Advertising agencies, design studios, interactive firms and other marketing communications providers see themselves as being on the leading edge of creativity. Creativity is what they sell to their clients. But when it comes to innovation in their own business practices, creative service companies are closer to the trailing edge. Nowhere is lack of creativity, in the business of creativity, more pronounced than in the area of compensation.
Agencies and firms dutifully produce standard rate cards, carefully track their hours and send clients bills for their time. Meanwhile, at the clients organizations the agencies serve, professional pricers conduct price elasticity studies, test different prices with consumers and ultimately price their products based on value, not costs. At automotive companies, do you think prices are based on the number of hours it took to build the car? At Toyota, they don’t even have a traditional cost-accounting system.
Just like advertising and design, value is subjective. The hourly-rate system tries to make it look like a science, but determining—and selling—value is an art.
VALUE BEARS NO RELATIONSHIP TO COSTOver the years, your firm has undoubtedly become expert at costing. Based on hours, you know exactly what your salary and overhead are on a project. In other words, you know the cost, but do you know the value? It’s a different, and much more important, question.
Now ask yourself whether your clients are paying for your costs, or paying for your value? The answer may seem obvious, but it doesn’t stop our industry from perpetuating a model that serves neither the interest of agencies nor clients.
When you walk around your firm asking each team member to estimate their hours on an upcoming project, you’re only working on the cost side of the equation. In fact, that’s all an estimate really is—a tally of anticipated costs. It has nothing to do with the value to the client. Estimating is not pricing.
The Role of the Pricing Council
• To make pricing for value a core competency within the agency.
• To ensure that the agency prices on purpose, according to the value received by the client, not the costs incurred by the agency.
• Establishing all company pricing and compensation policies.
• Overseeing all pricing and compensation agreements for major client assignments and relationships.
• Constructing and experimenting with various forms of value-based pricing and compensation.
• Assuring that the agency is engaged in continuous learning around the topic of pricing and value and
teaching every team member the importance of pricing for value.
• Sharing pricing and compensation success stories throughout the firm.
• Dealing with price objections from clients and client organizations. Because the number of pricing
objections is finite, the Pricing Council should have answers for all of them.
• Playing the role of “bad cop” when it comes to pricing. While it’s the client’s job to push down prices, it is
the agency’s job to push back; that is done most effectively by focusing on value, not capitulating on price.
The Pricing Council needs to ensure that agency associates are as firm about maintaining prices as clients
are about lowering them.
• Assuring that the agency is focused on the establishment of profitable client relationships, not merely taking on new clients to fuel non-profitable revenue growth.
• Conducting postmortem analyses at the end of major client assignments and relationships in order to assess what was learned, how adequate the compensation was, the value that was created and how the agency might have priced it better.