Next Friday you have a new business presentation that requires spec research, spec thinking, and spec concepts executed in multiple channels. You have engaged your very best people and they have given you their very best work.
One possible outcome is that despite all this great work, you don’t get the business. So you turn the attentions of your high-value people back to your current clients.
The other possible outcome is that you do get the business. So you roll up your sleeves and get to work on firming up the client’s scope of work, which means opening jobs, preparing estimates*, and getting to work on execution.
Congratulations. Yes, you have won the business. But you have also just succeeded in effectively giving away your higher-value work – strategic thinking, ideation, and concept-development – in order to get the lower-value work of production, execution, and implementation.
Sometimes winning can be losing
It’s not that the lower-value work isn’t important. Of course it is; it’s actually the thing that historically produces the most revenue in an agency. Today, it just doesn’t produce much profit. Because production work is largely “commoditized” in the mind of the client, it’s difficult to attach a price tag that allows the agency to cover its costs and earn a reasonable profit.
Services Perceived to be Higher-Value
- Market and consumer insights and segmentation
- Strategic planning and recommendations
- Campaign and concept development
- Channel planning and channel development
Services Perceived to be Lower-Value
- Production and execution
- Program implementation and activation
- Materials and media distribution
- Program and campaign coordination
- Media placement and monitoring
Four main ways agencies lose
The services that actually carry the highest perceived value in the mind of the client are the same things that most agencies do the absolute worst job of charging for. Here are the four main ways in which agencies routinely give up revenue and profit opportunities in regards to high-value services:
- Agreeing to develop and present high-value work in new business situations without upfront compensation in the form of an appropriate stipend.
- Presenting high-value work in new business situations where you then win the business but still fail to charge appropriately for the high-value work you’ve done, and instead launch directly into the low-value phase.
- For ongoing clients, failing to price high-value services appropriately (underpricing research studies, strategic planning, etc.) believing that you’ll “make it up on the back end.” This is the most common form of profit drain in agencies today.
- When pricing, combining high-value and low-value services on the same estimate. How can you possibly know what the production of a print ad should cost until you have an approved concept? Ideation and execution should always be separated when it comes to pricing agency services.
High or low value?
How do know if something is considered high-value or low-value? I believe there’s a pretty simple test. If the service in question is something clients believe they can do themselves, that’s a low-value service. (Clients rightly assume that anyone reasonably proficient with a Mac and Photoshop can resize a banner ad.) It’s hard to charge a price premium for services that fit this definition.
This leaves a lot of other services that actually can carry a price premium, because they are very often regarded as things clients can’t do for themselves (or at least can’t do them well). Good clients know that the most talented consumer insights experts and creatives still work in agencies. Consumer insight studies, brand and creative platform development, conceptual problem solving, and channel planning and development are examples of the areas where you can actually make a fair profit.
Two more things
You just need two things to make it happen. First, the self-confidence to charge what these higher-value services are actually worth. And second, a change of habit. We are in a habit that is actually a carry-over from 50 years ago when agencies could afford to “give away” their strategic and conceptual work because they were earning extraordinarily healthy media and production commissions.
Today’s reality is something quite different, and the agencies that understand this shift in the value paradigm can thrive well in the next 50 years.
*”Estimate” is a concept that should be banished from the agency lexicon, because it connotes “costing” based on hours instead of pricing based on value. Several other Propulsion posts deal with this concept in depth.