Who Are the Guardians of Value in Your Firm?
LinkedIn Article by Tim Williams
February 27, 2017
As marketers continue to trim budgets and cut costs, agencies are struggling to grow their revenues and improve their margins. The reaction of most firms is to attempt to do a better job of estimating, recording and billing for the agency's time. That is not the answer.
Agencies and other professional firms are on the defense -- not the offense -- because they are mired in industrial-age pricing practices based on the debunked “labor theory of value” posited by the likes of Karl Marx. By charging for their labor, agencies are stuck in the deep rut of reactively defending their costs instead of proactively selling their value. The result has been a 20-year decline in agency profitability which has produced a cascading series of challenges, not the least of which is the ability to afford world-class talent.
Reaching an Inflection Point
It's not too late to reverse this trend. Many well-known studies have shown that the single most powerful way for organizations to improve profits is not to increase revenues, but rather to improve pricing. Just a 1% improvement in pricing can produce an 11% improvement in profitability. Yet professional firms continue to invest most of their energies in chasing revenue.
If leadership teams would devote as much time and energy to pricing as to new business, the impact on the bottom line would be considerable. But thanks to the outmoded cost-plus approach still employed by most firms, pricing doesn't get anywhere close to the attention it deserves. Client service professionals are focused on meeting client needs, the creative team is devoted to producing innovative ideas, the media group seeks to maximize the effectiveness of client budgets, business development cultivates new clients, while finance counts the costs and calculates the income. In most firms, pricing is an afterthought, taking a back seat to these other core functions that occupy the attention of front-line leadership.
The Concept of a Pricing Council
This is why pricing must exist as its own discipline with its own dedicated staff, or at least have the attention of a group of people we call the Pricing Council. The role of the Pricing Council is to change the culture in the firm from focusing on activity, efforts, and inputs — which is what cost accounting measures — to one of results, outcomes, effectiveness, and value, the same things clients care about. While the traditional finance department is focused on internal measures driven by costs, the Pricing Council function is focused on external measures driven by value.
The Pricing Council is a small, interdisciplinary group of senior executives who are charged with the following basic responsibilities:
- Ensuring the firm prices on purpose, according to the value received by the client, not the costs incurred by the firm.
- Keeping the firm focused on profitable client relationships; not merely taking on new clients to fuel non-profitable revenue growth.
- Establishing all company pricing and compensation policies and practices.
- Overseeing all pricing and compensation agreements for major client assignments and relationships.
- Presenting pricing proposals and negotiating with client buyers, including procurement professionals.
- Constructing and experimenting with various forms of compensation agreements with clients.
- Developing approaches that will enable the firm to own more of its own intellectual property and to derive ongoing revenues from its use.
- Establishing a pricing knowledge base and sharing pricing success stories throughout the firm.
- Helping to keep the firm focused on effectiveness instead of efficiency. Establishing effectiveness tools, reports, and metrics in place of traditional time-based efficiency tools and metrics.
- Conducting “After Action Reviews” at the end of major client assignments and relationships in order to assess what was learned and how the firm could have priced it better.
Essential Qualities of Pricing Council Members
When selecting Pricing Council members, look for motivated senior professionals drawn from the major functions in the company who possess the following qualities:
Given the numerous objections to the concept of pricing based on value instead of cost, members of the Pricing Council must bring the right attitude to the job. This begins with the understanding that you will never get paid more than you think you are worth. They believe the firm’s products and services are worth every penny and more. They are more concerned with developing a value proposition based on value, not cost.
In addition to a positive attitude and high self-esteem, Pricing Council members must be able to command respect and credibility across the entire structure of the firm. This requires understanding enough about each of the organization's main offerings to talk intelligently about them and describe their value to current and prospective clients.
SPIRIT OF INNOVATION
Pricing Council members have to champion the cause of value. In that light, they have to be willing to constantly experiment with new forms of pricing the firm's products and services. They will tend to view the firm’s client roster as a stock portfolio comprised of diversified approaches to compensation, including revenue streams created by new ways to leverage the firm's intellectual capital.
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In most firms, serving on the Pricing Council is a part-time role, not a full-time responsibility. By involving professionals from multiple disciplines within the company, you obtain insights and ideas that would never arise from a traditional financial management group. Most importantly, the formation of a Pricing Council signals to the rest of the organization -- as well as to your clients and prospects -- that pricing is a separate discipline in your firm, never again to be confused with just counting your hours.