the Chance of Obtaining a Cheaper Quote?

Bob Kilcoyne 1
Suppose you want to buy a new washing machine, and so far youve visited three retailers
(whether physically or online) to check prices for the model you have in mind. Is it worth
visiting another retailer to see if their price is cheaper?
Or suppose your company policy requires you to obtain at least three quotes for your
proposed purchases and youve already received three quotes. Would it also be worth asking a
fourth company to quote?
These questions are examples of a general question which I am intending to address in this
paper:
Where n price quotations have already been obtained for the supply of goods or
services, what is the probability (p) that the n+1th quote will be lower than the lowest
of the quotes already obtained?
The theory being developed draws on the principles of statistics, especially the normal
distribution and makes some use of extreme value theory.
The overall decision on whether to obtain any further quotes and use them in determining
which quote to accept will depend on both the probability of a lower quote being obtained,
the cost of obtaining a quote and the availability of time. The cost could range from 0 (under
the conditions of perfect competition formulated under classical economic theory) or
negligible (e.g. where there are four appropriate retailers adjacent to each other in the same
shopping centre) to very significant (e.g. where time intensive bidder meetings and site visits
are required before quotes may be obtained). This paper only considers the probability of
obtaining a lower quote and takes no account of the costs of obtaining a quote; its conclusions
and observations are therefore not sufficient to determine whether you should in fact
request any further price quotes.
A Basic Model
Suppose three quotes have been received for the supply of X: 80, 100 and 120, and we
know that there are additional businesses from whom we are willing to make a purchase and
who are able to quote for the supply of X. In this simple example, the mean existing quote
(m) is 100, the lowest quote is 80 and the standard deviation (sd) is 20, calculated as:

1 I am grateful to Wendy Appleby and Anil Pandey for their comments on a previous draft of this paper and the
additional questions they have raised.

Assuming that the population of businesses able to meet our requirements is vast (so that
the number of quotes we obtain makes essentially no difference to the distribution of prices
charged by so-far-unquoted businesses), and that all businesses determine their prices
independently (no business relates its price to the prices offered by its competitors), we
cannot anticipate a businesss price positioning in advance of obtaining a quote, and all
businesses prices are normally distributed around the mean and standard deviation derived
from the sample three quotes, then the basic parameters of the normal distribution can be
used to predict that 68.2% of all businesses charge the mean price +/- the sd (in this case
between 80 and 120), and 15.9% of business would charge less than 80. The probability
of obtaining a further quote cheaper than any of the three already obtained is therefore
15.9% - just under 1 in 6.
In any similar case where three quotes are equally spaced apart (such as 1p, 2p and 3p, or
1,100,000, 1,200,000 and 1,300,000) and the same assumptions hold true, the
probability of obtaining a fourth quote lower than any of the previous three is always 15.9% this is because of the assumption that the initial quotes dictate the parameters of the
normally-distributed population.
Developing the Model
a)

More Initial Quotes

The more extensive the initial trawl for quotes has been, intuitively we can expect that the
probability of finding a further quote lower than the lowest original quote would diminish, i.e.
as n increases, p will decline. Again for the purposes of this exercise it is assumed that the
distribution of prices is normal, with population mean and standard deviations derived from
the full range of initial quotes.
For example, with 5 initial quotes of 300, 320, 340, 360 and 380, p can be calculated
as 12.3% (based on the reasoning that there is a 2.3% chance of a quote below m 2sd, and
that the minimum initial quote, 300, lies between m 2sd (282.57) and m-sd (306.28)
with 73.5% of the distribution below 300. As 75.5% of 13.6% is marginally higher than 10%,
p = 10% + 2.3% = 12.3%).
The same value of p arises for any range of 5 equidistant initial quotes.
The effect of concentrating the five initial quotes closer to the mean is to reduce p. For
example, if the 5 initial quotes were 320, 340, 340, 340 and 360, (same mean, but
smaller SD than in the previous example), p can be calculated as 10.3%. Similarly, if the five
initial quotes are more divergent then p will be greater, e.g. with initial quotes of 300,
301, 340, 379 and 380 (same mean, greater SD), p increases to 15.7%.
2

With 9 equidistant quotes and the same normal distribution assumptions, p falls to 9.6%.
With 9 quotes more concentrated towards the mean, p falls, whereas with more divergent
quotes p increases. With 11 equidistant quotes and the same normal distribution assumptions,
p falls to 9% and with 13 equidistant quotes and the same normal distribution assumptions, p
falls to 8.5%. Thus, progressively, a greater number of initial quotes reduces the probability
of an additional quote being lower.
b)

Impact of obtaining further quotes

What happens where an initial set of quotes are used to determine the population mean and
standard deviation, but successive additional quotes are obtained in pursuit of a quote lower
than the initial minimum one?
Suppose we have three initial quotes of 320, 340 and 360 (m = 340, sd = 20). We have
reason to believe that those three quotes are representative of the population of potential
quotes, but we are aiming to find a more extreme quote, specifically an extremely low one,
i.e. one outside the existing range. We know that there is a 15.9% possibility of obtaining a
fourth quote which is less than 320; the other probabilities are:

Price between 320 and 340

Price between 340 and 360
Price above 360

p = 34.1%
p= 34.1%
p= 15.9%

Having three initial quotes, suppose we commit to obtaining a fourth quote and (if the fourth
quote is not cheaper) a fifth quote as well. If the fourth quote is cheaper than the preceding
quotes, we will be happy to accept it and buy X without looking for a fifth quote. If we obtain
a fifth quote we will purchase X at the cheapest quoted price. The probability that either
the fourth or the fifth quotes are lower than the first three is:

p4 = 0.159 = 15.9%
p5 = (1-0.159) x (0.159) = 13.4%
p4,5 = 15.9% + 13.4% = 29.3%
Since (from the assumption that the suppliers fit the normal distribution) we are most likely
to find that the fourth quote is around 340, we will continue looking without increasing the
possibility of success it is only where the number of businesses able to quote is limited that
the elimination of more expensive businesses increases the likelihood that the next business
to be consulted will ask for a lower price.
c)

Non-normal Distributions

Whilst the model has so far been developed using the normal distribution, there may be
occasions when businesses' prices for X are not in fact normally distributed, but can still be
predicted through a probability analysis. For example, where a key contributor to the process
of manufacturing X has a regulated minimum cost (such as a minimum wage for labour) the
distribution of prices at the lower end will not reflect a normal distribution and the

probability of a quote falling below a certain parameter will diminish towards 0. This type of
factor can influence p in various ways:
(i)
(ii)

(iii)

d)

if the lowest initial quote represents the lowest possible quote because of the
regulated minimum cost element, then clearly p will be 0;
if sellers who would otherwise charge less than the regulated minimum price
raise their charges to just the minimum there is likely to be a cluster of prices
at the minimum with a greater probability that this will be the price quoted at
the next request; or
if sellers perceive that there is no commercial advantage in charging just the
regulated minimum price then prices may be spread across the price range from
the regulated minimum price upwards.

Meeting expectations

In reality, a buyer will often be prompted to look for more quotes if the initial group of
quotes are out of line with expectations: suppose you expected to have to pay around 250
for X perhaps because you previously purchased X for 250 some time ago - but your initial
three quotes are for 300, 320 and 340. There are two general possibilities:
(i)
(ii)

your expectations are realistic and the initial three quotes have come from
within the upper range of the population distribution; or
your expectations are unrealistic and the initial three quotes are
representative of the population (mean = 320, sd = 20)

Case (ii) reflects the examples which we have already discussed, with the same probabilities
of obtaining a cheaper quote, although the chances of finding a quote for 250 or less are
slim (0.023% under normal distribution conditions). Case (i), on the other hand, requires
further consideration.
If the initial quotes (300, 320 and 340) are not representative of the population of
potential quotes, what data would be representative? The expected cost of 250 could be, in
one scenario, the mean population quote, and therefore the 300+ quotes would have come
from the extreme top end of the spectrum: standard tables 2 show the percentage of the
population above the mean + 2.5 sd (standard deviation remaining at 20 for this exercise) as
0.62%; the chances of three quotes coming from this section of the population of potential
quotes is extremely low, though not impossible, and the probability of a further quote coming
below 300 is 99.38%. The most likely value of the next quote is 250 by virtue of our
assumptions on normal distribution and the probability of a quote being 250 or less is 50%.
Where the mean population quote is somewhere between the expected cost of 250 and the
initially observed quotes of 300 plus, there would still be a high probability of finding a
lower price by obtaining one or more further quotes.
Further Ideas

2 I have used the table at www.msu.edu/user/sw/tables/ztable.pdf, accessed 10 June 2013

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In considering an earlier draft of this paper, certain areas for further consideration were
suggested, which are initially explored in this section. These include looking at wide diversity
among the initial quotes, or conversely looking at quotes which are identical.
1

What if the initial quotes are all or partially the same?

Partial duplication of quotes will have the effect of reducing the standard deviation of a
range of quotes obtained, but may not have any other significance. Three quotes of 300,
320 and 340 would have a mean of 320 and a standard deviation of 20 whereas four
quotes of 300, 320, 320 and 340 have the same mean of 320 but a standard
deviation is 16.3. There is a 15.9% chance of a quote less than 300 with the three initial
quotes but only an 11.1% chance of a quote less than 300 with the duplicated fourth quote
because the standard deviation is lower.
The following sets of quotes share the same mean but have different standard deviations:
(a)

300
320
340
360
380

(b)

300
340
340
340
380

m
sd

340
31.62

340
28.28

sd

Statistically, there is a greater chance of a quote being lower than 300 in case (a) than in
case (b) and, intuitively, it also feels more reasonable than if more suppliers are concentrated
around a single mid-range price there would be less chance of finding further outliers. The
calculations here on probabilities are, in case (a) 12.3% (see page 2 above), and in case (b)
10.3% following the reasoning outlined previously. So duplication (or indeed closeness3) of
quotes around the mean would be likely to justify a decision not to seek further quotes.
Duplication of quotes around the extreme values would have different effects:
(c)

300
300
300
320
340

(d)

300
320
340
340
340

312
17.88

m
sd

328
17.88

sd

In case (c), where the duplication is concentrated at the lowest quoted price, and in case (d)
where the concentration is at the top of the range of quoted prices, the standard deviation is
3 Varying the initial quotes of case (b) to 300, 399.90, 340, 340.10 and 380, the probability of obtaining
a quote below 300 would increase from 10.266696% to 10.266756%.

in each case reduced to 17.88. The chance of a quote lower than 300 being obtained in case
(c) would be as high as 20.4% - unusually, in this case the minimum quote lies in the region
between m and m-sd, whereas in most cases under review the minimum quote has been in the
region between m-sd and m-2sd. In case (d), the chance of obtaining a quote lower than 300
would only be 8.21%, a result influenced by the likelihood that 340 could be the 'going rate'
for the purchase concerned.
2

What if all of the initial quotes are the same?

Three possibilities could result in this situation arising:

prices could be subject to some standardising force such as regulation or

manufacturer mandate: if I asked five garages to quote for the cost of an MOT test
for a car, they would all (currently) quote 54.85 4;
prices could be determined by the operation of perfect conditions of information and
competition and businesses are quoting the equilibrium price 5;
the consistency of quotes could involve some degree of coincidence and there is still a
chance of some variation.

It is only in the last of these circumstances that there might be financial value in pursuing
further quotes and in any case this situation places great stress on the assumptions that
qoutes might be normally distributed around a mean and that the mean of the initiallyobtained quotes is indicative of the population mean. The normal distibution-based model
which we have been using for this analysis is unable to assist with predicting the chance of a
quote less than the ones already obtained as the standard deviation would be 0. The only
advice the writer can offer is that if you think there is a chance of obtaining a lower quote
than a set of equal prices, then see what you can do to find it!
However, once one price variation has been identified, the normal distribution assumptions
result in an interesting observation: the greater likelihood sits with obtaining a further quote
in the opposite direction from the first price variation. For example, an intrepid buyer who
had obtained 8 quotes, all of 300, might insist that there is a chance of a lower price and
find that the 9th business quotes a slightly different price. If this business asks for 299,
the normal distribution assumption increases the likelihood that if any other quote is
requested it is more likely to be 300 or above, with no meaningful measure of the
probability of a further quote below 299. Conversely, if the 9th business asks for 301, the
the probability of a further quote being below 300 jumps to 24.97% - virtually 1 in 4.
3

What is there are wide variations among the initial quotes?

A further area for exploration arises where the initial quotes are highly divergent, for
example a real life procurement exercise was put forward where project prices quoted were
225,000, 350,000 and 550,000. The chance of a cheaper quote than 225,000 is around
17% if prices are normally distributed around the mean (m=375,000, sd=163,935), i.e. if we
4 http://www.gov.uk/getting-an-mot/mot-test-fees (accessed 23 November 2014)
5 See http://en.wikipedia.org/wiki/Perfect_competition and http://en.wikipedia.org/wiki/Economic_equilibrium
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really believe that the quotes reflect the range of business operations for the same project.
However, such wide variations in quotes raise a different question, namely whether the
outliers are really quoting on a like-for-like basis, or have the misunderstood the requirement
or chosen to offer a qualitatively different solution.
One of the reasons why businesses typically have a requirement for at least three quotes is
to provide a measure of confidence that quotes reflect a common understanding of the
buyer's requirements. Three quotes of 225,000, 350,000 and 352,000 would suggest
that the quote of 225,000 reflects a different understanding of the requirements or a
qualitatively different solution from the other two quotes, and therefore only two genuinely
comparable quotes have so far been obtained.
Discussion
The material I have used in this short paper constitutes a simple and unambitious exploration
of basis statistical theory, but I have not previously seen any application to the question of
obtaining quotes from suppliers. As a procurement professional, I have become interested in
the process of obtaining quotes because this is a commonplace occurrence in low value
purchasing i.e. where the likely value of an order is below the organisation's threshold for
employing more formalised tendering processes. Feedback from the contacts mentioned on
page one (obtained via an invitation issued through the Probability group on LinkedIn 6)
confirmed the interest is not mine alone and raised the queries reflected in the 'Further
Ideas' section above.
Where organisations rely on the requirement for just three price quotations they will have
some indication of price range and certainly have a means of demonstrating that buyers do
not rely on sole source suppliers, but there is a very real possibility that they are paying more
than they need to through insufficient market exploration.

Bob Kilcoyne
Leeds
27 November 2014

6 www.linkedin.com/
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