The first step in improving agency compensation is to commit to making pricing a core competence of your firm. In addition to a senior executive in charge of costs (Chief Financial Officer), assign a senior executive in charge of value (Chief Value Officer). Match the client’s professional buyers with the agency’s professional sellers.
Here are some of the key principles employed by pricing professionals:
- Stay focused on the truth that clients are not buying your costs; they’re buying outcomes, value, and utility. Help your team understand that there is no relationship between cost and value. Your cost should not become your price. Stop estimating and start pricing. Stop negotiating cost and start negotiating value.
- Use the language of utility and value in place of the language of costs. Construct RPF responses and new business presentations in a way that showcases benefits, outcomes, utility, value, and outputs rather than features, hours, inputs, activities, and efforts.
- Approach every compensation dialog with this question: how can we align our economic incentives? Make it clear you don’t view compensation as a zero-sum game. Instead of fighting with procurement for a bigger slice of the pie, find ways to grow the pie.
- Signal to procurement early in the process that you’re willing to walk away. You’ll never have any leverage in a negotiation the client believes that you’ll do anything to get the business. It’s counterintuitive, but wanting them less makes them want you more.
- Insist on transparency of expectations in place of transparency of costs. Show how it’s in the client’s best interest to discuss expected outcomes instead of expected costs. Costs are the seller’s concern, not the buyer’s. (Do you know what it cost to build your iPhone?)
- Match their process with your process. The typical procurement process jumps straight to deliverables as though agencies are factories that produce products based on pre-determined specifications. Early in your discussions, introduce the fact that you also have a process: Scope of Value before Scope of Work.
- Use the principle of anchoring to get a better price. The first figure named in a negotiation silently shifts the other side’s expectations of what it will have to pay or accept. In a very real sense, the more you ask for, the more you get. Above all stop practicing reserve-anchoring, which results from raising the possibility of discounted rates which actually lowers price expectations.
- Package your services and solutions in a way that makes them difficult to compare. The buyer’s job is to level the playing field. The seller’s job is to make your service offering incomparable. (Consider what it’s like to try to compare wireless providers. Each uses such different pricing structures that it’s almost impossible to conduct a side-by-side comparison).
- Offer uncommon services at uncommon prices. There is margin in mystery. By offering services or expertise not found at other agencies, you can command premium pricing. Make your margins on high-value strategy, concept, and communications planning work — things that clients can’t do for themselves. Stop trying to earn profits on the increasingly commoditized production side of the business.
- In new business, extend your creative thinking to include compensation. There are countless ways to construct compensation agreements. Falling back to cost-plus is not only ineffective; it’s incredibly unimaginative for a creative service business.
- Never lower price without also stripping out value; it destroys your pricing integrity. If you reduce the price, you must also strip out value. Remember that buyers always seek to reduce price, but not necessarily value. If you’re tempted to discount, keep in mind that the only winner in a price war is the buyer.
- Put the value of your price in perspective with choices. Pricing psychology shows that by offering a downscale option (“economy”) or an upscale option (“premium”), you improve your chances of getting a good price on your “basic” option.
To change your agency’s financial future, don’t just change your negotiating tactics; change your paradigm — your mental map of what you’re really selling and how professional firms should get paid.