The vast majority of agencies are mostly engaged in “costing” instead of pricing. When your production manager walks around asking team members how many hours they expect to spend on a project, that is essentially an exercise in determining your costs. Costs are one thing. Value is quite another.
What you should be charging your client is not what it costs you to do the work, but the perceived value of the work to the client. Sometimes the cost is substantially less than the value. You should be benefiting from that gap, just as Apple does by selling an iPhone that costs $49 to make at a price of $400. Of course the value gap goes both ways. Sometimes the costs can far outweigh the perceived value, which can result in a very unhappy client if you price based only on costs.
In pricing an assignment or relationship, you do in fact want to look at your costs, but your costs should be your pricing floor, not your ceiling. And your costs are not just your “hours.” There are other dimensions of cost you should consider, as follows:
Resource requirements: How much time and energy will be required for this assignment?
Talent level needed: Will we need our very best talent, or will mid-level or junior talent suffice?
Scope complexity: How complicated is this assignment?
Time sensitivity: Will the deadline for this assignment disrupt other work in the agency?
Client responsiveness: Does this client have an effective and timely approval and review process?
Client organizational complexity: Will we have to navigate through multiple layers of client management?
Your evaluation of the above factors will help determine the total cost you expect to incur. But now comes the “art”; determining the value that this work will create for the client. Here are the key Value Factors to consider:
Financial impact: What is the economic value to the client of a successful outcome?
Strategic importance: Is this of strategic value to the client organization, or is this a tactical assignment?
Value horizon: Will this help create long-term value for the client or brand?
Unique agency qualifications: Are we uniquely qualified to complete this assignment?
Degree of risk sharing: Are we willing to take risk in some way?
IP ownership: Is there an opportunity for the agency to own some of the IP related to this assignment?
While costs are objective, value is subjective. Costs are a calculation; value is a perception. The fact is that price is ultimately determined by perceived value, not costs. This is why a Mont Blanc ball point pen that costs 19 cents to manufacture can sell for $175.
So go ahead and calculate your costs, because it’s the only way to know if you’ll be making a profit. Just don’t let your costs be the sole determinant of your price. Your clients are buying the value you create, not the costs you incur.